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| Old GAAP | FRS 102 | Further Comment On Differences |
| Associates | Investment in Associates (S.14) | |
| An associate is an entity (other than a subsidiary) in which the investor has a participating interest and exercises significant influence. | An associate is an entity over which the investor has significant influence and which is not a subsidiary or a joint venture (Section 14.2). | No differences. |
| Exercise of significant influence is where the investor is actively involved and is influential in policy decisions, including strategic issues. The decisive feature is the actual relationship between investor and investee. An entity holding 20% or more of the voting rights in another entity is presumed to exercise significant influence over that entity unless the contrary is shown (FRS 9 paragraph 4). | Significant influence is the power to participate in (but not to control or jointly control) the financial and operating policy decisions of the associate. 20 % (directly or indirectly) of the voting power is the presumed threshold for the existence of significant influence (Section 14.4). | No differences in this area. |
| Actual exercise of the significant influence is what is important. | Having the power to participate is what is important regardless of whether an entity exercises this power. Therefore, there may be future investments accounted for as associates as a result. | Under old GAAP, in order for an entity to have a significant influence they must be actively exercising that interest. If they were not exercising this influence, then it was not treated as an associate. Under Section 14, even where an entity does not actively exercise its significant influence it can still be classed as an associate i.e. they have the power to exercise significant influence but they are not actively enforcing this. On transition such investment would now be accounted for as associates so therefore a transition adjustment will be required. On transition the investment would need to be adjusted for the parent’s share of the associate’s profits/losses. In reality the likelihood of an adjustment in this area is remote. |
| In the individual financial statements entities have the option to carry the investment under either: · the cost model; · the fair value through the STRGL model. | In the individual financial statements entities have the option to carry the investment under either: · the cost model; · the fair value through the OCI model; · the fair value through the profit and loss model. | Where an entity adopts a model of fair valuing through the profit and loss account, an adjustment will be required on transition including the deferred tax impact. See attached an example detailing the journals required (Example 40 – Adoption Of Fair Value Through Profit And Loss On Transition). Where on transition, an entity adopts a policy of fair valuing through the OCI an adjustment will also be required on transition including the deferred tax impact. See attached an example detailing the journals required (Example 41 – Adoption Of Fair Value Through Other Comprehensive Income On Transition). Where an entity previously carried investment in associates at fair value through OCI and from then on deems this as its costs as allowed under Section 35(10) deferred tax will need to be recognised on same. The journals required in this instance will be similar to those required for property, plant and equipment (Example 41A – Previous GAAP Revaluation As Deemed Cost). Where an entity continues to adopt a cost model no transition adjustments are required. |
| In the individual financial statements where a valuation was used under the alternative accounting rule, a director’s valuation was permitted. | In the individual financial statements, a director’s valuation is not permitted. Instead this should be valued in accordance with Section 11 i.e. first where available, the value from a quoted market, if this is not available then based on an identical transaction which was entered into within the recent past and if this is not available a valuation technique which uses the most of market data and very little of entity data. Where the valuation cannot be measured reliably then the investment must be carried at cost less impairment. | Where previously an entity has adopted a policy of fair valuing the investment through the STRGL and a director’s valuation was used, on transition no adjustment will be required as Section 35.10(f)(ii) allows the previous carrying amount to equal the deemed cost. However, if since the date of transition a director’s valuation was used, a review should be carried out to ascertain the valuation utilising the guidance detailed across. Where this provides a different valuation, the comparative year should be adjusted to reflect this. The journals required to reflect this are similar to those included in Example 34 and Example 35 above. |
| Under old GAAP where losses were incurred by an associate, and the losses had reduced the investment in the associate to nil, then the groups share of any future losses had to be included as a provision in the consolidated financial statements. (only applicable for consolidated financial statements). | Losses should be recognised until the carrying amount of the investment is reduced to nil and no further losses are recognised unless the entity has a legal or constructive obligation or has made payments on behalf of the associate (Section 14.9). (only applicable for consolidated financial statements). | Given the difference here, where associates are in a net liability position at the date of transition, an adjustment will be required to derecognise those losses previously recognised under old GAAP. (Note there is no impact on the individual financial statements as this would not have been applicable as the investment would have been measured at cost less impairment or fair value). See attached an example detailing the journals required (Example 42 – Derecognition Of Associates Losses). |
| For equity accounted results, the share of operating profit of associates is presented after the group operating profit with interest and tax related to associates being presented alongside the interest and tax line items in the group profit and loss account. (only applicable for consolidated financial statements). | For equity accounted results, the share of the income of the associate is to be presented as one line item, after the effects of interest and tax. (only applicable for consolidated financial statements). | This difference will need to be incorporated when preparing the consolidated financial statements. Effectively the profit after tax of the associate is shown as one figure on the face of the profit and loss. See example of the layout under FRS 102 attached (Example 43 – Extract From The Consolidated Profit And Loss Account Showing Share Of Associates Interest). |
| Old GAAP requires disclosure on the face of the balance sheet of the assets and liabilities of the associate. (only applicable for consolidated financial statements). | The net figure need only be shown on the face of the balance sheet. (only applicable for consolidated financial statements). | Section 14 provides less disclosure on the face of the balance sheet, however details of the movement in the investment in the associate should be shown in the notes similar to what was required under old GAAP. |
| Old GAAP requires the investment in associates and joint ventures to be shown separately on the face of the balance sheet. (only applicable for consolidated financial statements). | This is not required under FRS 102. (only applicable for consolidated financial statements). | Merely a disclosure requirement, no transition adjustment. The investment in the joint venture and associate can be shown as one-line item in the balance sheet. |
| Reducation of an entities interest in an investment such that it falls below the threshold of ‘associate’ would fall within the remit of FRS 5 which would not require the investment to be accounted at fair value through the profit and loss instead it would be accounted for at cost. | Where an interest is reduced such that it is no longer an associate; under FRS 102 it is then accounted for as a financial asset and comes within the scope of Section 11 and Section 12 of the standard. This would mean that it may need to be fair valued through the profit and loss depending on whether it meets the requirements. If requirements not met it is accounted for at cost less impairment. Requirements for fair valuing under Section 11 are such that the investment can be reliably measured using one of the following (in order of hierarchy): · a quoted price for an identical asset; · the price of a recent transaction for an identical asset; · a suitable valuation technique. | This is a significant difference and is related to Section 11 above. Where an investment has less than a significant influence, it should be carried at fair value unless this cannot be reliably measured. An example of the journal required has been included in Section 11- Example 25. |
| Not applicable. | For individual entity financial statements the investment can be measured at cost or fair value. Section 35.10 allows a first time adopter to deem the cost to be the carrying amount at the date of transition as determined under previous GAAP. | Where this exemption is applied, it is possible for an entity to previously have adopted a policy of fair valuing investments in associates at fair value through OCI and on adoption to FRS 102, apply the cost model. On transition no adjustment would be required as the carrying amount would be the deemed cost. An adjustment that would be required under Section 29 would be the deferred tax effect of the difference between the carrying amount and the tax cost. An example of the deferred tax adjustments has been illustrated in Example 35 above. |
| Under old GAAP, no deferred tax was required to be recognised on unremitted earnings unless the associate had a constructive obligation/binding agreement to make a dividend payment. | Section 29 requires deferred tax to be recognised on the unremitted earnings of an associate. A timing difference arises as in the consolidated financial statements under the equity method, the income or loss for the parents’ share is recognised in the profit and loss account which then increases or decreases the value on the balance sheet. This income/loss is not taxable/tax deductible in the tax computation, but it may be taxable in the future when dividend is received from the associate, hence this creates the timing difference. Whether deferred tax should be recognised will depend on whether any dividend received from the parent will be taxable on the parent company. Where the associate is an Irish company no tax will be payable and therefore no deferred tax needs to be recognised assuming the expected settlement will be from dividends received and not from a sale. Where it will be taxable then deferred tax will need to be recognised at the passive tax rate or where the investment is held for future sale the sales tax rate should be utilised. If this is the case a transition adjustment will need to be made on transition to FRS 102. | An adjustment will be required on transition where the dividends are deemed taxable in the hands of the entity. See attached an example of the calculation of this deferred tax where this is the case (Example 44 – Deferred Tax On Unremitted Earnings). |
| Not applicable. | The associates individual financial statements will need to be restated to comply with FRS 102 which may result in a different net asset carrying amount than was previously determined under old GAAP. As a result, an adjustment will be required on transition to show the updated carrying amount for the change in net assets. | Where there are GAAP differences in the associate’s financial statements, the consolidated financial statements will have to be updated on and since the date of transition such that the carrying amount in the consolidated financial statements is correct. See attached an example showing the journals required to be recognised (Example 45 – Updated Carrying Amounts As A Result Of Associate’s Transition To FRS 102). |
| No such requirement. | Deferred tax will need to be measured on investments measured at fair value. | This is significant difference. Adjustments will be required on transition to reflect the deferred tax where a fair value model is chosen. An example of the deferred tax adjustments has been illustrated in Examples 34 and 35 above. |
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