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Transition exemptions
Section 35.10(f) provides an exemption for entities that prepare separate and individual accounts and who hold an investment in a joint venture. This exemption allows an entity to treat the carrying amount at the date of transition to be its deemed cost. Given that under old GAAP, it would have already been carried at cost, this exemption has no real effect. The concepts in FRS 102 are similar to old GAAP.
For consolidated financial statements there are no exemptions. Therefore where there are differences they will have to be adjusted through opening reserves at the date of transition. See discussion below on the principal transition adjustments.
Principal transition adjustments
1) Joint ventures share of losses recognised as a provision in the group financial statements
Under old GAAP where losses were incurred by a joint venture, and the losses had reduced the investment in the joint venture to nil, then the groups share of any future losses had to be included as a provision in the consolidated financial statements. Section 15 does not require this instead where losses have reduced the investment to nil then no further losses should be provided for unless the group has a constructive or legal obligation to provide for these or has made payments on behalf of the associate. Therefore where joint ventures are in a net liability position at the date of transition an adjustment will be required to derecognise these losses/provisions. 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.
Example 18: Derecognition of joint ventures losses
Parent A prepares consolidated financial statements. At the date of transition, it had a 50% investment in a joint venture company. The joint venture company had net liabilities of CU100,000 on its balance sheet at the date of transition. A provision of CU25,000 was included in the consolidated financial statements of old GAAP at the date of transition to reflect the 25% ownership of these losses. A loss of CU5,000 was recognised in the 2014 accounts.
Assume the date of transition is 1 January 2014 and no deferred tax was recognised as it was not tax deductible. The journals required on transition are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Provision for Losses of Associate |
50,000 |
|
|
Cr Profit and Loss Reserves |
|
50,000 |
Being journal to derecognise provision for associates share of net liabilities
Journals to be posted at 31 December 2014 assuming the above journals were posted to reserves
|
|
CU |
CU |
|
Dr Provision for Losses of Associate |
5,000 |
|
|
Cr Profit and Loss Reserves |
|
5,000 |
Being journal to derecognise provision for joint venture’s share of net liabilities for the 2014 year
2) Investments previously classed as joint arrangements that are not entities (JANEs) not classed as jointly controlled entities
Under old GAAP, there was a concept of JANEs. These were joint ventures where although the joint venture may have been a separate legal entity, in substance they were not and as a result under old GAAP the equity method of accounting was not required. Instead the results were included in the normal sales, purchases etc. of the venture similar to jointly controlled assets and operations. However on transition, entities may find that some of these JANEs are in fact legal entities and under Section 15 as they are legal entities they come within the definition of a joint controlling entity which should be accounted for under the equity method of accounting.
Note this adjustment only effects the consolidated financial statements. The parent entity financial statements are not affected as equity method accounting would not be used in those financial statements.
If this is the case on transition an adjustment will be required to account for this under the equity method with an adjustment posted to profit and loss reserves. This would require an entity to ascertain the goodwill on the initial acquisition etc.
Example 19: JANE reclassified as a jointly controlled entity
Company A has an interest in a joint venture which was previously accounted for as a JANE under old GAAP. However as this is a legal entity, it now has to be accounted for as a jointly controlled entity and therefore the equity method of accounting should be used. For simplicity assume there was no goodwill on initial acquisition and there were no unrealised profits to be deferred on the date of transition. Assume the carrying amount in old GAAP consolidated books at 1 January 2014 is the net assets of CU100,000. The net asset at 1 January 2014 is split – debtors-CU50,000, creditors-CU20,000 and fixed assets CU70,000. The profit shown in the consolidated profit and loss for the year ended 31 December 2014 was CU4,000 (with the turnover recognised for the joint venture of CU30,000, administration expenses of CU5,000, cost of sales of CU20,000 and a tax cost of CU1,000). The net asset of the joint venture at 31 December 2014 as shown in the consolidated financial statements under old GAAP is split – debtors-CU54,000, creditors-CU20,000 and fixed assets CU70,000. Company A owns 50% of the share capital. On transition the following adjustment will be required in the consolidated financial statements:
On 1 January 2014
|
|
CU |
CU |
|
Dr Investment in Joint Venture |
100,000 |
|
|
Dr Creditors |
20,000 |
|
|
Cr Debtors |
|
50,000 |
|
Cr PPE |
|
70,000 |
Being journal to reflect Company A’s allocation of the joint ventures net assets at 31/12/14 to an investment in a joint venture. Note the above journals do not have to be brought forward.
Journals required for the year ended 31 December 2014
|
|
CU |
CU |
|
Dr Investment in Joint Venture |
104,000 |
|
|
Dr Creditors |
20,000 |
|
|
Cr Debtors |
|
54,000 |
|
Cr PPE |
|
70,000 |
Being journal to reflect Company A’s allocation of the joint ventures net assets at transition to an investment in a joint venture. Note the above journals do not have to be brought forward.
|
|
CU |
CU |
|
Dr Turnover |
30,000 |
|
|
Cr Cost of sales |
|
20,000 |
|
Cr Administration expenses |
|
5,000 |
|
Cr Tax |
|
1,000 |
|
Cr Share of profit in joint venture |
|
4,000 |
Being journal to reflect the reclassification of results for the joint venture from each of the line items in the P&L to one line item as required by the equity method of accounting.
A similar journal will be required for the 31 December 2015 year end.
3) Adjustments required to adjust carrying value in the consolidated financial statements for parent’s percent of the joint ventures net assets under FRS 102.
The joint ventures 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. The deemed goodwill is the difference between the investing entity’s share of those adjusted carrying amounts and the cost of the investment under old GAAP.
Example 20: Updated carrying amounts as a result of joint venture transition to FRS 102
Company A has a 30% interest in Company B which cost CU10,000. Company A prepares consolidated financial statements. At 1 January 2014 the net asset of Company B was CU120,000 and the carrying amount of the investment in the consolidated financial statements under old GAAP was CU39,000 ignoring any goodwill amortisation. Assume the date of transition is 1 January 2014 and no deferred tax is recognised on the uplift as the investment will be settled through dividends which will not be subject to tax on receipt of dividends from the joint venture. The joint ventures balance sheet has been restated to FRS 102 compliance figures and the new net asset figure is CU100,000.
The adjustments required on transition are:
1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
1,000 |
|
|
Cr Investment in joint ventures ((CU100,000*the percentage ownership of 30%=CU30,000) plus the initial cost of CU10,000 less carrying amount under old GAAP of CU39,000= CU1,000) |
|
1,000 |
Being journal to reflect the updated allocation of the joint ventures net assets based on FRS 102 numbers
For 31 December 2014 the below journals would need to be posted depending how the net assets of the joint venture has moved:
|
|
CU |
|
Dr/Cr Investment in Joint Venture |
XX |
|
Cr/Dr Share of Joint Venture Results |
XX |
4) Fair value adjustments in the individual financial statements
Where investments in joint ventures are recognised at fair value in the individual financial statements on transition to FRS 102, deferred tax will need to be recognised on transition as previous GAAP did not allow fair valuing and in any case deferred tax would not have been allowed to be recognised. The deferred tax rate to be used depends on the tax rate that will be payable on settlement i.e. whether the investment is held for dividend income or for future sale.
Example 21: Adoption of fair value through profit and loss on transition
Company A in its individual financial statements has adopted a policy of fair valuing investments in joint ventures through the profit and loss. Assume 1 January is the date of transition. The carrying value under old GAAP was CU100,000 at 1 January 2014 and 31 December 2014 & 2015 which represented the original cost. The fair value of the investment at 1 January 2014, 31 December 2014 and 31 December 2015 was CU120,000, CU95,000 and CU125,000 respectively. Assume a deferred tax sales rate of 20% (assuming investment is held for future sale, if not, the dividend tax rate should be utilised). The adjustments required on transition to reflect the fair value policy and the related deferred tax are:
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Joint Venture (CU120,000-CU100,000) |
20,000 |
|
|
Cr Profit and Loss Reserves |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU20,000*20%) |
4,000 |
|
|
Cr Deferred Tax Liability |
|
4,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2014 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Fair Value on movement in Joint Ventures in P&L |
25,000 |
|
|
Cr Investments in Joint Ventures (CU120,000-CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2014
|
|
CU |
CU |
|
Dr Deferred Tax liability |
4,000 |
|
|
Cr Deferred Tax in P&L (CU20,000*10%) |
|
4,000 |
Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU1,000 would be recognised ((CU100,000-CU95,000)*20%)
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Joint Ventures (CU125,000-CU95,000) |
30,000 |
|
|
Cr Fair value on movement in joint venture in P&L |
|
30,000 |
Being journal to reflect uplift in value from 2014 to 2015
|
|
CU |
CU |
|
Dr Deferred tax in P&L ((CU125,000-CU100,000)*20%) |
5,000 |
|
|
Cr Deferred tax liability |
|
5,000 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 is not recognised as the asset was not previously recognised.
Example 22: Adoption of fair value through other comprehensive income on transition
If we take example 21 above and assume Company A in its individual financial statements has adopted a policy of fair valuing investments in joint ventures through other comprehensive income this time. The journals required would be as follows.
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Associates (CU120,000-CU100,000) |
20,000 |
|
|
Cr Revaluation Reserve |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve (CU20,000*20%) |
4,000 |
|
|
Cr Deferred Tax Liability |
|
4,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2014 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Fair Value Movement in Profit and Loss |
5,000 |
|
|
Dr Fair Value on Movement in Joint Ventures in OCI/Revaluation Reserve |
20,000 |
|
|
Cr Investments in Joint Ventures (CU120,000- CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2014. The CU5,000 is posted to the profit and loss as there is nothing left in the revaluation reserve after the CU20,000 has been debited.
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,000 |
|
|
Cr Deferred Tax in Revaluation Reserve (CU20,000*20%) |
|
4,000 |
Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU1,000 would be recognised ((CU100,000-CU95,000)*20%).
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Joint Ventures (CU125,000-CU95,000) |
30,000 |
|
|
Cr Profit and Loss Fair Value Movement |
|
5,000 |
|
Cr revaluation reserve/OCI |
|
25,000 |
Being journal to reflect uplift in value on from 2014 to 2015. CU5,000 credit to profit and loss as CU5,000 had previously been debited to the profit and loss for the downward valuation
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve/OCI |
5,000 |
|
|
((CU125,000-CU100,000)*20%) |
|
|
|
Cr Deferred Tax Liability |
|
5,000 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 is not recognised as the asset was not previously recorded.
5) Deferred tax recognised in the consolidated financial statements on unremitted income from a joint ventures
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 joint venture, 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 for the parent company. Where the joint venture 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. Note deferred tax should only be recognised where the decision to distribute is not within the control of the venturer.
Under old GAAP, no deferred tax was required to be recognised unless the joint venture had a constructive obligation/binding agreement to make a dividend payment.
Example 23: Deferred tax on unremitted earnings
Company A invested CU10,000 to acquire 50% of Company B. The carrying amount at 1 Janaury 2014 in old GAAP books was CU15,000. The date of transition is 1 January 2014. The movement was due to income recognised since acquisition for the entity’s share of the profits year on year. Assume that the dividend when made to Company A by Company B are taxable in the hands of Company A at a rate of 10%. Under old GAAP deferred tax was not recognised as Company B was not legally obliged to pay a dividend. Assume the venturer does not have control over when it will be distributed. The transition adjustments required on transition are as follows:
1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves ((CU15,000-CU10,000)*10%) |
1,500 |
|
|
Cr Deferred Tax Liability |
|
1,500 |
Being journal to reflect deferred tax on unremitted earnings.
An adjustment may also be required in 31 December 2014 and 2015 year end where the parent company’s consolidated profit included its share of income/losses of the joint venture.
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