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Section 17 – Example 1 – Extract from an accounting policy for an entity that adopts fair value or previous revaluation at deem cost
Example of extract from an accounting policy for an entity that adopts fair value/or previous revaluation at deem cost and the cost model adopted:
Cost Property, plant and equipment are recorded at historical cost or deemed cost (note include valuation here where appropriate), less accumulated depreciation and impairment losses. Cost includes prime cost, overheads and interest incurred in financing the construction of tangible fixed assets. Capitalisation of interest ceases when the asset is brought into use. Freehold premises are stated at cost (or deemed cost for freehold premises held at valuation at the date of transition to FRS 102) less accumulated depreciation and accumulated impairment losses. The company previously adopted a policy of revaluing freehold premises and they were stated at their revalued amount less any subsequent depreciation and accumulated impairment losses. The company has adopted the transition exemption under FRS 102 paragraph 35.10(d) and has elected to use the previous revaluation as deemed cost OR The company has adopted the transition exemption under FRS 102 paragraph 35.10(C) and has elected to use the fair value as deemed cost. The difference between depreciation based on the deemed cost charged in the profit and loss account and the asset’s original cost is transferred from the non-distributable reserve to retained earnings through equity. Equipment and fixtures and fittings are stated at cost less accumulated depreciation and accumulated impairment losses. Where investment property can no longer be reliably measured without undue cost or effort these assets are reclassified to property, plant and equipment at the carrying amount prior to the transfer and depreciated over the useful economic lives. Spare parts that are acquired as part of an equipment purchase which are only to be used in connection with these specific assets are initially capitalised and amortised as part of the equipment. Spare parts which are expected to be used during than more than one period are capitalised as property, plant and equipment. Policy to be included where a policy of revaluation has been chosen: The company has adopted a policy of revaluing freehold premises. Freehold premises are included in the balance sheet at their fair value on the basis of a periodic professional valuation less accumulated depreciation. The difference between depreciation based on the revalued amount is charged in the profit and loss account and the asset’s original cost is transferred from revaluation reserve to retained earnings. Annually the carrying values are reviewed for appropriateness by the directors. Any changes in the value of freehold properties are reflected as a movement on the revaluation reserve except where the revaluation is below original cost in which case the balance is recognised in the profit and loss account. To the extent a legal or constructive obligation exists, the acquisition costs include the present value of estimated costs of dismantling and removing the asset and restoring the site. A change in estimated expenditures for dismantling, removal and restoration is added to/and or deducted from carrying value of the related asset. To the extent the change results in a negative carrying amount, the difference is recognised in the profit and loss. The change in depreciation is recognised prospectively. Depreciation Depreciation is provided on property, plant and equipment, on a straight-line basis, so as to write off their cost less residual amounts over their estimated economic lives. The estimated economic lives assigned to property, plant and equipment are as follows:
| Freehold Premises | 2% straight line on cost |
| Motor vehicles | 25% straight line on cost |
| Office Equipment, fixtures & fittings | 12½% straight line on cost |
| Computer equipment | 25%/33⅓% straight line on cost |
| Service equipment and spare parts | 10% straight line on cost |
The company’s policy is to review the remaining economic lives and residual values of property, plant and equipment on an on-going basis and where indicators exist adjust the depreciation charge to reflect the remaining estimated life and residual value. Fully depreciated property, plant & equipment are retained in the cost of property, plant & equipment and related accumulated depreciation until they are removed from service. In the case of disposals, assets and related depreciation are removed from the financial statements and the net amount, less proceeds from disposal, is charged or credited to the income statement. Extract from notes to the financial statements (assuming revaluation upwards)
- PROPERTY, PLANT AND EQUIPMENT
| Freehold Premises | Motor Vehicles | Plant and machinery | Computer Equipment | Total | |
| € | € | € | € | € | |
| Costs | |||||
| At beginning of year | 207,473 | 150,038 | 488,979 | 144,523 | 891,013 |
| Additions in year | 1,295,000 | 165,000 | 91,733 | 34,704 | 1,586,437 |
| Revaluation | 500,000 | – | – | – | 500,000 |
| Transfer from investment property | 100,000 | – | – | – | 100,000 |
| Disposals in year | – | (93,359) | – | – | (93,359) |
| At end of year | 1,502,473 | 221,679 | 580,712 | 179,227 | 2,984,091 |
| Depreciation | |||||
| At beginning of year | 187,723 | 111,836 | 270,802 | 134,767 | 705,128 |
| Charge for Year | 37,543 | 26,799 | 29,015 | 56,642 | 149,999 |
| Revaluation | (125,000) | – | – | – | (125,000) |
| On disposals | – | (42,060) | – | – | (42,060) |
| Impairment | – | – | 100,000 | – | 100,000 |
| At end of year | 100,266 | 96,575 | 399,817 | 191,409 | 788,067 |
| Net book value | |||||
| At 31 December 2015 | 1,752,207 | 125,104 | 80,895 | (12,182) | 2,196,024 |
| At 31 December 2014 | 19,750 | 38,202 | 18,177 | 9,756 | 85,885 |
The following assets were held under finance lease:
| 2015 | 2014 | ||
| € | € | ||
| Net Book Value | 66,884 | 129,389 | |
| Depreciation Charge for the Year | 29,015 | 31,317 | |
| (i) The land and buildings which are used as part of the company’s core business were revalued by [state name], [state qualification] to an open market value basis reflecting existing use [or state alternate basis if appropriate if this Is higher] on [state date] 20XX. The valuation was carried out in accordance with the SCS Appraisal and Valuation Manual. {If the valuer is an officer or employee of the company or a group company this fact must be stated}. These valuations have been incorporated into the financial statements and the resulting revaluation adjustments have been taken to the revaluation reserve. The revaluations during the year ended 30th June 2015 resulted in a revaluation surplus of 375,000. (ii) The historical cost of the freehold premises is as follows: At 31 December 2015 20,020 At 31 December 2014 24,165 (iii) As a result of falling profits and in accordance with Section 27 of FRS 102, the carrying values of the plant and machinery assets in the widget segment have been compared to their recoverable amounts. As a result of this exercise an impairment charge of €100,000 recognised in the financial statements. The value in use has been derived from the future cash flow projections using a pre-tax discount rate of X%. Cash flows have been projected over the next five years based on management’s business plan, and thereafter a steady growth rate of 1% has been applied which is consistent with the company’s growth rate over the past number of years. (iv) The freehold property has been pledged as security on loans taken out by the company. | |||
Transition exemptions
OmniPro comment
Section 35.10 provides an exemption on transition which allows an entity to use the fair value at the date of transition as deemed cost or a previous GAAP revaluation as deemed cost. For example a company previously choose the revaluation option and revalued the buildings under old Irish GAAP. The date of transition is 1 January 2014. A previous valuation was performed on 31 December 2012 and was stated at €500,000 which was included in the Irish GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is 464,285. Under the exemption at the date of transition, the company can elect to use the €464,285 as its deemed cost going forward. Depreciation will be charged over the remaining life from the date of transition i.e. 15 years. Note however, deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition. Where under old GAAP the revaluation option was chosen and the 2014 financial statements included a revaluation but on transition a cost model is chosen, a transition adjustment will be required to reverse the previous valuation under old GAAP in the 2014 financial statement together with the reversal of the additional depreciation on this revaluation.
Example 17: Fair value as deemed cost
A company previously chose the cost model under old GAAP. The date of transition is 1 January 2014 and the company intends to continue to use the cost model under FRS 102. The useful life of this asset was determined to be 20 years. The original cost was 600,000. The remaining useful life at 1 January 2014 was 15 years and the NBV is 450,000. The company has obtained a valuation representing fair value at 31 December 2013 of €700,000. Under the exemption at the date of transition, the company can elect to use the €700,000 as its deemed cost going forward and no further revaluation will be required as the entity has chosen to apply a cost model. Assume the deferred tax rate is 12.5% (non-CGT rate). Note however deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition. This transition exemption gives companies a one off opportunity to bolster the balance sheet of the company on the date of transition. It is also worth nothing where applicable the fair value should be split into each of its component parts. Note a valuation prepared after the date of transition cannot be used as the deemed cost, the valuation must be a valuation of the PPE on the date of transition. The journals required on transition using the above example are: On 1 January 2014
| Dr PPE | €250,000 (€700,000-€450,000) |
| Cr other non-distributable reserve | €250,000 |
Being journal to reflect the uplift in value on the date of transition
| Cr deferred tax liability | €31,250 (€250,000*12.5%) |
| Dr non-distributable reserve | €31,250 |
Being journal to recognise deferred tax on the uplift in value In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the depreciation and the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
| Cr accumulated depreciation | €16,667 ((€700,000-€450,000)/15yrs) |
| Dr depreciation in profit and los | €16,667 |
| Dr deferred tax liability | €2,083 (€16,667*12.5%) |
| Cr deferred tax in P&L | €2,083 |
Being journal to recognise the additional depreciation charge in the 2014 year and the release of the related deferred tax. The 2015 journal will be the very same as the 2014 journal above assuming the above journals are brought forward to reserves.
Example 18: Previous GAAP revaluation as deemed cost
A company previously chose the revaluation option and revalued the buildings under Old Irish GAAP. The date of transition is 1 January 2014. The original cost of the building was €300,000. A previous valuation was performed on 31 December 2012 and was stated at €500,000 which was included in the Irish GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is 464,285. The amount in the revaluation reserve at 31 December 2013 was €260,000. Under the exemption at the date of transition, the company has elected to use the €464,285 as its deemed cost going forward and not to adopt a policy of revaluation going forward. Note however deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition. Assume the rate of deferred tax is 12.5%. See below adjustments required on transition:
| Credit deferred tax in balance sheet | 20,535 (464,285 – 300,000) * 12.5%) |
| Debit non-distributable reserve | 20,535 |
Being journal to recognise deferred tax on the uplift at the date of transition to the non-distributable reserve
| Debit revaluation reserve | 260,000 |
| Credit non distributable reserve | 260,000 |
Being journal to reclassify previous revaluations under old GAAP to a non-distributable reserve to set against the deferred tax recognised on transition. From that date on, the increase in deferred tax should be recognised in the profit and loss account as the asset is depreciated. The asset is depreciated over its remaining life of 15 years so the depreciation charge will be the same as was posted under old GAAP. In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the depreciation and the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
| Credit deferred tax in balance sheet | 1,369 ((464,285-300,000)/15yrs=10,952) * 12.5%) |
| Debit deferred tax in profit and loss | 1,369 |
Being journal to reflect deferred tax movement to account for the decrease in the NBV of fixed assets due to depreciation for the year
| Cr profit and loss reserves | 9,583 (10,952-1,369) |
| Dr non-distributable reserve | 9,583 |
Being journal to transfer the depreciation on the revalued amount net of deferred tax from profit and loss reserves to the non-distributable reserve The 2015 journal will be the very same as the 2014 journal above assuming the above journals are brought forward to reserves.
Example 19: Revaluation option chosen under old GAAP, reverting to the cost model on transition
A company previously chose the revaluation option and revalued the buildings under Old Irish GAAP. On transition to FRS 102 the company revert back to the cost model. The date of transition is 1 January 2014. The original cost of the property was €300,000 purchased 5 years from the date of transition. A previous valuation was performed on 31 December 2012 and was stated at €500,000 which was included in the Irish GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is 464,285. Assume the €300,000 was allowed for capital allowance purposes. The journals posted to reflect this are: On 1 January 2014
| Cr PPE | €239,285* |
| Dr revaluation reserve | €243,750** |
| Cr profit and loss reserves | €4,465 (€243,750-€239,285) |
Being journal to restate the balance to a cost basis and eliminate the revaluation reserve * total of the adjustment is the difference between the carrying amount at 1 January and the amount this would have been stated at if no revaluation policy had of occurred. Original cost = €300,000/20yrs * 15yrs being the number of years remaining up to 1 January 2014 = €225,000. Therefore the adjustment required is =€464,285-€225,000= €239,285 **the value in the revaluation reserve at 1 January 2014 assuming depreciation each year was transferred to the revaluation reserve. Total revaluation posted at 31 December 2013 was €300,000/20yrs * 16yrs being the years held at cost up to date of revaluation=NBV of €240,000. The uplift at that time was €500,000-€240,000= €260,000. Therefore the additional depreciation on this revaluation during 2013 was €16,250 (€260,000/16yrs being number of years remaining at time of revaluation on 31/12/12 * 1 yr being the length of time from revaluation to date of transition = €16,250. Total carrying amount in reserve at 1 January 2014 was €243,750 (€260,000-€16,250). Note deferred tax is not effected here as under old GAAP deferred tax would only have been recognised on the cost. The revaluation was a permanent difference.
Example 20: Change economic life
At the date of transition, the NBV of plant and machinery was nil however the fair value was €30,000 with a remaining life of 2 years. Assuming the write down to nil is not an error under prior GAAP but instead due to changes in conditions, then although usually this change to the economic life would be treated as change in estimate and adjusted prospectively, Section 35.9 prevents a change in estimate to be recognised in the first set of financial statements under FRS 102 instead it should be reflected in the first set of FRS 102 financial statements. However, it can elect to use fair value as deemed cost as allowed under Section 35.10 and apply the below transition adjustment:
| Dr fixed assets | 30,000 |
| Cr retained earnings | 30,000 |
From then on the depreciation will have to be recognised on this value over two years remaining useful life. Note deferred tax may need to posted here if the machinery still has a tax written down value. Section 35 also provides an exemption where in the past an entity has not recognised the cost of dismantling, removing or restoring a site to its original condition. If this is the case, then instead of including the cost on transition at the date the liability arose the entity can elect to show this at the date of transition. In reality the requirement for a provision was also required under old GAAP therefore a provision should already have been made. Principal transition adjustments
OmniPro comment
The main adjustments expected on transition are detailed below: 1) Deferred tax to be recognised on any uplift in value above tax cost See example 17, 18 and 19 above for the transition adjustments required. 2) Spare parts Section 17.5 which is the standard that deals with property, plant and equipment makes it clear that -spare parts are classified as property plant and equipment when they are expected to be used during more than one period or only used in connection with an item of property plant and equipment. Where this is the case the spare part is depreciated over its useful life which cannot be more than the useful life of the main asset for which the spare parts are utilised. Old GAAP provided less guidance therefore, some entities would have classified such spare parts as inventory instead of PPE. As a result on transition to FRS 102, such entities will need to recognise a transition adjustment to correct this.
Example 21: Reclassification of spare parts from inventory to PPE
Company A, has a significant value of spare parts for the production equipment. Under old GAAP these spare parts were treated as inventory. The total value of these spare parts at the date of transition was €500,000. At the date of transition, the company determines the useful life of the spare parts to be 10 years from the date of transition and the residual value is nil. The transition adjustment required is:
| Credit inventory | 500,000 |
| Debit PPE | 500,000 |
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the depreciation and the deferred tax impact. Note from a tax perspective the depreciation will be allowed as a deduction, therefore after transition there will be no deferred tax effect. Deferred tax is recognised on transition for the tax deduction not allowed in the comparative year but will be allowed as part of transition adjustments in the tax computation going forward over 5 years. The journals required are:
| Debit profit and loss – depreciation | 50,000 (500,000 / 10yrs) |
| Credit PPE – spare parts | 50,000 |
| Debit balance sheet – deferred tax | 6,250 (50,000 *12.5%) |
| Credit profit and loss – deferred tax | 6,250 |
3) Transfer of software and website costs to intangibles Where software and website development costs have previously been included within PPE, on transition an adjustment may be required to transfer these to intangibles where they are not an integral part of the hardware. If this is the case, it will merely be a balance sheet reclassification from PPE to intangibles as the useful life etc should remain the same.
Example 22: Transfer of software and website costs to intangibles
Under old GAAP, Company A classified website development costs and software costs which are not an integral part of the asset as property, plant and equipment. Under FRS 102, these should be classified as intangible assets. The NBV of these assets on transition was €100,000. The journal required on transition is therefore: On 1 January 2014
| Dr intangible assets | €100,000 |
| Cr PPE | €100,000 |
For the year ended 31 December 2014 and 2015 a similar adjustment will be required for the NBV at that date assuming journal is not brought forward year on year. 4) Significant part of a fixed asset replaced since the date of transition Where a significant part of a fixed asset was upgraded/replaced/renovated and under old GAAP in the comparative year, this cost was expensed as it was not separately depreciated, a transition adjustment may be required under FRS 102. Under FRS 102, such replacement parts should be capitalised where they provide incremental benefits and the previous amount included in PPE derecognised. Where the initial cost of the item replaced cannot be determined, then applying IAS 16 principals, the depreciated replacement cost can be used. In this particular case a transition adjustment may be required as detailed below
Example 23: Significant part of a fixed asset replaced since the date of transition
Company A renovated/replaced the ventilation system in its factory at a cost of 200,000 on 1 January 2014. The transition date is 1 January 2014. This was a part that requires regular replacing. Under old GAAP, this was expensed and it had not previously been separately identified and depreciated nor did it enhance economic benefits above what it would have provided usually. Under FRS 102 it should have been capitalised and the NBV of the old ventilation system disposed of. Assume NBV of the factory is 800,000 with 8 years useful life remaining on transition. The UEL is 10 years. Ignore deferred tax. Under FRS102 the entity will need to calculate the depreciated replacement cost of the ventilation system. This is calculated as follows:
| 200,000/ useful life of 10 yrs * remaining useful life of 8 yrs = 160,000 |
The transition adjustments to be posted in the 31 December 2014 year end (comparative year) are:
| Cr repairs in P&L | 200,000 |
| Dr fixed assets | 200,000 |
Being journal to capitalise the cost previously expensed under old GAAP
| Cr fixed assets | 160,000 |
| Dr loss on disposal P&L | 160,000 |
Being journal to derecognise the old ventilation system
| Dr depreciation | 25,000 (200,000/8 yrs) |
| Cr fixed assets | 25,000 |
Being journal to reflect additional depreciation on the new ventilation unit over its remaining UEL The transition adjustment for 2015 will just be the depreciation journal of 25,000 assuming the above journals are brought forward to reserves.
Example 24: purchasing on deferred credit terms
A company purchased a piece of equipment from a related party supplier on preferential terms for €300,000 on 1 January 2013. The company does not have to pay for the Property until 2 years after delivery (i.e. 31 December 2014). Under normal trading conditions, the company would have to pay on delivery. Under old GAAP, the €300,000 was charged to fixed assets and creditors respectively. The NBV at the date of transition (assume the date of transition is 1 January 2014) is €270,000 with a remaining useful life of 9 years (€30,000 depreciation charge per annum under old GAAP). Assume the entity will not adopt a policy of deemed cost or revaluation on transition. Assume the asset does not qualify for capital allowance purposes. Under Section 17, the Company must present value the €300,000 using the rate of interest that would be charged on this balance by a third party. Assume the interest that would be charged by a bank for 2 years on a loan of €300,000 is 7%. The amount to be recognised as an asset is the present value for the future payment.
| €300,000 / (1+.07)^2 = €262,031. |
The difference of €37,969 (300,000-262,031) is posted as an interest cost over the two year period assuming it does not meet the requirements for capitalising borrowing costs under Section 25 i.e. it is a qualifying asset where the asset takes a period of time to complete. This €37,969 is charged to the profit and loss account under the effective interest rate method as detailed in Section 11 of this manual. Therefore the interest charge for 2013 and 2014 should have been:
| 2013 interest charge = €262,031*7%= €18,342. Therefore the required carrying amount at the date of transition is €280,373. |
| 2014 interest charge = €280,373 * 7%= €19,627 |
The NBV required at 1 January 2014 under FRS 102 is= €235,828 (€262,031 cost net of finance charge/10 year life at date of acquisition* 9 years remaining at date of transition i.e. €26,203) The journals required on transition are: 1 January 2014
| Cr PPE | €7,969 (€270,000 NBV-€235,828 required NBV) |
| Cr profit and loss reserves | €11,658 |
| Dr trade creditors | €19,627 (€300,000 of creditors-€280,373) |
Being journal to recognise the correct NBV of PPE and of trade creditors under FRS 102 at the date of transition and the related deferred tax impact Journals required in year ended 31 December 2014 assuming the above journals are posted to profit and loss reserves etc.
| Cr depreciation | €3,797 |
| Dr PPE | €3,797 (€30,000-€26,203) |
Being journal to reverse over depreciation charged under old GAAP
| Dr interest charge | €19,627 |
| Cr trade creditors | €19,627 |
Being journal to reflect deemed finance interest on the extended credit to bring the balance to €300,000 prior to the date of payment Journals required in year ended 31 December 2015 assuming the above journals are posted to profit and loss reserves etc.
| Cr depreciation | €3,797 |
| Dr PPE | €3,797 (€30,000-€26,203) |
Being journal to reverse over depreciation charged under old GAAP [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]