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FRS 102 Transition exemptions
OmniPro comment
Section 35.10 provides an exemption whereby lease incentives received prior to the date of transition do not have to be retrospectively adjusted. Instead the entity can continue to release the accrual over the life determined under old GAAP. This is likely to be a very beneficial exemption for retailers who have a large number of leases with incentives. Under FRS 102 the lease incentives are recognised over the life of the lease. This contrasts with old GAAP where the lease incentive was released over the shorter of the lease term or over the period from the commencement of the lease to the date of the first market rent review/break clause.
Section 35.10 also allows an entity to carry out an assessment as to whether an arrangement constitutes a lease on the transition date as opposed to determining it at the date the arrangement was entered into.
Principal transition adjustments
- Lease incentives entered into since the date of transition
Under FRS 102 the lease incentives are recognised over the life of the lease. This contrasts with old GAAP where the lease incentive was released over the shorter of the lease term or over the period from the commencement of the lease to the date of the first market rent review/break clause.
Assuming the entity takes the exemption in Section 35.10 to not retrospectively adjust lease incentive accruals prior to the date of transition the only adjustment required will be for any lease incentive received since the date of transition. In this case there will be an impact on the profit and loss for the reduction in the lease incentive credit and the related deferred tax to reflect the fact that tax may have been charged on the additional credit in the comparative year which will be reimbursed in the tax computation over its life. If the exemption is not taken then a detailed exercise will need to be performed for each lease incentive similar to the below but will obviously be looking at incentives received pre transition.
Example 9: Lease incentives since date of transition
Company A’s date of transition is 1 January 2014 i.e. 31 December year end. Company A entered into a lease on 2 January 2014 for 10 years with a landlord for a premises it occupies. As part of the agreement the landlord provided a 3 month rent free period (lease incentive of CU200,000/12mths*3mths=CU50,000). The rent payable on the lease per annum is CU200,000. As part of the agreement, the landlord agreed to provide the first 3 months rent free. A rent review/break clause was included which could be initiated at the end of year 5. Under old GAAP, this lease incentive was released to the P&L over the 5 years as was dictated by that GAAP. Therefore at 31 December 2014 the lease incentive accrual under old GAAP was CU40,000 (i.e. the value of the rent free period of CU50,000 / 5 years * 4 years that remain) and the rent cost in the P&L was CU190,000. Assume deferred tax is at 10%. The adjustment will be tax deductible over a 5 year period in the tax computation.
Under Section 20, the lease incentive needs to be written off over the life of the lease which is 10 years. See below for the calculation of what should have been accrued at the 31 December 2014.
The journals required to be posted in Company A’s TB at the 31 December 2014 to correct the old GAAP postings are:
|
|
CU |
CU |
|
Dr Rental Expense in P&L (CU45,000-CU40,000) |
5,000* |
|
|
Cr Lease Incentive Accrual BS |
|
5,000 |
Being journal to reverse understatement of accrual under old GAAP
From year 2 on, the CU45,000 is written back to the profit and loss and set against the rental expense i.e. at the end of year 2 the accrual would be reduced to CU40,000 (CU50,000-CU5,000 for 2014 – CU5,000 for 2015) to show the net cost of CU195,000 per annum.
If in the above example the landlord provided a contribution of CU50,000 towards the cost of fixed assets or towards the cost of relocating, the treatment would be the same.
* Calculate the actual total rental payments over the 10 years i.e. actual rent payments are only paid for 9 years and 9 months = CU200,000 *9.75 years= CU1,950,000. Therefore the total amount of rent to be charged over the life of the lease is = CU1,950,000/10 years = CU195,000 per annum or CU16,250 per month. Therefore for the first 3 months an accrual is required as no payment is made. The accrual is then reduced over the life of the lease (the value of the rent free period was CU50,000). Therefore the accrual required at 31 December 2014 was CU45,000 (CU50,000 less the amount utilised in 2014 of CU5,000 (being CU50,000 / 10 years) compared to the old GAAP accrual of CU40,000.
Given that the company has already been taxed on the additional credit posted in old GAAP of CU500, a deferred tax asset should recognised for the fact that this will be recouped in future tax computations
The journals required are:
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU5,000*10%) |
500 |
|
|
Cr Deferred Tax P&L |
|
500 |
Being journal to reflect deferred tax on the above adjustment
For the year ended 31 December 2015, a similar adjustment will be required (plus the profit and loss reserve adjustment for 2014), however no deferred tax will be required on the 2015 adustment as the tax computation has not been submitted to the tax authorities at the time of preparing the financial statements. 1/5th of the deferred tax asset of CU500 recognised in 2014 will have to be released in 2015 for the fact that a deduction will be obtained in the tax computation for this 1/5th in 2015. The journal required is:
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
100 |
|
|
Cr Deferred Tax Asset |
|
100 |
Being journal to release 1/5th of the deferred tax asset to match the tax deduction claimed that year.
2) Directly attributable transaction costs
Under FRS 102 directly attributable transaction costs should be capitalised with the finance lease. This was not the case under old GAAP. In the unlikely event that these are material, retrospective adjustment will be required.
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