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Transition exemptions
OmniPro comment
Section 23 should be applied retrospectively. Section 35 provides no exemptions. This is unlikely to be an issue as old GAAP (FRS 5 and SSAP 9) and FRS 102 have the same principals so no material differences are expected other than some disclosure differences as detailed in the differences section of this website.
Principal differences on transition.
- A sale with unusual credit terms (not normal credit terms) and is therefore deemed a financing transaction
Under Section 11 and Section 23, where a financing transaction is included within a sale, the amount to be recognised within revenue is the cash price that would be charged where no unusual credit terms were provided. The deemed financing element is posted as interest/finance income in the P&L and released over the terms of the credit provided. Deferred tax will need to be recognised on transition in the opening balance sheet and will be reversed over the financing period. Under old GAAP, this sale was recognised at the gross amount and not present valued (i.e. sale recognised for CU50,000).
Example 29: Sale with unusual credit terms
Company A sold goods worth CU50,000 with unusual credit terms on 01/12/13 (date of transition is 01/01/14). The credit provided is for a period of up to 31/12/15. The normal cash price for these goods would be CU35,000. Under old GAAP CU50,000 was recognised in 2013 and the carrying amount in debtors at 01/01/14 was CU50,000. The difference of CU15,000 is determined to be a financing transaction. Assume the deferred tax rate is 10% and the transition adjustment will be taxed in future tax computation as the finance income is released. The effective interest rate is calculated at 18.62% as per below. The effective interest rate is determined so as to write the deemed interest into the P&L over the life of the transaction. The effective interest rate is determined through trial and error or through the use of excel.
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Calculated EIR – 18.62% |
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Period Ending |
Opening Balance |
Interest for Period @ 18.62% |
Cash flow |
Closing Balance |
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31/12/2013 |
35,000 |
536 |
– |
35,536 |
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31/12/2014 |
35,536 |
6,617 |
– |
42,152 |
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31/12/2015 |
42,152 |
7,848 |
(50,000) |
– |
The transition adjustments required to adjust the opening balance sheet at 01/01/14 are:
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CU |
CU |
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Dr Profit and Loss Reserves (CU15,000-CU536 which relates to pre-transition) |
14,464 |
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Cr Trade Debtors |
|
14,464 |
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Dr Deferred Tax on BS (CU14,464*10%) |
1,446 |
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Cr Profit and Loss Reserves for Deferred Tax |
|
1,446 |
Being journal to reflect correct carrying amount of CU35,536 in the opening balance sheet and the effect of deferred tax on this adjustment (deferred tax as this was taxed under old GAAP but it has not hit the profit and loss account under FRS 102 at this time, so the deferred tax will be released as this is released to the profit and loss as this amount will be deducted in the tax computation going forward)
The adjustments required to adjust the comparative year (year ended 31/12/14) assuming the opening transition journals above are carried forward and P&L journals above posted to reserves.
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CU |
CU |
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Dr Trade Debtors |
6,617 |
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Cr Finance Income in P&L (so that the carrying amount is now CU42,152) |
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6,617 |
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Dr Deferred Tax P&L |
661 |
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Cr Deferred Tax on BS (CU6,617*10%) |
|
661 |
Being journal to reflect the deemed interest income in the profit and loss for the year and the related deferred tax effect
The adjustments required to adjust the current year (year ended 31/12/15) assuming the opening transition and 2014 journals above are carried forward to reserves.
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CU |
CU |
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Dr Trade Debtors |
7,848 |
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Cr Finance Income in P&L (so that the carrying amount is now CU50,000) |
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7,848 |
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Dr Deferred Tax P&L |
785 |
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Cr Deferred Tax on BS (CU7,848*10%) |
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785 |
Being journal to reflect the deemed interest income in the profit and loss for the year and the related deferred tax effect
2) Customer loyalty schemes not accounted for under old GAAP
Although customer loyalty schemes were required to be accounted for under old GAAP, application of this requirement was not always adhered to. Therefore on transition an entity that engages in loyalty schemes should ensure that the award credits are measured at its relative fair value and that they are accounted for as a separately identifiable component of the initial sales transaction and the amount deferred. Whether a prior year adjustment is required on transition should be considered given that it should always have been accounted for in this way under old GAAP.
Example 30: Customer loyalty
Company A is a hairdresser. It operates a customer loyalty scheme where if a customer gets 10 hair cuts, they get the next one free. The entity did not account for the fair value of this scheme under old GAAP. The date of transition is 1 January 2014. At the 1 January the Company estimates the total number of customers who hold a loyalty card is 3,000. 1,500 of these customers have the full 10 haircuts obtained and therefore are entitled to a free hair cut. An average of another 500 customers have the card half way filled and the remaining 1,000 has obtained on average 8 hair cuts. The selling price for each hair cut is CU20. At the 31 December 2014 the company estimates the total number of customers who hold a loyalty card is 2,500. 1,500 of these customers have the full 10 haircuts obtained and therefore are entitled to a free hair cut. An average of another 400 customers have the card half way filled and the remaining 600 have obtained on average 8 hair cuts.
Assume a prior year restatement is not required and the hair cuts must be redeemed within a year and will be redeemed by all customers. Assume the deferred tax rate is 10%.
The amount of revenue to be deferred so as to reflect the fair value of the loyalty scheme awards which remains outstanding at the 1 January 2014 is calculated as follows:
1 January 2014
The fair value of the loyalty scheme every time a hair cut is obtained = CU20/10 hair cuts = CU2. Therefore the total revenue that should be recognised each time the company cuts a head of hair (assuming the customer has a loyalty card and is likely to redeem it when full) is:
Fee/fair value for one hair cut of CU20 – CU2 allocated to the award scheme = CU18
1,500 customers who have 10 haircuts obtained * CU2 = CU30,000 (1,500*CU2*10)
500 customers who have 5 haircuts obtained * CU2 = CU5,000 (500*5*CU2)
1,000 customers who have 8 haircuts obtained * CU2 = CU16,000 (1,000*8*CU2)
Therefore the total revenue to be deferred is CU51,000 (CU30,000+CU16,000+CU5,000)
31 December 2014
1,500 customers who have 10 haircuts obtained * CU2 = CU30,000 (1,500*CU2*10)
400 customers who have 5 haircuts obtained * CU2 = CU4,000 (400*5*CU2)
600 customers who have 8 haircuts obtained * CU2 = CU9,600 (600*8*CU2)
Therefore the total revenue to be deferred is CU43,600 (CU30,000+CU4,000+CU9,600)
The journals required on transition are:
On 1 January 2014
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CU |
CU |
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Dr Profit and Loss Reserves Net of Tax (CU51,000-CU5,100) |
45,900 |
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Dr Deferred Tax in Balance Sheet (CU51,000*10%) |
51,000 |
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Cr Provision for Cost of Customer Loyalty Scheme |
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51,000 |
Being journal to defer the fair value of the loyalty scheme on transition and the related deferred tax for the fact that a tax deduction will be obtained in the future.
Journals required in 31 December 2014 year end assuming the above journals are posted to profit and loss reserves
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CU |
CU |
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Dr Provision for Cost of Customer Loyalty Scheme (CU51,000-CU43,600) |
7,400 |
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Dr Deferred Tax in P&L (CU15,400*10%) |
740 |
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Cr Deferred Tax in Balance Sheet |
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740 |
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Cr Revenue |
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7,400 |
Being journal to defer the fair value of the loyalty scheme at 31/12/14 and the movement in the related deferred tax. The net deferred tax asset of CU4,360 (CU5,100-CU740) will be recovered over a 5 year period under the tax transition rules, therefore this will be released over those 5 years.
If we assume there was no movement in the 31 December 2015 year then no journals are required. However where there is movement, the same journal as the 2014 year will need to be posted with the exception of the deferred tax journal on this movement as the movement will be taxed in the 2015 year. The deferred tax journal to derecognise the CU4,360 over 5 years will be required as follows:
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CU |
CU |
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Dr Deffered Tax in P&L (CU4360/5 years) |
872 |
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Cr Deferred Tax Asset |
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872 |
Being journal to release 1/5 of the deferred tax asset.
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