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| Old GAAP | FRS 102 | Further Comment On Differences |
| Financial Instruments | Other Financial Instrument issues (S.12) | |
| For non-FRS 26 adopters, any financial assets or liabilities were accounted for as described in Section 11. The concepts and accounting detailed in Section 12 are all new. |
Section 12 deals with financial instruments which do not come within the scope of Section 11 and also have similar exceptions to Section 11 (as detailed in Section 11 of the guide) which are detailed in Section 12.3. On top of Section 11 exclusions the below are also excluded from Section 12:
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As this standard is new, there will be significant transition adjustments where financial instruments come within the scope of Section 12. An entity should choose whether it wants to apply Section 11 and 12 in full or alternatively choose IAS 39/IFRS 9. It is likely that most companies which did not have to apply Section 26 under old GAAP will choose to apply Section 11 and Section 12 in full as requirements under these standards are less onerous than IAS 39/IFRS 9. |
| For non-FRS 26 adopters, there was no requirement to recognise derivative financial instruments other than a requirement to have them disclosed in the notes to the financial statements. This will result in significant volatility to the profit/loss of entities year on year unless hedge accounting is adopted. For FRS 26 adopters, the requirements for recognition is the same as FRS 102 except some difference with regard to hedging. |
Derivative financial instruments are required to be recognised initially at fair value on the statement of financial position and subsequently at fair value, with changes reported in the profit and loss. The only exceptions to this measurement requirement are: certain hedging instruments and investments in equity instruments which are not publicly traded and whose fair value cannot be reliably measured. This will result in significant volatility to the profit/loss of entities year on year unless hedge accounting is adopted. A derivative financial instrument is a financial instrument or other contract with all three of the following characteristics: a) its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable (sometimes called the ‘underlying’), provided in the case of a non-financial variable that the variable is not specific to a party to the contract; b) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and c) it is settled at a future date. Examples of derivative financial instruments include: · forward foreign currency contracts that can be settled in cash or in exchange for another financial instrument;
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As there was no requirement to account for these derivative financial instruments under old GAAP, this represents a significant difference. Therefore, a number of transition adjustments will be required to fair value these instruments. On initial transition deferred tax will need to be recognised for tax payable/refundable in future years as a result of these journals. Transition adjustments will be required where: a) the entity has forward foreign contracts in place at the date of transition or since the date of transition. These will have to be fair valued. There will also be deferred tax implications on transition as these will not have been taxed in the past as they would not have been included in the profit under old GAAP. See attached an example of the work and journals required on transition to Section 12 (Example 31 – Forward Contracts); b) the entity has interest rate swaps in place at the date of transition or since the date of transition. These will have to be fair valued. There will also be deferred tax implications on transition as these will not have been taxed in the past as they would not have been included in the profit under old GAAP. See attached an example of the work and journals required on transition to Section 12 (Example 31 – Forward Contracts) c) the entity entities have options to purchase or sell/firm commitments and these options relate to commodities, products which are not for own use i.e. (that are not used as stock in trade, used in production or sold) then these contracts will have to be fair valued on the balance sheet under FRS 102. This was not the case under old GAAP. Therefore if any such options exist then these will need to be fair valued. The fair value of these options would be the value that they would get if they were disposed of then reacquired immediately or the penalty that would be payable if a party wanted to cancel the option. The way in which this would be accounted would be similar to the forward exchange example above where no hedging existed; d) an entity has put or call options included in contracts (contracts for own use, or relating to non-financial assets are ignored). A detailed review will need to be carried out of any contracts entered into by the entity. |
| Under old GAAP entities could retranslate foreign currency balances at the year-end rate based on the forward contract rate. | Section 30 does not allow the forward contract rate to be used to retranslate foreign currency balances instead the year end spot rate should be used and the foreign contract fair valued as discussed above. | As detailed above where an entity has forward foreign exchange contracts these are required to be fair valued, therefore where under old GAAP the entity has retranslated year end balances at the forward rate, a transition adjustment will also be required. Therefore two adjustments are required: · adjustment to fair value the forward foreign exchange contract (see the section above for examples of the journals likely to be required); and · restate the balance sheet to the spot rate. See attached an example of how such a restatement should be carried out (Example 33 – Contracted Rate Adjustment). |
| Hedge accounting was not permitted unless FRS 26 was adopted. For FRS 26 adopters, the range of hedging options is greater than FRS 102 (unless FRS 26 adopter choses to apply IAS 39/IFRS9). IAS39/IFRS9 required effectiveness of 80%-125%). |
Section 12 allows companies to apply hedge accounting. There was no concept of hedge accounting for non FRS 26 adopters. In order to apply hedge accounting the entity needs to have designated and documented the hedging relationship, and needs to expect that the hedge will be highly effective in offsetting the designated hedged risk (Section 12.18). There is no requirement for an effectiveness test before the hedge can be recognised. Section 12.16B deals with certain exclusions for use of hedge accounting for intra group transactions. An instrument is a hedging instrument provided all the following conditions are met:
a) Fair value hedge, b) cash flow hedge and c) hedge of a net investment in a foreign operation. Where a fair value hedge exists the gain/loss is posted to the profit and loss account. Where a cash flow hedge or a net investment in foreign operation hedge exists, the gain/loss on the hedging instrument is posted to other comprehensive income to the extent that this offsets against the loss/gain posted on the hedged item with the ineffective portion posted to the profit and loss account. An entity may apply hedge accounting to a hedging relationship from the date all of the following conditions are met: a) the hedging relationship consists only of a hedging instrument and a hedged item as described in paragraphs 12.16 to 12.17C; b) the hedging relationship is consistent with the entity’s risk management objectives for undertaking hedges; c) there is an economic relationship between the hedged item and the hedging instrument; d) the entity has documented the hedging relationship so that the risk being hedged, the hedged item and the hedging instrument are clearly identified; and e) the entity has determined and documented causes of hedge ineffectiveness. |
As hedge accounting is a new concept for non FRS 26 adopters, where an entity on transition wishes to apply hedge accounting a number of transition adjustments will be required. There is no requirement for an entity to apply hedge accounting, instead entities have a choice. See attached a worked example of the journals required for a cash flow hedge where a forward foreign contract is in place on transition to FRS 102 assuming the conditions for hedge accounting were met. (Example 34 – Cash Flow Hedge Example). See attached a worked example of the journals required for a cash flow hedge where an interest rate swap is in place on transition to FRS 102 assuming the conditions for hedge accounting were met. (Example 35 – Interest Rate Swap – Cash Flow Hedge Accounting). See attached a worked example of the journals required for a fair value hedge (using an interest rate swap) where an interest rate swap is in place on transition to FRS 102 assuming the conditions for hedge accounting were met. (Example 36 – Fair Value Hedge – Interest Rate Swap – Fixed Interest Rate On A Dept Instrument (Carried At Amortised Cost). See attached a worked example of the journals required when a net investment in foreign operation hedge is in place on transition to FRS 102 assuming the conditions for hedge accounting were met. (Example 37 – Net Investment In A Foreign Operation (Extracted From Appendix To Section 12 Of FRS 102). |
| No deferred tax required. | As section 29 requires deferred tax to be recognised on all timing differences, where adjustments are posted on transition deferred tax may be required to be reflected. | Usually the fair value adjustments are taxable/tax deductible as expensed however, on transition as items have fallen out of the tax computation a one off deferred tax cost is required to be recognised. This deferred tax is unwound as it becomes taxable/tax deductible. |
| See Section 11 where the differences were highlighted. | Guidance on derecognition and impairment are the same as what has been detailed in Section 11 where the differences were highlighted. | Based on the differences noted, an assessment should be made as to whether this results in transition adjustments. |
| FRS 26 adopters See differences across. | FRS 26 adopters · No concept of embedded derivatives under FRS 102; · hedge accounting under FRS 102 is simpler; · the disclosure requirements in Section 11 and Section 12 are less onerous than FRS 29. Under FRS 102, assets which have been individually assessed for impairment and found not to be impaired do not subsequently need to be included in a collective assessment of impairment. | Where a previous FRS 26 adopter chooses to apply IAS 39 IFRS9, the aforementioned difference with regard to hedge accounting and embedded derivatives will not be relevant as IAS 39/IFRS 9 is the same as old FRS 26. Therefore there should be no adjustments on transition other than the reduced disclosure requirements. Where a previous FRS 26 adopter decides to apply Section 12 in full, then it is likely transition adjustments will be required to derecognise embedded derivatives and apply further hedge accounting as the hedge accounting rules are simpler. |
| Not applicable. | Section 35.10(u-v) exemptions allow a small entity to: · not restate the comparative figures disclosed in the first set of financial statements prepared under FRS 102 for the following. (For example, assume Company A has a year-end of 31 December. The date of transition would then be 1 January 2014 and the comparatives would be for the year ended 31 December 2014. In this case the 2014 comparatives would not need to be adjusted): · financial instruments required to be held at fair value under Section 11 and Section 12 of FRS 102. Examples of what would need to be fair valued under these sections are: i. Fair valuing forward; foreign exchange contracts ii. Fair valuing interest rate swaps; iii. Investments where the entity does not hold a significant influence (usually less than 20% owned) which can be measured reliably (i.e. publically traded shares): · sales and purchases to/from related parties (as defined in Section 33) where payment is beyond normal business terms; · loan to/from related parties which are at non-market rates. This exemption can only be claimed by UK entities. (Note: this exemption is not available to Republic of Ireland companies at this time as EU Directive 2013/34 has not been enacted at this time. It is expected to be enacted in early 2016). | This exemption can only be claimed by UK entities. (Note: this exemption is not available to Republic of Ireland companies as EU Directive 2013/34 has not been enacted at the time of creating this guide. It is expected to be enacted in early 2016). |
| Not applicable. | Section 35.10(t) deals with derivatives. It allows entities the choice to apply hedge accounting from the date of transition if the conditions for hedge accounting are met and the documentation requirements stated in Section 12.18(d) and 12.19(e) before the first set of FRS 102 financial statements are authorised for issue. Section 35.10(t) also allows entities who met the conditions at period ends after the date of transition to apply hedge accounting if the conditions for hedge accounting are met and the documentation requirements stated in Section 12.18(d) and 12.19(e) in place before the first set of FRS 102 financial statements are authorised for issue. |
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