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Example 1: Impact of change in tax rate – substantively enacted just after year end
Company A operates in Ireland. During the year the government announced in the budget that the tax rate would change to 10%. The company year-end is 31 December 2014. The tax rate is not substantively enacted by the government until 10 January 2015. The tax rate prior to this was 15%. At the year end 31 December 2014, the company should calculate its tax at the 15% rate.
Deferred tax should also be measured at the tax rate of 15%. In effect it is a non-adjusting post balance sheet event. The fact that the rates changed and the deferred tax impact of the change in rate from 15% to 10% should be disclosed in a note to the financial statements.
Example 2: Change in rate during the year
Company A’s year end is 31 December. The tax rate for the first 3 months of the year was 20% and the tax rate for the remaining 9 months was 10%. The tax rate that should be used for computing taxable profits should be the weighted average of these rates.
Tax rate of 20% for 3 months = 20%/12mths*3mths = 5%
Tax rate of 10% for 9 months = 10%/12mths*9mths = 7.5%
Total average rate to be used in the financial statements 12.5%
If the profits are earned somewhat evenly during the year, then the tax rate of 12.5% can be used in the tax computation.
Example 3: Carry back of losses
Company A incurred losses of CU100,000 in the year which are all allowable for tax purposes. In the previous year the company had taxable trading profits of CU150,000 and paid tax at 10% so tax of CU15,000 was paid on this income. Therefore the losses in the current year of CU100,000 can be offset against the taxable trading in the prior year of CU150,000 which leaves CU50,000 taxable in the prior year. Assuming the prior year tax has been paid, the company can recognise a current tax asset for the CU10,000 (CU100,000*10%) refundable from the tax authorities. Note in the tax note in the financial statements there would be a line to say ‘set back of losses to the previous year’. If there was CU200,000 losses in this example the remaining CU5,000 (CU50,000*10%) could be recognised as a deferred tax asset if is probable future profits will be available to utilise this loss.
Example 3A
Company A has losses forward of CU200,000. The projected profits over the next 6 years is CU100,000. In this example given that it is going to take 6 years to recover only CU100,000 of the losses, the entity should at a maximum recognise a deferred tax asset of CU100,000. Whether to recognise this CU100,000 will depend on the strength of projections and how accurate the Company has been with projecting in the past.
Example 4: Conditions for retaining tax allowances have been met
Company A purchased an industrial property 25 years ago for CU500,000. This property is being depreciated for tax purposes over 50 years but capital allowances are being claimed for tax purposes over 25 years after which no claw back arises for previous tax deductions claimed. Assume the deferred tax rate is 10%. Therefore in the accounts at the end of year 25 the deferred tax liability recognised was:
|
|
CU |
|
NBV Per Accounts (CU500,000/50yrs*25yrs)= |
250,000 |
|
Tax Written Down Value (CU500,000/25yrs*0yr left)= |
(0 ) |
|
Deferred Tax Liability |
250,000 |
|
Deferred Tax Rate @ 10% |
25,000 |
At the end of year 26, the previous years deferred tax liability can be released in full as the tax life is over and no balancing charge/allowance can arises following a sale.
Example 5: Indexation of base cost – non depreciable asset
Company A purchased a piece of land for CU100,000 in 1990. Assume the carrying amount in the accounts is CU500,000 following a revaluation. Under local tax rules, indexation is allowed to be applied when determining the tax to be paid on the sale of the land. If we assume that indexation allowed is 2.5 times the original cost and the deferred tax rate on sale is 20%, the deferred tax asset to be recognised at the year end is:
CU500,000 – (CU100,000*2.5 times)= CU250,000 * the sales tax rate of 20%= CU50,000
Note if no revaluation had of been booked in the accounts, then no deferred tax would be recognised as there is no difference between the carrying amount in the accounts and the tax base cost. Also if the above was a loss, the loss would be restricted to the actual loss excluding indexation. Whether a deferred tax asset should be recognised for the loss will be determined by whether the entity believes the capital loss can be utilised in the foreseeable future.
Example 6: Allowable for tax and depreciable
At the start of year 1, Company A purchased a machine for CU100,000 which is fully allowable for capital allowance purposes. The asset is written off over a life of 10 years for accounting purposes and a life of 8 years for tax purposes. As a result of the mismatch in the life for tax and accounting purposes a timing difference arises as the depreciation charged to the profit and loss each year differs from the capital allowances used to reduce profit in the tax computation for that year. Assume trading tax rate of 10% and the profit before tax is CU50,000. To determine the timing difference at the end of year 1, do the following:
|
|
CU |
|
NBV of Machine (CU100,000/10yrs*9yrs)= |
90,000 |
|
TWDV of Machine (CU100,000/8yrs*7yrs)= |
(87,500) |
|
Deferred Tax Timing Difference – Liability |
2,500 |
|
Deferred Tax Liability (CU2,500*10%) |
250 |
Journal to post at the end of year 1 is:
|
|
CU |
CU |
|
Dr Deferred Tax in Profit and Loss |
250 |
|
|
Cr Deferred Tax Liability |
|
250 |
Being journal to recognise deferred tax.
The reason for the difference is that depreciation was booked in the accounts of CU10,000 in the year whereas CU12,500 was allowed in the tax computation. Applying the accounting profit of CU50,000 and taking the current tax rate at 10% would give a profit of CU5,000 to be shown in the tax line in the accounts. However the actual tax charge is CU4,750 (50,000 accounting profit + depreciation addback of CU10,000 less capital allowance deduction of CU12,500 multiplied by 10%). Therefore by accounting for the deferred tax this CU4,750 is increased to CU5,000 so as to eliminate the effect of this timing difference in the P&L for the year which is what Section 29 tries to achieve.
The deferred tax to be recognised in the profit and loss in year 2 is obtained by taking the deferred tax timing difference at the end of year 2 from the timing difference at the end of year 1.
|
|
Year 1 |
Year 2 |
|
NBV (CU100,000/10yrs by number of years remaining) |
CU90,000 |
CU80,000 |
|
TWDV (CU100,000/8yrs by number of years remaining) |
CU87,500 |
CU75,000 |
|
Deferred Tax Timing Difference Liability |
CU2,500 |
CU5,000 |
|
Deferred Tax Liability (amount*10%) |
CU250 |
CU500 |
Journal to post at the end of year 2 is:
|
|
CU |
CU |
|
Dr Deferred Tax in Profit and Loss |
250 |
|
|
Cr Deferred Tax Liability (CU500-CU250) |
|
250 |
Being journal to recognise deferred tax.
Example 7: Asset allowable for tax, depreciable and revalued
At the start of year 1, Company A purchased an industrial building for CU100,000 which is fully allowable for capital allowance purposes. The asset is written off over a life of 10 years for accounting purposes and a life of 8 years for tax purposes. At the start of year 2 the asset was revalued to CU150,000. As a result of the mismatch in the life for tax and accounting purposes a timing difference arises as the depreciation charged to the profit and loss each year differs from the capital allowances used to reduce profit in the tax computation. Assume trading tax rate of 10%. To determine the timing difference, do the following:
The deferred tax liability at the end of year 1 is as per example 6 above as the numbers are the same. At the end of year 2 the timing difference is as follows:
|
|
Cost |
|
NBV of building |
CU133,333* |
|
TWDV of Building (CU100,000/8yrs*6yrs)= |
(CU75,000) |
|
Deferred Tax Timing Difference – Liability |
CU58,333 |
|
Deferred Tax Liability (CU58,333*10%) |
CU5,833 |
*carrying amount of the building at the end of year 1 was CU90,000 plus the revaluation at start of year 2 to bring the value up to CU150,000. Therefore an adjustment of CU60,000 was posted to the revaluation reserve. At time of revaluation the asset is depreciated over the remaining life of 9 years. NBV at the end of year 2 is therefore = CU150,000/9yrs*8yrs=CU133,333
Posting of movement in deferred tax:
Movement = deferred tax liability at end of year 1 of CU250 less deferred tax liability at end year 2 of CU5,833
However where a revaluation is recognised, the deferred tax on initial recognition of the CU60,000 follows how the revaluation was treated under Section 17. Section 17 requires the revaluation to be posted to OCI/revaluation reserve. Therefore the deferred tax on initial recognition of CU6,000 (CU60,000*10%) should be debit to the revaluation reserve/OCI. The journal required at the end of year 2 is:
|
|
CU |
CU |
|
Dr Revaluation Reserve |
6,000 |
|
|
Cr Deferred Tax Liability |
|
5,583* |
|
Cr Deferred Tax in P&L |
|
417 |
Being journal to correctly classify the deferred tax on initial recognition to the revaluation reserve and the balance to the profit and loss (CU417 is the difference between the depreciation charge posted in the year of CU16,667 (CU150,000/9yrs) less the capital allowance claimed of CU12,500 by the 10% tax rate).
For year 3, the deferred tax journal will be CU417
Example 8: Accounting for revaluations and subsequent movements including deferred tax – depreciable/not allowable for capital allowance purposes
Company A has adopted a policy of revaluation on its PPE. The company purchased an asset for CU500,000 at the start of year 1 and determined the useful life to be 20 years. By the end of year one, there were indicators of a change in market conditions and a valuation exercise was performed which showed the market value at CU525,000. At the end of year 4, a further valuation was performed as the difference in fair value and the carrying value was material, at this time the value was reduced to CU300,000. In year 8, a further valuation was performed which indicated a fair value of CU600,000.
Assume the deferred tax rate is 10% (this is not the sales rate as the asset is depreciated) and the asset does not qualify for capital allowances. Assume the depreciation on the revalued amount is transferred from the revaluation reserve to profit and loss reserves on a year by year basis as the depreciation is charged.
Company A would account for the changes in value in the following way:
At end of year 1:
The carrying value of the asset is CU475,000 (i.e. CU500,000 less depreciation for one year of CU25,000 (CU500,000/20yrs))
|
|
CU |
CU |
|
Dr Fixed Assets (CU525,000-CU475,000) |
50,000 |
|
|
Cr OCI/Revaluation Reserve |
|
50,000 |
From then on the carrying amount of CU525,000 will be depreciated over the remaining life of 19 years (CU27,632 per annum).
Deferred tax
|
|
CU |
CU |
|
Dr OCI/Revaluation Reserve |
5,000 |
|
|
Cr Deferred Tax in Balance Sheet (CU50,000 *10%) |
|
5,000 |
Therefore, the net amount posted to the revaluation reserve is CU45,000 (CU500,000-CU5,000). For year 2 to year 4, the deferred tax will be reduced and posted to the profit and loss account in line with the additional depreciation charged on the uplift in value of CU2,632 (i.e. CU27,632 less depreciation under cost basis of CU25,000).
At end of year 4:
The carrying value of the asset is CU442,104 (i.e. CU525,000 less depreciation of CU27,632 for three years totalling CU82,896)
|
|
CU |
CU |
|
Dr Profit and Loss (CU142,104-CU50,000) |
92,104 |
|
|
Dr Revaluation Reserve (reversal of amount recognised in yr 1) |
50,000 |
|
|
Cr Fixed Assets (CU442,104-CU300,000) |
|
142,104 |
From then on the carrying amount of CU300,000 will be depreciated over the remaining life of 16 years (CU18,750 per annum).
Deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet (CU5,000 less ((CU2,632 * 10%) * 3 years) = CU789) |
4,211 |
|
|
Cr OCI/Revaluation Reserve |
|
4,211 |
Note deferred tax asset on the write down is not recognised on the basis that it is not reasonable that future economic benefits will be derived from the capital losses.
At end of year 8:
The carrying value of the asset is CU225,000 (i.e. CU300,000 less depreciation of CU18,750 for 4 years totalling CU75,000)
|
|
CU |
CU |
|
Dr Fixed Assets (CU600,000 mkt value-CU225,000 NBV) |
375,000 |
|
|
Cr Profit and Loss (CU92,104 previously posted-CU25,000 See note 1) |
|
67,104 |
|
Cr Revaluation Reserve (CU375,000-CU67,104) |
|
307,896 |
Deferred tax
|
|
CU |
CU |
|
Dr OCI/Revaluation Reserve |
10,000 |
|
|
Cr Deferred Tax in Balance Sheet ((CU600,000-CU500,000 original cost) * 10%) |
|
10,000 |
From then on the carrying amount of CU600,000 will be depreciated over the remaining life of 12 years.
Note 1: The amount that can be credited to the P&L is reduced by the additional depreciation that would have been charged had the asset not been revalued downward in the past i.e. original cost prior to downward revaluation of CU500,000 / useful life of 20 years= CU25,000 * 4 years = CU100,000. This compares to depreciation charged while the asset was being depreciated on the reduced amount of CU75,000 (year 5 to year 8 – CU300,000/UEL of 16 years* 4 years) = CU25,000
Treatment of depreciation on upward revaluation
The revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realised i.e. disposed of, retired from use or as the asset is used by the entity. The transfer is made through reserves and not through the profit and loss. In relation to a transfer being completed as a result of the asset being used by the entity, the amount to be transferred is the difference between the depreciation charged to the profit on loss on the revalued amount compared to the depreciation that would have been charged if revaluation had not occurred.
Example 9: Transfer of depreciation on revalued amount from profit and loss reserves
Taking the above example, at the end of year 2 for the depreciated asset, the additional depreciation charged of CU2,632 (CU27,632-CU25,000) as a result of the revaluation and the related deferred tax credit on this of CU263 (CU2,632*10%), would be transferred from P&L reserves to the revaluation reserve. The below would be shown in the statement of changes to equity in the financial statements.
|
|
Year 2 |
|
Revaluation Reserve at 01/01/Year 2 |
45,000 |
|
Transfer from Profit & Loss Reserve (CU2,632-CU263) |
(2,369) |
|
Revaluation Reserve at 31/12/Year 2 |
42,631 |
|
Profit and Loss Reserves at 01/01/Year 2 |
50,000 |
|
Transfer to Revaluation Reserve |
2,369 |
|
Profit and Loss Reserves Reserve at 31/12/Year 2 |
52,369 |
Example 10: Accounting for initial and subsequent revaluations on non-depreciable assets – i.e. on land
Company A has adopted a policy of revaluation on its PPE. The company purchased land for CU500,000 at the start of year 1. By the end of year 1, there were indications of a change in market conditions and a valuation exercise was performed which showed the market value at CU525,000. At the end of year 4, a further valuation was performed as the difference in fair value and the carrying value was material, at this time the value was reduced to CU300,000. In year 8, a further valuation was performed which indicated a fair value of CU700,000.
Assume the deferred tax rate on a sale is 20%
Company A would account for the changes in value in the following way:
At end of year 1:
|
|
CU |
CU |
|
Dr Fixed Assets (CU525,000-CU500,000) |
25,000 |
|
|
Cr OCI/Revaluation Reserve |
|
25,000 |
Deferred tax
|
|
CU |
CU |
|
Dr OCI/Revaluation Reserve |
5,000 |
|
|
Cr Deferred Tax in Balance Sheet (CU25,000* 20%) |
|
5,000 |
Therefore, the net amount posted to the revaluation reserve is 20,000.
At end of year 4:
|
|
CU |
CU |
|
Dr Profit and Loss |
200,000 |
|
|
Dr OCI/Revaluation Reserve (being the amount previously recognised) |
25,000 |
|
|
Cr Fixed Assets (CU525,000-CU300,000) |
|
225,000 |
Deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet (CU25,000 * 20%) |
5,000 |
|
|
Cr OCI/revaluation Reserve (CU25,000 * 20%) |
|
5,000 |
Note deferred tax asset on the write down of the land is not recognised on the basis that it is not reasonable that future economic benefits will be derived from the capital losses.
At end of year 8:
|
|
CU |
CU |
|
Dr Fixed Assets (CU700,000-CU300,000) |
400,000 |
|
|
Cr Profit and Loss (i.e. reversal of amounts previously recognised in P&L) |
|
200,000 |
|
Cr OCI/Revaluation Reserve (CU400,000-CU200,000) |
|
200,000 |
Deferred tax
|
|
CU |
CU |
|
Dr OCI/Revaluation Reserve (CU200,000 * 20%) |
40,000 |
|
|
Cr Deferred Tax in Balance Sheet ((CU400,000-CU200,000) * 20%) |
|
40,000 |
Example 11: Fair value movements and deferred tax impact
Company A purchased a property on 1 February 2015 for CU200,000 which was rented out on 1 March 2015 and therefore met the definition of investment property. Legal costs of CU10,000 were incurred on the purchase and property assessment costs were incurred of CU5,000. At the 31 December 2015 the fair value was CU250,000. The sales deferred tax rate is 20%. The accounting requirements are as follows:
On initial recognition
|
|
CU |
CU |
|
Dr Investment Property (property assessment costs are not directly attributable) |
210,000 |
|
|
Cr Bank |
|
210,000 |
On 31 December 2015
|
|
CU |
CU |
|
Dr Investment property (CU250,000-CU210,000) |
40,000 |
|
|
Cr Fair Value Movement on Investment Property in P&L |
|
40,000 |
|
|
CU |
CU |
|
Dr Deferred Tax P&L (CU40,000*20%) |
8,000 |
|
|
Cr Deferred Tax in Balance Sheet |
|
8,000 |
Being journal to reflect the movement in fair value during the year including the deferred tax impact
Going forward deferred tax should be accounted on any fair value movements.
Example 12: Pensions/royalties
Company A pays pension contributions for its employees. Total charge posted to the profit and loss in the year was CU100,000, CU20,000 of which had not been paid over to the pension scheme by the year end. Assume tax rate of 10%.
For tax purposes, only the CU80,000 would be allowable. Therefore the remaining CU20,000 will be allowable when it is paid. On this basis a deferred tax asset of CU2,000 should be recognised to reflect this tax asset.
If we assume that a deferred tax asset was in existence in the prior year for CU30,000 in relation to unpaid contributions (i.e. deferred tax asset of CU3,000), the amount to be posted to the profit and loss is a debit of CU1,000 (CU3,000 paid in year re prior year less CU2,000 unpaid at year end).
Example 13: Pensions/royalties
Company A paid a one off lump sum to a directors pension scheme of CU200,000 which is expensed in the year for accounting purposes as required. However assume for tax purposes this is only allowed over two years. Assume the tax rate is 10%.
Therefore, a deferred tax asset of CU10,000 (CU100,000*10%) should be recognised at the year-end assuming there are other taxable profits to utilise this or there are other deferred tax liabilities to set this against.
Example 14: Finance lease
Company A entered into a finance lease for a machine. From an accounting perspective the asset was capitalised as CU30,000 and a finance liability recognised for CU30,000. The total cost including finance charges is CU36,000 over a two year life. At the end of year 1 the NBV of the asset was CU25,000 and carrying amount of the finance lease liability was CU16,000. Details on the postings for the year include:
|
Depreciation |
CU5,000 |
|
Finance Lease Interest |
CU4,000 |
|
Finance Lease Rentals Paid |
CU18,000 |
The deferred tax at the year-end is calculated as follows:
|
NBV of Finance Leased Asset (CU30,000-CU5,000 depreciation) |
CU25,000 |
|
Carrying Amount of Lease (CU30,000-CU18,000 payments+CU4,000 in lease interest) |
CU16,000 |
|
Deferred Tax Liability |
CU9,000 |
|
Deferred Tax at 10% |
CU900 |
The reason for the timing difference is that CU9,000 was only charged to the P&L (i.e. depreciation of CU5,000 and finance interest of CU4,000) whereas a tax deduction was allowed for CU18,000.
Example 15: Deferred tax on net defined benefit asset/liability
See below extract from an actuarial report detailing the movement in the plan assets during the year. See below the way in which this will be presented in the financial statements and the journals required to reflect these movements. Assume the prior year discount rate was 3.49% and the 2015 discount rate is 2.6%:
Changes in the present value of the defined benefit obligation are as follows:
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Benefit obligation at start of year |
(26,724) |
(26,236) |
|
Current Service Cost |
(615) |
(689) |
|
Interest Cost |
(1,325) |
(1,270) |
|
Plan participants’ contributions |
(334) |
(334) |
|
Actuarial gain/(loss) |
(10,148) |
1,601 |
|
Benefits paid |
313 |
204 |
|
Curtailment |
122 |
0 |
|
Benefit obligation at end of year |
(38,711) |
(26,724) |
Changes in the fair value of plan assets are as follows:
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Fair Value of Plan Assets at start of year |
18,030 |
17,318 |
|
Expected Return on Plan Assets |
1,093 |
1,161 |
|
Employer contribution |
1,250 |
1,535 |
|
Plan participants’ contributions |
334 |
334 |
|
Benefits paid |
(313) |
(204) |
|
Actuarial gain (Actual less expected) |
2,342 |
(2,114) |
|
Fair Value of Plan Assets at end of year |
22,736 |
18,030 |
The net pension liability as at 31 December 2014 and 2015 is analysed as follows:
|
|
2015 |
2014 |
|
|
|
CU |
CU |
|
|
Present value of defined obligations |
(38,711) |
(26,724) |
|
|
Fair Value of Plan Assets |
22,736 |
18,030 |
|
|
Net Pension Liability |
(15,975) |
(8,964) |
|
See below the journals required in the entity’s financial statements assuming a deferred tax rate of 10%. How each of the main figures are determined is discussed in the sections that follow.
Example 16: Recognising deferred tax
If we take example 15 above, the net defined benefit pension liability was CU15,975. Therefore the deferred tax asset to be recognised assuming the expected tax rate is 10% is CU1,598 (CU15,975*10%). This is a deferred tax asset as the expense has hit the profit and loss or other comprehensive income but has not yet been allowable for tax. Therefore when the pension contributions are made to reduce this liability they will be allowable for tax purposes.
The same approach should be taken in relation to a net defined benefit pension asset i.e. a deferred tax liability should be recognised. Given that a defined benefit asset is only recognised where it is deemed recoverable, if an asset is shown then it is appropriate to recognise a deferred tax liability for this asset.
Example 17: Undistributed profits of a subsidiary
Parent A has a subsidiary Company B. As Parent A controls the dividend policy and it is unlikely to pay a dividend in the foreseeable future, the entity should not recognise deferred tax assuming the asset will be realised from dividends.
Example 18: Assets partly allowable for tax purposes
Company A acquired a car at a cost of CU10,000. Assume under tax rules only CU4,000 is allowable for capital allowances. The asset is depreciated over 10 years and the tax life is also 10 years for the sake of simplicity. The deferred tax to be recognised is:
|
NBV at Year End (CU10,000/10yrs*9yrs) |
CU9,000 |
|
Less NBV of Non-Allowable Element (CU6,000/10yrs*9yrs) |
CU5,400 |
|
NBV of Allowable Element of Asset |
CU3,600 |
|
TWDV at Year End |
CU3,600 |
|
Deferred Tax at Year End |
CUNil |
The same could be the case for other items of plant, a car is just used as an example here.
Example 19: Deferred tax on business combinations
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000. Assume the deferred tax rate is 10%. Assume deferred tax has been recognised correctly on the book amounts transferred. Details of the book value and fair value at the time of acquisition is detailed below:
|
|
Book value |
Fair value |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
|
Intangible Assets |
CUnil |
CU100,000 |
|
Inventory |
CU150,000 |
CU160,000 |
|
Cash |
CU100,000 |
CU100,000 |
|
Debtors |
CU20,000 |
CU25,000 |
|
Creditors |
(CU100,000) |
(CU100,000) |
|
Deferred Tax |
(CU60,000) |
(CU86,500*) |
|
Total Net Assets |
CU370,000 |
CU748,500 |
|
Consideration |
|
CU1,000,000 |
|
Goodwill |
|
CU251,500 |
The deferred tax to be recognised on acquisition is:
|
Uplift in Property, Plant and Equipment |
CU150,000 |
|
Uplift in Intangible Assets |
CU100,000 |
|
Uplift in Inventory |
CU10,000 |
|
Uplift in Cash |
CUnil |
|
Uplift in Debtors |
CU5,000 |
|
Uplift in Creditors |
CUnil |
|
Total Timing Difference |
CU265,000 |
Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade rate should be used in measuring the deferred tax. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
From above we can see that the additional liability for deferred tax has increased goodwill by the same amount. The deferred tax will be reduced as the differences reverse year on year (i.e. for PPE and intangibles in the period depreciation/amortisation is charged, for debtors when they are paid, for inventory when they are sold etc.)
Note in the example above if there was a large residual value on the PPE, then it may be appropriate to recognise deferred tax at the sales rate for the value allocated to the residual amount and the remainder would be measured using the trading tax rate. This would then give a different answer for goodwill.
Example 20: Dividend received
Company A paid a dividend CU10,000 to Company B. Tax legislation in the country company A resides requires it to withhold tax of CU1,000 which is irrecoverable. In the books of company A the journals would be posted gross:
|
|
CU |
CU |
|
Dr Equity |
10,000 |
|
|
Cr Bank |
|
9,000 |
|
Cr Liability to Tax Authorities |
|
1,000 |
The journal that would be posted in Company B assuming it is paid out of post-acquisition profits would be:
|
|
CU |
CU |
|
Dr Bank |
9,000 |
|
|
Cr Dividend Received |
|
10,000 |
|
Cr Tax in Profit and Loss |
|
1,000 |
If in the above case the tax withheld was refundable, then instead of debiting the profit and loss with the CU1,000, a withhold tax asset account would be debited on the balance sheet.
Example 21: Offset of current tax assets and liabilities
Company A owes tax for year 1 totaling CU10,000 which has not been paid but a refund is due for year 2 of CU5,000.
In the financial statements the net CU5,000 can be shown as a creditor in the notes to the financial statements. Netting is allowed as it is tax due to the same tax authority and there is a right of offset.
Example 22: Offset of current tax assets and liabilities
Company A owes tax for year 1 totaling CU10,000 to the Irish government for its operations in Ireland and a tax refund of CU2,000 is due from the UK government.
In this instance no netting can occur. CU10,000 would be shown as a tax creditor and CU2,000 shown as a tax debtor.
Example 23: Offset of deferred tax assets and liabilities
Company A has deferred tax assets in relation to pension accruals but also has deferred tax liability with regard to accelerated capital allowances. All of these are for the same tax authorities.
In this case netting can occur as there is a legal right to net these off.
Example 24: 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 subsidiaries through the profit and loss. Assume 1 January 2014 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 rate of 20% (being the capital gains tax rate as it will be settled through sale for the purposes of this example). 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 Subsidiaries (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 Deferred Tax in P&L (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 etc.
|
|
CU |
CU |
|
Dr Fair Value Movement in Subsidiaries in P&L |
25,000 |
|
|
Cr Investments in Subsidiaries (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*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 CU500 would be recognised ((CU100,000-CU95,000)*10%)
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 |
|
|
Cr Fair Value Movement in Subsidiaries 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 was not recognised in 2014 as per the narrative above as the asset was not deemed recoverable.
Note if the investment were to be settled or realised through receipt of future dividends, the tax rate on the receipt of the dividend should be used in the above example.
Example 25: Adoption of fair value through other comprehensive income on transition
If we take example 24 above and assume Company A in its individual financial statements has adopted a policy of fair valuing investments in associates through other comprehensive income this time. The journals required would be as follows.
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (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 Movement in Subsidiaries in OCI/Revaluation Reserve |
20,000 |
|
|
Cr Investments in Subsidiaries (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 in line with Section 17
|
|
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 Subsidiaries (CU125,000-CU95,000) |
30,000 |
|
|
Cr Profit and Loss Fair Value Movement |
|
5,000 |
|
Cr Fair Value Movement in Subsidiaries in Revaluation Reserve/OCI |
|
25,000 |
Being journal to reflect uplift in value 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 ((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 was not recognised in 2014 as per narrative above as the asset was not deemed recoverable.
Note if the investment were to be settled or realised through receipt of future dividends the tax rate on the receipt of the dividend should be used for the deferred tax rate in the above example.
Example 26: Non-puttable ordinary shares at market value
Company A had an investment in ordinary shares which were list on the stock exchange. If we assume the date of transition is 01/01/14 and the market value of these shares at that date was CU10,000. Under old GAAP the carrying amount of these shares was CU6,000 being their original cost. Assume the deferred tax rate is 20% (CGT rate). The fair value at 31/12/14 was CU11,000 and CU9,000 at 31/12/15.
The transition adjustments required to adjust the opening balance sheet at 01/01/14 are:
|
|
CU |
CU |
|
Dr Investments at Fair Value |
4,000 |
|
|
Cr Profit and Loss Reserves (CU10,000 – CU6,000 cost) |
|
4,000 |
|
Dr Profit and Loss Reserves for Deferred Tax (CU4,000*20%) |
800 |
|
|
Cr Deferred Tax Liability |
|
800 |
Being journal to reflect the fair value at the date of transition and the related deferred tax on the uplift.
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
|
|
CU |
CU |
|
Dr Investments at Fair Value |
1,000 |
|
|
Cr Profit and Loss – Finance Income (CU11,000 – CU10,000 prior carrying amount) |
|
1,000 |
|
Dr Deferred Tax in P&L (CU1,000*20%) |
200 |
|
|
Cr Deferred Tax Liability |
|
200 |
Being journal to reflect the movement in fair value during the year and the related movement on deferred tax
The adjustments required to adjust the current year (year ended 31/12/15) assuming the opening transition journals above and the 2014 journals are carried forward and P&L journals above posted to reserves:
|
|
CU |
CU |
|
Dr Profit and loss – Finance Expense (CU11,000 prior carrying amount – CU9,000) |
2,000 |
|
|
Cr Investments at Fair Value |
|
2,000 |
|
Dr Deferred Tax Liability |
400 |
|
|
Cr Deferred Tax in P&L (CU2,000*20%) |
|
400 |
Being journal to reflect the movement in fair value during the year and the related movement on deferred tax
Example 27: Sale with unusual credit terms
Company A sold goods worth CU50,000 with unusual credit terms on 01/12/13. The credit provided is for a period of up to 31/12/15. The normal cash price for these goods would be CU35,000. The difference of CU15,000 is determined to be a financing transaction. 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.
The adjustments required to accounted for this are as follows:
|
|
CU |
CU |
|
Dr Trade Debtors |
50,000 |
|
|
Cr Sales |
|
50,000 |
Being journal to recognise the sale
|
|
CU |
CU |
|
Dr Sales (CU50,000-CU35,000) |
15,000 |
|
|
Credit Trade Debtors |
|
15,000 |
Being journal to reflect the deemed financing element of the sale so as to show the correct amortised cost
|
|
CU |
CU |
|
Dr trade debtors |
536 |
|
|
Cr Finance Income in P&L (so that the carrying amount is now CU35,536) |
|
536 |
Being journal reflect the deemed interest income in the profit and loss for the year for one month. The same type of journal is posted for the other two years.
Example 28: Purchase with unusual credit terms
If we take example 16A, and show the accounting for the purchaser in this case. For the purchasing company the journals to post are:
|
|
CU |
CU |
|
Dr Inventory |
50,000 |
|
|
Cr Trade Creditors |
|
50,000 |
Being journal to reflect purchase of stock
|
|
CU |
CU |
|
Dr Trade Creditors |
15,000 |
|
|
Cr Inventory |
|
15,000 |
Being journal to reflect the deemed financing element of the sale so as to show the correct amortised cost
|
|
CU |
CU |
|
Dr Finance Expense in P&L (so that the carrying amount is now CU35,536) |
536 |
|
|
Cr Trade Creditors |
|
536 |
Being journal reflect the deemed interest income in the profit and loss for the year for one month. The same type of journal is posted for the other two years.
Example 29: Forward Contracts
Company A entered into a forward contract to hedge against foreign exchange movements as the company engages in a significant volume of foreign currency sales. The year end is 31 December. It entered into a forward contract on 1 November 2013 to sell FC100,000 of FC in return for CU at a set rate of CU1:FC0.80 maturing on 31 March.
Assume the spot rate at 31 December 2013 and 31 December 2014 was CU1:FC0.70 and the date of transition is 1 January 2014. Assume deferred tax of 10%.
The forward rate quoted for sterling contract at 31 December 2013 by the bank for a contract that matures on 31 March is CU1:FC0.75.
Under old GAAP this forward contract was not accounted for; instead it was disclosed in the financial statements. However under FRS 102 this should be fair valued.
The transition adjustments as a result of entering into this forward contract at 31 December year end under FRS 102 assuming it does not meet the conditions for hedge accounting are as follows:
1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss reserves |
8,333 |
|
|
Cr Forward Contract Liability |
|
8,333* |
Being journal to reflect fair value of the forward contract at the year-end not accounted for under old GAAP.
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU8,333*10%) |
833 |
|
|
Cr Profit and Loss reserves |
|
833 |
Being journal to reflect deferred tax on the above adjustment for the fact that this will be tax deductible in future years.
*Fair value of the forward contract:
Amount of CU’s that will be obtained on 31 March at contracted rate of CU1:FC0.80 is FC100,000/0.80= CU125,000
Note any FC balances in the balance sheet at 31 December should be retranslated to the year-end spot rate.
Amount of CU’s that could theoretically be obtained on 31 March at contracted rate of CU1:FC0.75 = FC100,000/0.75= CU133,333
Fair value loss at 31 December 2013/1 January 2014 is CU133,333-CU125,000 = CU8,333
Journals required for year ended 31 December 2014 assuming the above journals are brought forward)
|
|
CU |
CU |
|
Dr Forward Contract Liability |
8,333 |
|
|
Cr Foreign Exchange Gain |
|
8,333 |
Being journal to derecognise the liability recognised on 1 January 2014 above on the contract maturing
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
833 |
|
|
Cr Deferred Tax Asset |
|
833 |
Being journal to reverse deferred tax as this was taxed in the 2014 tax computation when the forward contract was settled.
Example 30: Forward contracts in existence after the date of transition
If we take the example above and this time assume that the forward contract was entered into on 1 November 2014 and it matured on 31 March with the same dates and fair values. The journals that would be required on transition is:
31 December 2014
|
|
CU |
CU |
|
Dr Foreign Exchange Gain in P&L |
8,333 |
|
|
Cr Forward Contract Liability |
|
8,333 |
Being journal to reflect fair value of the forward contract at the year-end not accounted for under old GAAP.
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU8,333*10%) |
833 |
|
|
Cr Deferred Tax in P&L |
|
833 |
Being journal to reflect deferred tax on the above adjustment for the fact that this will be tax deductible in future years
31 December 2015 assuming the above journals were posted to reserves
|
|
CU |
CU |
|
Dr Forward Contract Liability |
8,333 |
|
|
Cr Foreign Exchange Gain |
|
8,333 |
Being journal to derecognise the liability recognised at 31 December on the contract maturing
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
833 |
|
|
Cr Deferred Tax Asset |
|
833 |
Being journal to reverse deferred tax as this will be taxed in the 2015 tax computation when the forward contract was settled.
Note if a forward contract exists at 31 December 2015 no deferred tax will be required to be recognised on the adjustment as it will be taxed/tax deductible in the 2015 year.
Example 31: Interest rate swap – non hedge accounting
Company A gets a loan for CU100,000 on 1 January 2013 at a fixed rate of 5% which is repayable in 5 years.
At the same time Company A enters into an interest rate swap with a third party e.g. another bank for a 5 year period whereby Company A will pay the floating rate to the third party and the third party will pay the fixed rate to Company A. The notional amount hedged is CU100,000 Assume the current average variable interest rate was 6%.
Under old GAAP (for non-FRS 26 adopters) this interest rate swap was not accounted for, instead it was disclosed in the financial statements. However under FRS 102 this should have been fair valued.
Assume at the end 31 December 2013 and 2014, there was a loss of CU5,000 and profit of CU6,000 respectively on the interest rate swap.
The transition adjustments required are:
1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
5,000 |
|
|
Cr Interest Rate Swap Liability |
|
5,000 (CU500*10%) |
Being journal to recognise the fair value of the interest rate swap
|
|
CU |
CU |
|
Dr Profit and Reserves with Deferred Tax |
500 |
|
|
Cr Deferred Tax Liability |
|
500 |
Being journal to reflect the deferred tax on the above adjustment.
Journals required for year ended 31 December 2014 assuming the above journals are brought forward)
|
|
CU |
CU |
|
Dr Interest Rate Swap Liability |
5,000 |
|
|
Cr Interest Expense |
|
5,000 |
Being journal to reverse the fair value of the interest rate swap at the end of prior year.
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
500 |
|
|
Cr Deferred Tax P&L |
|
500 |
Being journal to reflect the deferred tax on the above adjustment.
|
|
CU |
CU |
|
Dr Interest Rate Swap Liability |
6,000 |
|
|
Cr Interest Expense |
|
6,000 |
Being journal to recognise the fair value of the interest rate swap at 31 December 2014
|
|
CU |
CU |
|
Dr Deferred Tax P&L |
600 |
|
|
Cr Deferred Tax Liability |
|
600 |
Being journal to reflect the deferred tax on the above adjustment as it was not taxed in 2014 tax computation.
Journals required for year ended 31 December 2015 (assuming the above journals are brought forward)
|
|
CU |
CU |
|
Dr Interest Expense |
6,000 |
|
|
Cr Interest Rate Swap Liability |
|
6,000 |
Being journal to reverse the fair value of the interest rate swap at 31 December 2014.
Note that only 1/5th of the deferred tax is reversed in 31 December 2015 as under the tax transition rules the adjustment in 2014 will be taxable over 5 years from 2015.
Note that no deferred tax journals are required on the fair value of the interest rate swap adjustment in 31 December 2015 as this will be taxed/tax deductible in the 2015 year. This journal is not illustrated below.
Example 32: Cash flow hedge example
On 1 December 2013 Company A whose functional currency is CU secured a highly probable contract with a foreign currency customer worth FC100,000. The sale is expected to happen on 31 March 2015 of the following year.
In contemplation of the sale Company A enters into a forward FX contract to sell FC100,000 at a rate of CU1:FC0.80.
Assume the spot rate at 31 December 2013 was CU1:FC0.70 and the date of transition is 1 January 2014. Assume deferred tax of 10%.
The forward rate quoted for the foreign currency contract at 31 December 2013 by the bank for a contract that matures on 31 March is CU1:FC0.75.
Under old GAAP this forward contract was not accounted for instead it was disclosed in the financial statements. However under FRS 102 this should have been fair valued. The contract also meets the hedge accounting requirement in 12.18 and the client wants to hedge account.
The transition adjustments as a result of entering into this forward contract and chosing to adopt hedge accounting is as follows:
1 January 2014
|
|
CU |
CU |
|
Dr – Cash Flow Hedge Reserve |
8,333 |
|
|
Cr Forward Contract Liability |
|
8,333* |
Being journal to reflect fair value of the forward contract at the year-end not accounted for under old GAAP and applying hedge accounting (i.e. posted to OCI as it meets the condition for hedging).
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU8,333*10%) |
833 |
|
|
Cr Deferred Tax in Cash Flow Hedge Reserve |
|
833 |
Being journal to reflect deferred tax on the above adjustment
*Fair value of the forward contract:
Amount of CU that will be obtained on 31 March at contracted rate of CU1:FC0.80 is FC100,000/FC0.80= CU125,000.
Note any FC balances in the balance sheet at 31 December should be retranslated to the year-end spot rate.
Amount of euros that could theoretically be obtained on 31 March at contracted rate of CU1:FC0.75 is FC100,000/FC0.75 = CU133,333.
Fair value loss at 31 December 2013/1 January 2014 is CU133,333-CU125,000 = CU8,333.
Journals required for year ended 31 December 2014 assuming the above journals are brought forward)
|
|
CU |
CU |
|
Dr Forward Contract Liability |
8,333 |
|
|
Cr Other Comprehensive Income – Cash Flow Hedge Reserve |
|
8,333 |
Being journal to reverse the journals posted at 1 January as the contract has now matured and the FX gain on the contract has already been posted to the P&L under old GAAP (i.e. contract settled for CU125,000 (FC100,000/FC0.80) less the FC100,000 at the spot rate at 31 March of CU1:FC0.84p i.e. (CU119,048)= CU5,952.
|
|
CU |
CU |
|
Dr Deferred Tax in OCI/Cash Flow Hedge Reserve |
833 |
|
|
Cr Deferred Tax Asset (CU8,333*10%) |
|
833 |
Being journal to reflect reversal of deferred tax recognised on transition as the contract has now matured.
If another forward contract was entered into in 2014 and 2015, the same type of journals would be required. In the 2015 year 1/5 of the deferred tax liability/asset would be released over a 5 year period in line with revenue guidelines.
Example 33: Interest rate swap – cash flow hedge accounting
On 1 December 2013 Company A whose functional currency is CU secured a highly probable contract with a foreign currency customer worth FC100,000. The sale is expected to happen on 31 March 2015 of the following year.
In contemplation of the sale Company A enters into a forward FX contract to sell FC100,000 at a rate of CU1:FC0.80.
Assume the spot rate at 31 December 2013 was CU1:FC0.70 and the date of transition is 1 January 2014. Assume deferred tax of 10%.
The forward rate quoted for the foreign currency contract at 31 December 2013 by the bank for a contract that matures on 31 March is CU1:FC0.75.
Under old GAAP this forward contract was not accounted for instead it was disclosed in the financial statements. However under FRS 102 this should have been fair valued. The contract also meets the hedge accounting requirement in 12.18 and the client wants to hedge account.
The transition adjustments as a result of entering into this forward contract and chosing to adopt hedge accounting is as follows:
1 January 2014
|
|
CU |
CU |
|
Dr – Cash Flow Hedge Reserve |
8,333 |
|
|
Cr Forward Contract Liability |
|
8,333* |
Being journal to reflect fair value of the forward contract at the year-end not accounted for under old GAAP and applying hedge accounting (i.e. posted to OCI as it meets the condition for hedging).
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU8,333*10%) |
833 |
|
|
Cr Deferred Tax in Cash Flow Hedge Reserve |
|
833 |
Being journal to reflect deferred tax on the above adjustment
*Fair value of the forward contract:
Amount of CU that will be obtained on 31 March at contracted rate of CU1:FC0.80 is FC100,000/FC0.80= CU125,000.
Note any FC balances in the balance sheet at 31 December should be retranslated to the year-end spot rate.
Amount of euros that could theoretically be obtained on 31 March at contracted rate of CU1:FC0.75 is FC100,000/FC0.75 = CU133,333.
Fair value loss at 31 December 2013/1 January 2014 is CU133,333-CU125,000 = CU8,333.
Journals required for year ended 31 December 2014 assuming the above journals are brought forward)
|
|
CU |
CU |
|
Dr Forward Contract Liability |
8,333 |
|
|
Cr Other Comprehensive Income – Cash Flow Hedge Reserve |
|
8,333 |
Being journal to reverse the journals posted at 1 January as the contract has now matured and the FX gain on the contract has already been posted to the P&L under old GAAP (i.e. contract settled for CU125,000 (FC100,000/FC0.80) less the FC100,000 at the spot rate at 31 March of CU1:FC0.84p i.e. (CU119,048)= CU5,952.
|
|
CU |
CU |
|
Dr Deferred Tax in OCI/Cash Flow Hedge Reserve |
833 |
|
|
Cr Deferred Tax Asset (CU8,333*10%) |
|
833 |
Being journal to reflect reversal of deferred tax recognised on transition as the contract has now matured.
If another forward contract was entered into in 2014 and 2015, the same type of journals would be required. In the 2015 year 1/5 of the deferred tax liability/asset would be released over a 5 year period in line with revenue guidelines.
Example 34: Fair value hedge – Interest rate swap – fixed interest rate on a debt instrument (carried at amortised cost)
Company A gets a loan for CU100,000 at a fixed rate of 7% which is repayable in 5 years on 1 January 2013.
At the same time Company A enters into an interest rate swap with a third party (e.g. another bank) for a 5 year period whereby Company A will pay the floating rate to the third party and the third party will pay the fixed rate to Company A (i.e. receive fixed pay variable). The notional amount hedged is CU100,000. Assume the current average variable interest rate for the year was 6%.
At the end of 31 December 2013 the interest rate swap has a positive fair value of CU6,100 and the negative fair value of the loan attributable to the hedged interest rate risk is CU5,600. Assume for the simplicity these values are the same for 31 December 2014 and 2015 year end.
Assume the transition date is 1 January 2014 and that all conditions for hedge accounting in 12.18 have been met. Assume the deferred tax rate is 10%.
The transition adjustments required are:
1 January 2014
The accounting entries required assuming all other conditions for hedge accounting have been met and the interest has already been charged and paid/received:
|
|
CU |
CU |
|
Dr Swap Fair Value on Balance Sheet |
6,100 |
|
|
Dr Profit and Loss Reserves on Loan Fair Value Gain |
5,600 |
|
|
Cr Loan Liability |
|
5,600 |
|
Cr Profit and Loss Reserves on Swap FV loss |
|
6,100 |
|
|
|
|
Being journal to reflect fair value of loan and swap at date of transition
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU6,100-CU5,600*10%) |
50 |
|
|
Cr Deferred Tax Liability |
|
50 |
Being journal to reflect deferred tax on the above adjustment
Journals required at 31 December 2014 assuming the above journals are brought forward
|
|
CU |
CU |
|
Dr Swap FV Loss in P&L |
6,100 |
|
|
Dr Loan Liability |
5,600 |
|
|
Cr Loan Fair Value Gain in P&L |
|
5,600 |
|
Cr Swap Fair Value on Balance Sheet |
|
6,100 |
Being journal to reverse prior year fair value of loan and swap
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
50 |
|
|
Cr Deferred Tax in P&L (CU6,100-CU5,600*10%) |
|
50 |
Being journal to reverse prior year deferred tax
|
|
CU |
CU |
|
Dr Swap Fair Value on Balance Sheet |
6,100 |
|
|
Dr Loan Fair Value Gain in P&L |
5,600 |
|
|
Cr Swap FV Loss in P&L |
|
6,100 |
|
Cr Loan Liability |
|
5,600 |
|
|
|
|
Being journal to reflect fair value of loan and swap at 31 December 2014
|
|
CU |
CU |
|
Dr Deferred Tax in P&L (CU6,100-CU5,600*10%) |
50 |
|
|
Cr Deferred Tax Liability |
|
50 |
Being journal to reflect deferred tax on year end journal
The final balance sheet will look like the below at 31 December 2014:
Note in accordance with 12.22 if the hedge is discontinued before the loan is repaid in 5 years time the CU5,600 would have to be credited as interest to the profit and loss at the effective interest rate from that date to bring the liability to CU100,000 by the end of year 5. The amortisation does not take place until the hedge is ceased, it just lies there any moves in line with the fair value adjustments year on year.
If the swap is in place for all 5 years then the movement in fair values year on year will bring it back to CU100,000.
Journals required at 31 December 2015 assuming the above journals are brought forward
|
|
CU |
CU |
|
Dr Swap FV loss in P&L |
6,100 |
|
|
Dr Loan Liability |
5,600 |
|
|
Cr Swap Fair Value on Balance Sheet |
|
6,100 |
|
Cr Loan Fair Value Gain in P&L |
|
5,600 |
Note the deferred tax journal above is not reversed here as this will be taxable in the tax computation over the 5 year period as part of the tax transition exemptions. See journal below.
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
10 |
|
|
Cr Deferred Tax in P&L (CU50/5 years) |
|
10 |
Being journal to release 1/5 of the deferred tax liability on transition
|
|
CU |
CU |
|
|
|
|
|
Dr Swap Fair Value on Balance Sheet |
6,100 |
|
|
Dr Loan Fair Value Gain in P&L |
5,600 |
|
|
Cr Swap FV loss in P&L |
|
6,100 |
|
Cr Loan Liability |
|
5,600 |
|
|
|
|
Being journal to reflect fair value of loan and swap at 31 December 2015
It is evident that there are no deferred tax journal at 31 December 2015 for the 2015 contract entered into. The reason for same is that this adjustment will be included in the tax computation in 2015.
Example 35: 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 CU500,000. 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. Assume the date of transition is 1 January 2014 and the tax rate is 10%. The transition adjustment required on 1 January 2014 is:
|
|
CU |
CU |
|
Dr PPE |
500,000 |
|
|
Cr Inventory |
|
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. Assume 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:
|
|
CU |
CU |
|
Dr Profit and Loss – Depreciation (CU500,000 / 10yrs) |
50,000 |
|
|
Cr PPE – Spare Parts
|
|
50,000 |
|
Dr Balance Sheet – Deferred Tax (CU50,000 *10%) |
5,000 |
|
|
Credit Profit and Loss – Deferred Tax |
|
5,000 |
|
|
|
|
Journals required in the 31 December 2015 year end assuming the above journals were posted to profit and loss reserves etc.
Assuming no movement has occurred no journals are required on top of what has already been posted to reserves. Even if there was movement in 2015 no deferred tax journal will be required for that movement as it would be included in the 2015 tax computation. The deferred tax of CU5,000 will be recovered over the next 5 years under the tax transition adjustments (i.e. a journal to derecognise CU1,000 (CU5,000/5 years) of this deferred tax asset required in the 2015 year and for the four years following this).
3) Recognition of fair value adjustments through the profit and loss on investment property and the related deferred tax to include transfer from revaluation reserve to a non-distributable reserve for investment property
Example 36: Fair value and tax adjustments – Investment property
Assume the date of transition is 1 January 2014. Under old GAAP the company purchased a property for CU100,000. The valuation at 31 December 2013 was CU200,000 which equated to the open market value which also equates to the fair value at that date. Under old GAAP the open market value at 31 December 2014 and 2015 was CU250,000, the movement of which was posted to the STRGL in the year ended 31 December 2014. The revaluation reserve under old GAAP was CU100,000 and CU150,000 for year ended 31 December 2013 & 2014 respectively. Assume the deferred tax rate is 20% (the sales (CGT) rate). Assume indexation is not applicable for tax purposes.The transition adjustments required on adoption of FRS 102 are:
Transition journals to be posted on 1 January 2014
|
|
CU |
CU |
|
Dr Revaluation Reserve |
100,000 |
|
|
Cr Non-Distributable Reserve |
|
100,000 |
Being journal to transfer the old revaluation reserve to a non-distributable reserve.
|
|
CU |
CU |
|
Dr Non-Distributable Reserve for Deferred Tax ((CU200,000-CU100,000)*20%) |
20,000 |
|
|
Cr Deferred Tax Liability Balance Sheet |
|
20,000 |
Being journal to reflect the deferred tax liability on the uplift in value at the future expected sales tax rate
Transition journals to be posted on 31 December 2014 assuming the journals above are posted to reserves etc
|
|
CU |
CU |
|
Dr STRGL |
50,000 |
|
|
Cr Fair Value Movement on Investment Property in P&L (CU250,000-CU200,000) |
|
50,000 |
Being journal to transfer the fair value uplift to the profit and loss account from the STRGL.
|
|
CU |
CU |
|
Dr Deferred Tax in P&L (CU50,000*20%) |
10,000 |
|
|
Cr Deferred Tax Liability Balance Sheet |
|
10,000 |
Being journal to reflect the deferred tax on the uplift in value at the future expected sales tax rate
|
|
CU |
CU |
|
Dr Revaluation Reserve |
50,000 |
|
|
Cr Non-Distributable Reserve |
|
50,000 |
Being journal to transfer the old revaluation reserve to a non-distributable reserve.
No journals are required at the 31 December 2015 assuming the above journals are posted and the fair value remains at CU250,000. If the fair value moves then journals similar to the 31 December 2014, above should be posted.
Example 37: Property leased to other group companies classified as investment property
Assume the date of transition to FRS 102 is 1 January 2014 and the deferred tax rate is 20% which is the sales tax (CGT) rate. Company A is a member of a group. Company A leases a property to a sister Company; Company B for 10 years and receives an annual rent of CU50,000. The property was purchased for CU150,000 and the net book value at 1 January 2014, 31 December 2014 and 2015 in the old GAAP books is CU100,000, CU90,000 and CU80,000 respectively. The directors have determined the fair value of the property at 1 January 2014 was CU200,000. Assume the property did not qualify for capital allowance purposes and the property remained at its fair value of CU200,000 at 31 December 2014 and 2015 as this still equated to fair value. Assume the property met the conditions for investment property from 1 January 2014. The adjustments required on transition are:
Transition journals to be posted on 1 January 2014
|
|
CU |
CU |
|
Dr Investment Property |
CU200,000 |
|
|
Cr Non-Distributable Reserve (200,000-150,000) – fair value uplift |
|
CU50,000 |
|
Cr Profit and Loss Reserves (150,000-100,000) – prior depreciation |
|
CU50,000 |
|
Cr Property, Plant and Equipment |
|
CU100,000 |
Being journal to transfer the property from PPE to investment property, derecognise prior years depreciation and recognise the fair value uplift.
|
|
CU |
CU |
|
Dr Profit and Loss Reserves for Deferred Tax ((200,000-150,000 cost)*20%) |
CU10,000 |
|
|
Cr Deferred Tax liability in Balance Sheet |
|
CU10,000 |
Being journal to reflect the deferred tax on the uplift in value at the future expected sales tax rate
Transition journals to be posted on 31 December 2014 assuming the journals above are posted to reserves etc
|
|
CU |
CU |
|
Dr Property, Plant and Equipment |
10,000 |
|
|
Cr Depreciation in P&L (being movement in book value yr on yr) |
|
10,000 |
Being journal to reverse depreciation posted in 2014 on the property under old GAAP.
The same journal as above is posted in 2015 to reverse the depreciation charged in the 2015 trial balance.
Example 38: Deferred tax on unremitted earnings
Company A invested CU10,000 to acquire 25% of Company B. The carrying amount at 1 January 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 is 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 entity does not have control over when it will be distributed. The transition adjustments required on transition are:
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 associate.
Example 39: Fair value as deemed cost for PPE
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 CU600,000. The remaining useful life at 1 January 2014 was 15 years and the NBV is CU450,000. The company has obtained a valuation representing fair value at 31 December 2013 of CU700,000. Under the exemption at the date of transition, the company can elect to use the CU700,000 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 10% (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
|
|
CU |
CU |
|
Dr PPE (CU700,000-CU450,000) |
250,000 |
|
|
Cr Other Non-Distributable Reserve |
|
250,000 |
Being journal to reflect the uplift in value on the date of transition
|
|
CU |
CU |
|
Dr Non-Distributable Reserve |
25,000 |
|
|
Cr Deferred Tax Liability (CU250,000*10%) |
|
25,000 |
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):
|
|
CU |
CU |
|
Dr Depreciation in Profit and Loss |
16,667 |
|
|
Cr Accumulated Depreciation ((CU700,000-CU450,000)/15yrs) |
|
16,667 |
|
Dr Deferred Tax Liability (CU16,667*10%) |
1,667 |
|
|
Cr Deferred Tax in P&L |
|
1,667 |
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 40: Previous GAAP revaluation as deemed cost for PPE
A company previously chose the revaluation option and revalued the buildings under Old GAAP. The date of transition is 1 January 2014. The original cost of the building was CU300,000. A previous valuation was performed on 31 December 2012 and was stated at CU500,000 which was included in the 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 CU464,285. The amount in the revaluation reserve at 31 December 2013 was CU260,000. Under the exemption at the date of transition, the company has elected to use the CU464,285 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 10% (non-CGT rate). See below adjustments required on transition:
|
|
CU |
CU |
|
Dr Non-Distributable Reserve |
16,429 |
|
|
Cr Deferred Tax in Balance Sheet (CU464,285 – CU300,000) * 10%) |
|
16,429 |
Being journal to recognise deferred tax on the uplift at the date of transition to the non-distributable reserve
|
|
CU |
CU |
|
Dr Revaluation Reserve |
260,000 |
|
|
Cr 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):
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet ((CU464,285-CU300,000)/15yrs=CU10,952) * 10%) |
1,095 |
|
|
Cr Deferred Tax in Profit and Loss |
|
1,095 |
Being journal to reflect deferred tax movement to account for the decrease in the NBV of fixed assets due to depreciation for the year
|
|
CU |
CU |
|
Dr Non-Distributable Reserve |
9,857 |
|
|
Cr Profit and Loss Reserves (CU10,952-CU1,095) |
|
9,857 |
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.
[/et_pb_text][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]
Example 41: Intangible asset that used a default useful life of 20 years under old GAAP
An intangible asset of CU500,000 was recognised under old GAAP (acquired 5 years prior to the date of transition). Under old GAAP the default life of 20 years was chosen so the carrying amount in old GAAP books was CU375,000. Assume the date of transition is 1 January 2014 and the useful life cannot be determined under FRS 102 either, hence the default rate of 10 years for UK companies which have early adopted and 5 years for Republic of Ireland companies or UK entities that have not early adopted the September2015 version of FRS 102 should be used. Therefore, a transition adjustment is required. As the default rate is 10 years under FRS 102, at the date of transition using this default rate a remaining useful life of 5 years exists. Therefore, the carrying amount required on transition for UK companies is CU250,000 (CU500,000/10 years*5 years remaining at the date of transition) and for Republic of Ireland companies or UK entities who have not early adopted is nil (CU500,000/5 years*0 years remaining at the date of transition)
The journals required on 1 January 2014 are:
UK companies that have early adopted
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU375,000 carrying amount under old GAAP-CU250,000 required under FRS 102) |
125,000 |
|
|
Cr Intangible Asset |
|
125,000 |
Republic of Ireland companies and UK companies that have not early adopted
|
|
CU |
CU |
|
Debit Profit and Loss Reserves (CU375,000 carrying amount under old GAAP-Nil required under FRS 102) |
375,000 |
|
|
Credit Intangible Asset |
|
375,000 |
Being journal to recognise additional amortisation charge under FRS 102 for the period from acquisition to the date of transition i.e. 1 January 2014 for a company with a December year end. Then in future years an amortisation charge of CU25,000 should be posted. Here we have assumed that this intangible has not been allowable for capital allowance purposes so therefore there is no deferred tax effect nor was there a revaluation.
The journals required for 31 December 2014 assuming the above journals are posted to reserves:
UK companies that have early adopted
|
|
CU |
CU |
|
Dr Amortisation in the P&L ((CU500,000/10 yrs under FRS 102) = (CU500,000/20yrs under old GAAP)) |
25,000 |
|
|
Cr Accumulated Amortisation |
|
25,000 |
Being journal tor reflect additional amortisation for the 2014 year for the fact that this is being written off over 10 years as opposed to 20 years under old GAAP.
Other companies
|
|
CU |
CU |
|
Dr Accumulated Amortisation |
25,000 |
|
|
Cr Amortisation in the P&L (CU500,000/20yrs) |
|
25,000 |
Being journal required to reverse previous depreciation posted under old GAAP as under FRS 102 this has a nil NBV on transition
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
If we assume capital allowances was allowable on these intangibles and assume the deferred rate is 10% and the capital allowances are at a set rate per annum as opposed to being based on the amortisation charged. The journals required are:
On 1 January 2014
UK companies that have early adopted
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU125,000*10%) |
12,500 |
|
|
Cr Profit and Loss Reserves |
|
12,500 |
Being journal to reflect deferred tax on the amortisation charged to profit and loss reserves
Other companies
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU375,000*10%) |
37,500 |
|
|
Cr Profit and Loss Reserves |
|
37,500 |
Being journal to reflect deferred tax on the amortisation charged to profit and loss reserves
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
UK Companies that have early adopted
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU250,000*10%) |
2,500 |
|
|
Cr Deferred Tax in P&L |
|
2,500 |
Being journal to reflect deferred tax on the amortisation charged in the year
Where capital allowances/tax deductions were allowed based on the amortisation charged the deferred tax recognised up to 1 January 2015 would be released in line with the tax authorities tax transition guidelines which details when the deduction is allowed in the tax computation.
Other Companies
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
2,500 |
|
|
Cr Deferred Tax Asset (CU25,000*10%) |
|
2,500 |
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
Example 42: Deferred tax on revaluation whether a previous revaluation on intangibles is used as deemed cost
Company A previously had a policy of revaluation on intangibles. The original cost was CU600,000. Assume the date of transition is 1 January 2014. The intangibles were revalued on 31 December 2012 to CU700,000 and at 31 December 2013, the carrying amount was CU630,000 (useful life of 10 years at that time – amortisation charge of CU70,000). The amount in the revaluation reserve at 31 December 2013 was CU30,000. On transition to FRS 102, the company has decided to discontinue adopting the revaluation option and instead use the previous revaluation as the deemed cost. On the date of transition, assuming the intangible can be sold separately a deferred tax liability should be recognised for the uplift in value above its tax cost which was not required under old GAAP. Assume deferred tax is 10%. The deferred tax rate to be recognised is as follows:
Deferred tax = CU630,000 less CU600,000 = CU30,000 * 10%= CU3,000.
Journal required be posted on transition i.e. 1 January 2014 is:
|
|
CU |
CU |
|
Dr Revaluation Reserve |
30,000 |
|
|
Cr Non Distributable Reserve |
|
30,000 |
Being journal to reclassify previous revaluations under old GAAP to a non-distributable reserve.
|
|
CU |
CU |
|
Dr Non Distributable Reserve |
3,000 |
|
|
Cr Deferred Tax Liability |
|
3,000 |
Being journal to recognise deferred tax on the uplift at the date of transition to the non-distributable reserve
In the 31/12/14 (comparative year) and 31/12/15, deferred tax will also be required to be posted for the deferred tax on the movement on the carrying amount in relation to additional amortisation posted on the revalued amount each year. From 1 January 2014 the CU630,000 is depreciated over its useful economic life at that date, that being 9 years (CU630,000/9 years=CU70,000). The additional amortisation on the revalued amount is therefore CU333 ((CU630,000-CU600,000)/9 yrs)*10%).
The journal required to be posted in relation to deferred tax for each year is:
|
|
CU |
CU |
|
Dr Deferred Tax Liability (CU30,000/9yrs *10%) |
333 |
|
|
Credit Profit and Loss–Tax Change |
|
333 |
Being journal to reflect release of deferred tax for depreciation charged in the year. This deferred tax journal will also be required in the 2015 year.
No adjustment is required for depreciation as the depreciation charge in 2014 and 2015 is equal to what should have been charged.
Example 43: Adjustments for deferred tax on business combinations prior to date of transition where transition exemption availed of
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 1 January 2013. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year. Assume the amortisation on intangibles and PPE is over a period of 10 years from the date of acquisition.
Details of the book value and fair value at the time of acquisition is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
Book value |
Fair value |
Fair value |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
|
Intangible Assets |
CUnil |
CU100,000 |
CU100,000 |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
|
Total Net Assets |
CU410,000 |
CU775,000 |
CU748,500 |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
|
Goodwill |
|
CU225,000 |
CU251,500 |
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
|
Date of Acquisition |
Book Amount at Date of Transition |
|
Uplift in Property, Plant and Equipment |
CU150,000 |
CU135,000** |
|
Uplift in Intangible Assets |
CU100,000 |
CU90,000** |
|
Uplift in Inventory |
CU20,000 |
CU0** |
|
Uplift in Cash |
CUnil |
N/a |
|
Uplift in Contingent Liabilities |
(CU10,000) |
CU0** |
|
Uplift in Debtors |
CU5,000 |
CU0** |
|
Uplift in Creditors |
CUnil |
CUN/a |
|
Total Timing Difference* |
CU265,000 |
CU225,000 |
|
Deferred Tax* |
CU26,500 |
CU22,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value at acquistion is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is on the date of acquisition under FRS 102 = CU26,500+CU60,000=CU86,500
At date of transition is CU22,500 (CU225,000*10%)
**Carrying amount of fair value adjustment in the consolidated financial statements at date of acquisition is:
PPE = CU135,000 (CU150,000/10yrs*9yrs being the years left on the asset at date of transition).
Intangibles = CU90,000 (CU100,000/10yrs*9yrs being the years left on the asset at date of transition).
Other non-monetary assets is nil as it is assumed the difference has reversed.
Therefore the deferred tax which would have been recognised under FRS 102 was CU22,500.
The journals required on transition are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
22,500 |
|
|
Cr Deferred Tax Liability |
|
22,500 |
Being journal to recognise the deferred tax on fair value differences at date of transition
Note goodwill is not adjusted instead profit and loss reserves is adjusted as Goodwill cannot be adjusted where the exemption is claimed.
Journals to be posted at 31 December 2014 assuming the above journal is posted to reserves:
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
2,500 |
|
|
Cr Deferred Tax in P&L ((CU150,000+CU100,000)/10yrs)*10%) |
|
2,500 |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences in consolidated financial statements
Journals to be posted at 31 December 2015 assuming the above journal is posted to reserves:
The same journal will be required for 31 December 2015 as for 2014 above
Example 44: Adjustments to business combinations where it occurs after the date of transition
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 2 January 2014. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred. Assume the useful life of goodwill is 10 years.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year and the useful life of PPE is 10 years.
Details of the book value and fair value at the time of acquisition for Old GAAP and FRS 102 purposes is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
|
Book value |
Fair value |
Fair value |
Difference |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
CUNil |
|
Intangible Assets |
CUnil |
CUnil |
CU100,000 |
(CU100,000) |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
CUNil |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
CUNil |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
CUNil |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
CUNil |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
CUNil |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
CU26,500 |
|
Total Net Assets |
CU410,000 |
CU675,000 |
CU748,500 |
(CU73,500) |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
CUNil |
|
Goodwill |
|
CU325,000 |
CU251,500 |
CU73,500 |
Given the threshold for identifying intangible is not as stringent under FRS 102 as it does not have to be separable from goodwill, under FRS 102, intangibles of CU100,000 should have been recognised. Assume the useful life of intangibles is 5 years.
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
Uplift in Property, Plant and Equipment |
CU150,000 |
|
Uplift in Intangible Assets |
CU100,000 |
|
Uplift in Inventory |
CU20,000 |
|
Uplift in Cash |
CUnil |
|
Uplift in Contingent Liabilities |
(CU10,000) |
|
Uplift in Debtors |
CU5,000 |
|
Uplift in Creditors |
CUnil |
|
Total Timing Difference |
CU265,000 |
|
Deferred Tax (CU265,000*10%)* |
CU26,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
Adjustment required to the comparative financial statements:
At 31 December 2014
|
|
CU |
CU |
|
Dr Intangible Assets (CU100,000 less nil) |
100,000 |
|
|
Cr Goodwill (CU325,000-CU251,500) |
|
73,500 |
|
Cr Deferred Tax Liability (as above) |
|
26,500 |
Being journals required to post adjustments so as to show the correct fair values and goodwill under FRS 102
Journal for change in amortisation
|
|
CU |
CU |
|
|
|
|
|
Dr Amortisation of Intangibles in P&L*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to Old GAAP figures posted being different.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquistion. However under old GAAP the goodwill of CU325,000 was depreciated over 10 years so therefore depreciation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed.
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be recognised.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
6,015 |
|
|
Cr Deferred Tax in P&L ((CU4,515 +CU1,500) |
|
6,015**** |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences and release of monetary assets in the year in consolidated financial statements
****Reversal of the timing difference of inventory (CU20,000), contingent liability (CU10,000) and debtors (CU5,000) = (CU20,000-CU10,000+CU5,000)*10%= CU1,500
Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charge in the year = (CU25,150+CU20,000)*10%=CU4,515.
Adjustments required in the 31 December 2015 year end accounts assuming the above journals are posted into reserves where relevant:
The same type of journals would be posted for the amortisation/depreciation on intangible, goodwill and PPE in the 2015 as the 2014 year assuming consolidated financial statements have first been performed under old GAAP. Deferred tax of CU4,515 would only be posted as the monetary differences have been reduced to nil in the prior year.
If the intangible was allowed for tax purposes an adjustment may be required on the corporation tax computation for the tax deduction not previously allowable on goodwill. This deduction would be obtained in line with the tax transition rules issued by the tax authorities.
The above example assumes shares were acquired, the principals would be the same for a trade acquisition (when meets the definition of a business as per Section 19). Deferred tax may not be as applicable as it may have already have been provided or the intangible is allowed for capital allowance purposes with the deduction claimed being equal to the amortisation for the year.
Example 45: Adjustments to business combinations where it occurs before date of transition but exemption Section 35.10(a) not claimed
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 1 January 2013. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred. Assume the useful life of goodwill is 10 years.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year and the useful life of PPE is 10 years.
Details of the book value and fair value at the time of acquisition for old GAAP and FRS 102 purposes is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
|
Book value |
Fair value |
Fair value |
Difference |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
CUNil |
|
Intangible Assets |
CUnil |
CUnil |
CU100,000 |
(CU100,000) |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
CUNil |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
CUNil |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
CUNil |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
CUNil |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
CUNil |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
CU26,500 |
|
Total Net Assets |
CU410,000 |
CU675,000 |
CU748,500 |
(CU73,500) |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
CUNil |
|
Goodwill |
|
CU325,000 |
CU251,500 |
CU73,500 |
Given the threshold for identifying intangibles is not as stringent under FRS 102 as it does not have to be separable from goodwill, under FRS 102, intangibles of CU100,000 should have been recognised. Assume the useful life of intangibles is 5 years.
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
Uplift in Property, Plant and Equipment |
CU150,000 |
|
Uplift in Intangible Assets |
CU100,000 |
|
Uplift in Inventory |
CU20,000 |
|
Uplift in Cash |
CUnil |
|
Uplift in Contingent Liabilities |
(CU10,000) |
|
Uplift in Debtors |
CU5,000 |
|
Uplift in Creditors |
CUnil |
|
Total Timing Difference |
CU265,000 |
|
Deferred Tax (CU265,000*10%)* |
CU26,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
Adjustment required:
At 1 January 2014
|
|
CU |
CU |
|
Dr Intangible Assets (CU100,000 less nil) |
100,000 |
|
|
Cr Goodwill (CU325,000-CU251,500) |
|
73,500 |
|
Cr Deferred Tax Liability (as above) |
|
26,500 |
Being journals required to post adjustments so as to show the correct fair values and goodwill under FRS 102
Journal for change in amortisation
|
|
CU |
CU |
|
|
|
|
|
Dr Amortisation of Intangibles in P&L Reserves*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L Reserves** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to old GAAP figures posted being different up to the date of transition so that the correct NBV is shown.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquisition. However under old GAAP the goodwill of CU325,000 was amortised over 10 years so therefore amortisation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed to profit and loss reserves for 1 year (being the period from the date of acquisition to the date of transition of 1 January 2014).
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be reversed for 1 year (being the period from the date of acquisition of 1 January 2013 to the date of transition of 1 January 2014) to profit and loss reserves.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
6,515 |
|
|
Cr Profit and Loss Reserves ((CU4,515+CU1,500) |
|
6,515**** |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences and release of monetary assets in consolidated financial statements up to the date of transition
****Reversal of the timing difference of inventory (CU20,000), contingent liability (CU10,000) and debtors (CU5,000) = (CU20,000-CU10,000+CU5,000)*10%= CU1,500
Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charged in the year = (CU25,150+CU20,000)*10%=CU4,515.
Journals required to be posted at 31 December 2014 assuming the above journals are brought forward
Journal for change in amortisation
|
|
CU |
CU |
|
Dr Amortisation of Intangibles in P&L*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to old GAAP figures posted being different.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquistion. However under old GAAP the goodwill of CU325,000 was amortised over 10 years so therefore amortisation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed.
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be reversed.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,515 |
|
|
Cr Deferred Tax in P&L |
|
4,515**** |
Being journal to reflect the reversal of deferred tax to match depreciation/amortisation posted on fair value differences in the year in consolidated financial statements not accounted for under old GAAP.
****Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charged in the year = (CU25,150+CU20,000)*10%=CU4,515.
Adjustments required in the 31 December 2015 year end accounts assuming the above journals are posted into reserves where relevant:
The same type of journals would be posted in the 2015 as the 2014 year assuming consolidated financial statements have first been performed under old GAAP.
If the intangible was allowed for tax purposes an adjustment may be required on the corporation tax computation for the tax deduction not previously allowable on goodwill. This deduction would be obtained in line with the tax transition rules issued by the tax authorities.
Example 46: 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.
Example 47: Inclusion of future operating losses in a provision for termination of operations under old GAAP
During the year ended 31 December 2013 Company A made a formal announcement to all effected parties that the Company would cease trading on 30 April 2014. At the 31 December 2013 under old GAAP a provision of CU1 million was included for the cost of closure including the cost of redundancies. Included in this provision was CU300,000 for the cost of future losses for the period 1 January to 30 April 2014. The provision for future losses as part of a closure provision was allowed under old GAAP. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014 and the provision was allowable for tax purposes.
Under Section 21 of FRS 102, future operating losses cannot be included in a closure provision. As a result the following transition adjustments are required:
On 1 January 2014
|
|
CU |
CU |
|
Dr Provisions |
300,000 |
|
|
Cr Profit and Loss Reserves |
|
300,000 |
Being journal to reverse the future operating losses included in the provision
|
|
CU |
CU |
|
Dr Profit and Loss Reserves for Deferred Tax (CU300,000*10%) |
30,000 |
|
|
Cr Deferred Tax Liability |
|
30,000 |
Being journal to reflect deferred tax on the above adjustment as a tax deduction was obtained in 2013 however since it has now been taken out it is then a deferred tax liability. A deduction will not be allowed until 2014.
Adjustment required in 2014 financial statements assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Administrative Expenses |
300,000 |
|
|
Cr Provisions |
|
300,000 |
Being journal to reflect reversal of transition posting on 1 January 2014 above for the fact that losses were incurred in 2014 and the provision under old GAAP in 2013 would have been reversed, therefore this journal ensures the losses are shown in the 2014 financial statements.
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
30,000 |
|
|
Cr Deferred Tax P&L |
|
30,000 |
Being journal to reflect the reversal of the deferred tax previously recognised.
No further adjustments are required in the 2014 and 2015 books. If the provision was booked in the 31 December 2014 year end, then the opening transition journal above would be to debit administration costs in the P&L as opposed to profit and loss reserves. The 2015 journal would be the same as the 2014 journal above. The same deferred tax journal would be posted in the year ended 31 December 2014 as was posted on 1 January 2014 and this deferred tax will reduce over a 5 year period in line with the tax transition rules (CU6,000 will be taxed in the 2015 tax computation and therefore CU6,000 of the deferred tax liability released in that year.)
Example 48: 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
|
|
CU |
CU |
|
Dr Profit and Loss Reserves Net of Tax (CU51,000-CU5,100) |
45,900 |
|
|
Dr Deferred Tax in Balance Sheet (CU51,000*10%) |
51,000 |
|
|
Cr Provision for Cost of Customer Loyalty Scheme |
|
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
|
|
CU |
CU |
|
Dr Provision for Cost of Customer Loyalty Scheme (CU51,000-CU43,600) |
7,400 |
|
|
Dr Deferred Tax in P&L (CU15,400*10%) |
740 |
|
|
Cr Deferred Tax in Balance Sheet |
|
740 |
|
Cr Revenue |
|
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:
|
|
CU |
CU |
|
Dr Deffered Tax in PSL (4360/5 years) |
872 |
|
|
Cr Deferred Tax Asset |
|
872 |
Being journal to release 1/5 of the deferred tax asset
(4) Adoption of a policy of recognising grants on a performance model basis on revenue grant in existence at the transition date and the related deferred tax impact (assuming the revenue grant is taxable)
As stated above, where an entity decides to adopt a performance model approach to accounting for government grants, the company will need to apply this policy retrospectively as this model was not permitted under old GAAP.
Example 49: Adoption of the performance model – revenue grant
Company A’s date of transition is 1 January 2014. The company received a revenue grant on 1 January 2013 of CU10,000 for the cost of employing 10 employees. A condition of the grant states that the employees must be kept on for a minimum of 2 years. Under old GAAP Company A recognised the full CU10,000 on the basis that the conditions of the grant were likely to be achieved and that the CU10,000 grant was set against the first years cost of the employees. Assume the grant was taxable when released in 2013 and the tax rate is 10%
A transition adjustment would be required as follows:
At 1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
10,000 |
|
|
Cr Deferred Revenue/Grant Liability |
|
10,000 |
Being journal to recognise the deferral of the grant under the performance model as the grant cannot be recognised in the P&L until after 31 December 2015.
|
|
CU |
CU |
|
Dr Deferred Tax Asset |
1,000 |
|
|
Cr Profit and Loss Reserves (CU10,000*10%) |
|
1,000 |
Being journal to reflect deferred tax for tax previously paid in 2013 assuming the grant was taxable.
Year ended 31 December 2014
No journals required other than the carry forward of the opening balance sheet journal above.
Year ended 31 December 2015
|
|
CU |
CU |
|
Dr Deferred Revenue/Grant Liability |
10,000 |
|
|
Dr Deferred Tax in P&L |
1000 |
|
|
Cr Other Operating Income |
|
10,000 |
|
Cr Deferred Tax Asset |
|
1,000 |
Being journal to derecognise the grant liability and the related deferred tax as the performance conditions are met
Note a similar adjustment would be required if there was a grant received in year ended 31 December 2014.
Example 50: Reasonable that the conditions for the grant will be complied with
Company A’s date of transition is 1 January 2014. The company did not recognise a revenue grant on 31 December 2013 as all the conditions had not been complied with and therefore it could not be recognised under old GAAP however it was reasonable that all the conditions would be complied with. The grant was received during the 31 December 2014 year and was recognised at that date. Under FRS 102 this would have been allowed to be recognised as an asset on 1 January 2014. The grant was a revenue grant of CU10,000 for the cost of carrying out research. There were no conditions to be complied with on receipt of the grant as the work was performed. Under FRS 102, Company A should have recognised the full CU10,000 on the basis that the conditions of the grant were likely to be achieved and that the CU10,000 grant was set against the cost of the work. Assume the grant was taxable when released in 2014 and the tax rate is 10%
A transition adjustment would be required as follows:
At 1 January 2014
|
|
CU |
CU |
|
Dr Receivable for Government Grant |
10,000 |
|
|
Cr Profit and Loss Reserves |
|
10,000 |
Being journal to recognise the receivable for the grant and the associated income
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU10,000*10%) |
1,000 |
|
|
Cr Deferred Tax Liability |
|
1,000 |
Being journal to reflect deferred tax for tax to be paid on this grant in the future.
31 December 2014 journals assuming the above journals were posted to reserves etc
|
|
CU |
CU |
|
Dr Other Operating Income |
10,000 |
|
|
Cr Receivable for Government Grant |
|
10,000 |
Being journal to derecognise the receivable for the grant and set it against the grant recognised in the P&L under old GAAP as it has been recognised on transition under FRS 102
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
1,000 |
|
|
Cr Deferred Tax in P&L |
|
1,000 |
Being journal to reverse deferred tax on the grant receipt as it was taxed in 2014.
If a similar situation occurred at 31 December 2014 the journals included under the 1 January 2014 would be posted in 31 December 2014 year with the credit going to other operating income in the P&L. The 2015 journals would be the same as these shown at the 31 December 2014 in the example above.
Example 51: Impairment loss on a CGU with goodwill and non-controlling interests
At 1 January 2013, Parent A acquired 70% of company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU80,000. Therefore goodwill of CU44,000 (CU100,000-CU80,000) being the fair value of net asset * 70% being the proportion of the net assets acquired) was recognised. The goodwill and identifiable assets are amortised over 10 years. At the date of acquisition; goodwill of CU44,000, CU80,000 of assets was recognised and CU24,000 (CU80,000*30%) was recognised in non-controlling interest.
At the 31 December 2014, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU50,000. The carrying value of goodwill at that date was CU35,200 (CU44,000/10yrs*8yrs) and the carrying amount of the identifiable assets was CU64,000 (CU80,000/10yrs*8yrs). Under old GAAP an impairment of CU49,200 was booked (the non-controlling interest was not incorporated)-CU35,200 against goodwill and CU14,000. However under old GAAP the non-controlling interest is required to be incorporated into the calculation. Assume a deferred tax rate of 10%.
Calculations required to determine the impairment under FRS 102.
In accordance with Section 27.16 when assessing the amount of impairment the notional non-controlling interest needs to be incorporated as per below.
|
|
CU |
|
Carrying Amount of Goodwill at the End of Year 2 |
35,200 |
|
Unrecognised Non-Controlling Interest in Goodwill * |
15,086 |
|
Carrying Amount of Identifiable Assets |
64,000 |
|
Notionally Adjusted Carrying Amount |
114,286 |
|
Recoverable Amount |
(50,000) |
|
Impairment |
64,286 |
The impairment loss of CU64,286 is first allocated against goodwill and the remaining to the identifiable assets assuming they have a nil fair value less costs to sell. The amount to be allocated to goodwill is the total carrying amount of goodwill including the non-controlling notional interest i.e. CU35,200+CU15,086= CU50,286. However only 70% of this CU50,286 relates to Parent A’s interest so the amount to be taken off Parent A’s goodwill is CU35,200.
The remaining CU29,086 (CU64,286-CU35,200) is set against the carrying amount of the identifiable assets. In the consolidated accounts the 30% of the impairment of CU8,726 would be attributed to non-controlling interest. Therefore the carrying amount at the end of year 2 after the impairment would be:
|
|
Goodwill |
Identifiable assets |
Total |
|
Carrying Amount Before Impairment |
CU35,200 |
CU64,000 |
CU99,200 |
|
Impairment Loss |
(CU35,200) |
(CU29,086) |
(CU64,286) |
|
Carrying Amount after Impairment |
– |
CU34,914 |
CU34,914 |
*carrying amount notionally adjusted to include goodwill attributable to the non-controlling party which is then compared to the recoverable amount. Non-controlling interest in goodwill = CU44,000/0.7*0.3 = CU18,857 at the date of acquisition. There has been two years since acquisition and this would notionally have been amortised for two years which would mean the NBV would be CU15,086 (CU18,857/10yrs*8yrs).
Transition adjustments required:
At 1 January 2014
No journals required
At 31 December 2014
|
|
CU |
CU |
|
Dr Impairment in P&L |
15,086 |
|
|
Cr Property, plant and equipment (CU29,086 that should have been booked-CU14,000 actually booked) |
|
15,086 |
Being journal to reflect additional impairment required under FRS 102
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU15,086*10%) |
1,509 |
|
|
Cr Deferred Tax P&L |
|
1,509 |
Being journal to reflect deferred tax movement on the additional impairment assuming capital allowances are claimed.
Journals required in 31 December 2015 year end assuming the above journals are posted to profit and loss reserves etc
|
|
CU |
CU |
|
Dr PPE |
1,885 |
|
|
Cr Depreciation on Fixed Assets (CU15,086/8 years remaining life at time of impairment) |
|
1,885 |
Being journal to reflect depreciation booked under old GAAP which was impaired in 2014 under FRS 102.
|
|
CU |
CU |
|
Dr Deferred Tax Asset in P&L (CU1,885*10%) |
189 |
|
|
Cr Deferred Tax Asset |
|
189 |
Being journal to reflect deferred tax on the above journal.
Example 52: Reclassification of deferred tax from the carrying amount of the defined benefit balance
Company A operates a defined benefit pension scheme. Assume the date of transition is 1 January 2014 and the deferred tax rate is 10%. The defined benefit pension liability was CU10,000. A deferred tax asset of CU1,000 was netted against this balance in the 2013 TB. Assume the date of transition is 1 January 2014. The journal required on transition is:
1 January 2014
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
1,000 |
|
|
Cr Defined Benefit Liability (CU10,000*10%) |
|
1,000 |
Being journal to reclassify the deferred tax balance from the defined benefit liability.
Note a similar journal will be required for the 31 December 2014 year end. If there was a defined benefit asset in existence the journals would be the opposite way around.
Example 53: Holiday accrual
Company A did not previously accrue for untaken holiday pay. The company pays employees who leave the value of the employees untaken leave. Assume the date of transition is 1 January 2014. At 1 January 2014 the company estimates the holiday accrual should be CU10,000 and the accrual at the 31 December 2014 and 31 December 2015 should be CU15,000 and CU17,000 respectively. Assume the deferred tax rate is 10%.The adjustments required on transition are:
Journals required to be posted to the opening balance sheet at 1 January 2014 are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
10,000 |
|
|
Cr Holiday Accrual |
|
10,000 |
Being journal to reflect required accrual under FRS 102
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
1,000 |
|
|
Cr Profit and Loss Reserves (CU10,000*10%) |
|
1,000 |
Being journal to reflect the deferred tax on the holiday accrual which will be allowed for tax purposes in the future
Journals required to be posted to the 31 December 2014 old GAAP TB assuming the journals above are re-posted to be retained earnings etc.:
|
|
CU |
CU |
|
Dr Wages and Salaries in P&L (CU15,000 less prior year accrual of CU10,000) |
5,000 |
|
|
Cr Holiday Accrual |
|
5,000 |
Being journal to reflect additional accrual required for holiday pay at 31 December 2014
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
500 |
|
|
Cr Deferred Tax in P&L (CU5,000*10%) |
|
500 |
Being journal to reflect movement on deferred tax so as to show the deferred tax on CU15,000 at the year end.
Journals required to be posted to the 31 December 2015 old GAAP TB assuming the journals above are re-posted to retained earnings etc.:
|
|
CU |
CU |
|
Dr Wages and Salaries in P&L (CU17,000 less prior year accrual of CU15,000) |
2,000 |
|
|
Cr Holiday Accrual |
|
2,000 |
Being journal to reflect additional accrual required for holiday pay at 31 December 2015
Note there is no deferred tax in 2015 as under tax law this accrual is fully allowable as the tax return has not been submitted. Under Irish tax law it is likely the holiday accrual up to 31 December 2014 of CU15,000 will be allowed as a deduction over the period defined by the relevant tax authorities for an adjustment of this nature. In this instance a period of 5 years has been assumed. So therefore the deferred tax recognised up to the end of 2014 (that being CU1,500 i.e. CU15,000*10%) will be released as the deduction is given in the tax computation. The journal to reflect this in 2015 assuming a deduction of 1/5th of the CU1,500 (CU300) is allowed in the 2015 tax computation is:
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
CU300 |
|
|
Cr Deferred Tax in Balance Sheet |
|
CU300 |
Being journal to reflect reversal of deferred tax recognised on the holiday accrual at 31 December 2015.
For each year for the next 4 years this journal for CU300 will need to be posted.
Example 54: Group defined benefit pension scheme treated as defined contribution scheme under old GAAP now required to be brought on balance sheet
Company A is part of a group of companies. A group defined benefit scheme is in operation. Under old GAAP all group companies accounted for the scheme as a defined contribution scheme as a split of the asset and liabilities could not readily be determined. The total pension contributions during 2014 was CU100,000. Assume the date of transition is 1 January 2014. On transition to FRS 102, the group did a detailed analysis and identified the assets and liabilities of the scheme which were attributable to Company A. It determined the allocation of the scheme liabilities and assets were CU650,000 and CU500,000 respectively. Assume a deferred tax rate of 10%.The adjustments required on transition are:
Journals required to be posted to the opening balance sheet at 1 January 2014 are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU650,000 liabilities less CU500,000 assets) |
150,000 |
|
|
Cr Defined Benefit Pension Liability |
|
150,000 |
Being journal to recognise the defined benefit liability at the date of transition
|
|
CU |
CU |
|
Dr Deferred Tax Balance Sheet |
15,000 |
|
|
Cr Profit and Loss Reserves (CU150,000*10%) |
|
15,000 |
Being journal to recognise deferred tax on the defined benefit liabilities
Journals required to be posted to the 31 December 2014 old GAAP TB assuming the journals above are re-posted to retain earnings at:
|
|
CU |
CU |
|
Dr Defined Benefit Pension Liability |
100,000 |
|
|
Cr Pension Cost in P&L |
|
100,000 |
Being journal to reverse the actual contributions made from P&L to set it against the liability as the service cost will be posted to the P&L as provided by the actuary report.
Note based on the actuary valuation of the schemes assets and liabilities attributable to Company A at 31 December 2014, Company A will have to post this movement into the profit and loss account. The journals to be posted will be similar to the journals posted in example 10 above. These journals will also be required for 2015.
Example 55: Past service costs not-vested recognised in full under FRS 102
During 31 December 2014, Company A agreed with the pension trustees to a change to the plan whereby the percentage of final salary per year of service as a pension would increase from 1% to 2% for everyone who has in excess of 5 years of service. An actuarial valuation indicates that this will result in additional liabilities for past service for members with over 5 years of service of CU100,000 and CU20,000 for members who have yet to reach the five year mark. Under old GAAP any unvested rights were charged on a straight line over the period in which the benefits vested. In this particular case they were charged at CU5,000 (CU20,000/5years). Under old GAAP all past service costs vested were expensed i.e. total expensed in 31 December 2014 period was CU105,000 (CU100,000+5,000). Assume the date of transition is 1 January 2014 and the deferred tax rate is 10%.
FRS 102 would require the full CU120,000 to be recognised in the profit and loss as vested and non-vested rights must be included. The transition adjustments required in the 2014 financial statements are:
|
|
CU |
CU |
|
Dr Service Costs in P&L (CU120,000 required less CU105,000 booked) |
15,000 |
|
|
Cr Defined Benefit Liability |
|
15,000 |
Being journal to expense all un-vested rights
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet (CU15,000*10%) |
1,500 |
|
|
Cr Deferred Tax in P&L |
|
1,500 |
Being journal to reflect deferred tax on the above journal
In the 2015 year an adjustment would be required to reverse the CU5,000 posted (i.e. credit service cost in P&L and debit profit and loss reserves) for the past service costs in the old GAAP TB as it would have been recognised in 31 December 2014 period under FRS 102 through the journal above. Deferred tax of CU500 would also have to be reversed on this CU500.
If in the above example, the change occurred in 2013, then the CU15,000 would be posted to profit and loss reserves and the 2014 journal would be similar to the 2015 journal above.
Example 56: Determination of net interest on defined benefit scheme
Company A operates a defined benefit scheme. At 31 December 2014, under old GAAP the expected return on plan assets posted as a credit to interest costs in the profit and loss account was CU20,000. The discount rate was 8% at 31/12/14 and 10% at 31/12/13. The fair value of plan liabilities at 31/12/13 and 31/12/14 was CU100,000 (split CU250,000 to liabilities and CU150,000 to assets) and CU150,000 (split CU300,000 to liabilities and CU150,000 to assets) respectively. Assume there were no contributions or payments out of the scheme during the year for simplicity and that the date of transition is 1 January 2014. Assume the deferred tax rate is 10%. FRS 102 requires an entity to show the net interest cost calculating the return on plan assets at the discount rate
The transition adjustment for 31 December 2014 is:
|
|
CU |
CU |
|
Dr Interest Cost in P&L |
15,000* |
|
|
Cr Actuarial Gain in Other Comprehensive Income |
|
15,000 |
Being journal to transfer the difference to OCI
*the net interest cost is obtained by multiplying the opening discount rate of 10% by the net opening pension liability of CU100,000 = CU10,000, therefore the return on the opening assets= CU150,000*10%= CU15,000. Hence this is the finance income to be shown in interest cost under FRS 102. The difference of CU15,000 between the CU20,000 posted under old GAAP is posted to OCI above.
|
|
CU |
CU |
|
Dr Deferred Tax in OCI |
1,500 |
|
|
Cr Deferred Tax in P&L (CU15,000*10%) |
|
1,500 |
Being journal to reclassify deferred tax from the P&L to OCI as a result of the above adjustment.
Example 57: Contracted rate adjustment
The date of transition is 1 January 2014. Company A had forward contracts in place at 1 January 2014. The company makes sales in FC and CU. The functional currency of the company is CU. Under old GAAP as the entity was a non-FRS 26 adopter, the average forward contract rate of CU1=FC0.80 was used to retranslate the 31 December 2013 year end debtor and cash balances and the rate of CU1=FC0.78p at 31 December 2014. The actual year end spot rate at 1 January 2014 was CU1=FC0.75 and 31 December 2014 was CU1=FC0.82. Assume a deferred tax rate of 10%. Details of the value of the cash and debtor balances in FC are:
|
|
31/12/13 |
31/12/14 |
|
Debtors in Foreign Currency |
FC100,000 |
FC50,000 |
|
Cash in Foreign Currency |
FC70,000 |
FC80,000 |
|
Year-end Spot Rate |
CU1=FC0.75p |
CU1=FC0.82p |
|
Average Forward Rate Used |
CU1=FC0.80p |
CU1=FC0.79235 |
|
Debtors as Stated in Balance Sheet |
CU125,000 |
CU63,103 |
|
Cash as Stated in Balance Sheet |
CU87,500 |
CU102,564 |
|
Average Contracted Rate |
CU1=FC0.80p |
CU1=FC0.78p |
The following adjustments would be required:
On 1 January 2014
The carrying amount at 1 January using the year end spot rate as required by FRS 102 should have been:
Debtors – FC100,000/0.75p i.e. year end rate= CU133,333
Cash – FC70,000/0.75p i.e. year end rate= CU93,333
|
|
Debtors |
Cash |
|
Carrying Amount per the Balance Sheet |
CU125,000 |
CU87,500 |
|
Carry Amount at Spot Rate |
CU133,333 |
CU93,333 |
|
Difference – FX Gain |
CU8,333 |
CU5,833 |
Journals required
|
|
CU |
CU |
|
Dr Debtors |
8,333 |
|
|
Dr Cash |
5,833 |
|
|
Cr Profit and Loss Reserves for Foreign Exchange Gain |
|
14,166 |
Being journal to reflect adjustment required to show foreign currency balances at year end spot rate
|
|
CU |
CU |
|
Dr Profit and Loss Reserves for Deferred Tax (CU14,166*10%) |
1,417 |
|
|
Cr Deferred Tax in Balance Sheet |
|
1,417 |
Being journal to reflect deferred tax on the adjustment to reflect tax to be paid on this in the future
Journals required at 31 December 2014 assuming the above journals are posted to balance sheet and P&L reserves
The carrying amount at 31 December 2014 using the year end spot rate should have been:
Debtors – FC50,000/0.82p i.e. year end rate= CU60,975
Cash – FC80,000/0.82p i.e. year end rate= CU97,561
|
|
Debtors |
Cash |
|
Carrying amount per the balance sheet |
CU63,103 |
CU102,564 |
|
Carry amount at spot rate |
CU60,975 |
CU97,561 |
|
Difference – FX loss |
CU2,128 |
CU5,003 |
|
Journals required
|
CU |
CU |
|
Dr Foreign Exchange Loss in P&L |
7,131 |
|
|
Cr Debtors |
|
2,128 |
|
Cr Cash |
|
5,003 |
Being journal to reflect adjustment required to show foreign currency balances at year end spot rate
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
713 |
|
|
Cr Deferred Tax in P&L (CU7,131*10%) |
|
713 |
Being journal to reflect deferred tax on the adjustment to reflect the fact that tax was paid on this in the prior year and therefore a tax deduction will be obtained over the next 5 years under the tax transitional arrangements.
The journals posted for the 1 January 2014 will also have to be reversed into the profit and loss account as we have assumed these were posted in 31 December 2014 so as to show the correct opening reserves:
|
|
CU |
CU |
|
Dr Foreign Exchange Gain in P&L |
14,166 |
|
|
Cr Debtors |
|
8,333 |
|
Cr Cash |
|
5,833 |
Being journal to reflect reversal of prior year FX adjustment
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
1,417 |
|
|
Cr Deferred Tax in P&L (CU14,166*10%) |
|
1,417 |
Being journal to reflect reversal of prior year deferred tax on the adjustment above
Journals required in the year ended 31 December 2015 year end assuming the above journals are posted to reserves etc
|
|
CU |
CU |
|
Dr Debtors |
2,128 |
|
|
Dr Cash |
5,003 |
|
|
Cr FX gain in P&L |
|
7,131 |
Being journal to reverse the 2014 journals on the forward contract was closed out in the year.
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
143 |
|
|
(713/5 years) |
|
|
|
Cr Deferred Tax Asset |
|
143 |
Being journals to reflect the 1/5th release of the deferred tax asset recognised in 2014 to reflect the fact that a tax deduction will be claimed for CU1,426 (CU7,131/5 years) in the 2015 tax computation in line with the tax transition guidelines. The remaining deferred tax will be released over the following four years as the tax deduction is claimed.
Example 58: Long term loan adjustment
The date of transition is 1 January 2014. Company A has a 100% investment in Company B. Company A loaned stgFC100,000 to Company B when the rate was CU1=0.80p. The terms of the loan was such that it was long term and it was not likely this loan would ever be repayable in the foreseeable future. Under old GAAP Company A treated this as a non-monetary asset as it was akin to an investment as a result this debtor balance was carried at its historical rate of CU125,000 (CU100,000/0.80). Under Section 30 although this balance would still meet the definition of an investment as it is akin to an investment (net investment in foreign entity) this balance is a non-monetary asset and therefore should be retranslated at the year end spot rate. The spot rate at 1 January 2014 and 31 December 2014 was CU1=FC0.75 and CU1=FC0.82 respectively. Assume the FX adjustment is taxable/tax deductible. Assume deferred tax of 10%. The journals to be posted on transition are:
1 January 2014
The carrying amount of the loan using the spot rate of CU1=FC0.75 under FRS 102 is = CU133,333 (FC100,000/0.75). Therefore the adjustment required is:
|
|
CU |
CU |
|
Dr Amounts Due from Company B (investment) (CU133,333-CU125,000) |
8,333 |
|
|
Cr Profit and Loss Reserves for Foreign Exchange Gain |
|
8,333 |
Being journal to reflect FC loan at the year end spot rate
|
|
CU |
CU |
|
Dr Profit and Loss Reserves for Deferred Tax (CU8,333*10%) |
833 |
|
|
Cr Deferred Tax Liability |
|
833 |
Being journal to reflect deferred tax as tax will be payable on this balance in the future
Journals required at 31 December 2014 assuming the above journals are posted in balance sheet and P&L side to reserves
The carrying amount of the loan using the spot rate of CU1=FC0.82 under FRS 102 is = CU121,951 (FC100,000/0.82). Therefore the adjustment required is:
|
|
CU |
CU |
|
Dr Foreign Exchange Loss in P&L |
3,049 |
|
|
Cr Amounts Due from Company B (investment) (CU121,951-CU125,000) |
|
3,049 |
Being journal to reflect FC loan at the year end spot rate
|
|
CU |
CU |
|
Dr Deferred Tax Asset |
305 |
|
|
Cr Deferred Tax in P&L (CU3,049*10%) |
|
305 |
Being journal to reflect deferred tax as tax will be payable on this balance in the future through adjustment to the tax computation for transition adjustments.
The journals posted for the 1 January 2014 will also have to be reversed into the profit and loss account as we have assumed these were posted in 31 December 2014 so as to show the correct opening reserves:
|
|
CU |
CU |
|
Dr Foreign Exchange Loss in P&L |
8,333 |
|
|
Cr Debtors |
|
8,333 |
Being journal to reflect reversal of prior year FX adjustment
|
|
CU |
CU |
|
Dr Deferred Tax Asset |
833 |
|
|
Cr Deferred Tax in P&L (CU8,333*10%) |
|
833 |
Being journal to reflect reversal of prior year deferred tax.
Journals required at 31 December 2015
The same type of journals will be required as was done in 2014 for 2015 excluding the deferred tax impact as this will be included in the 2015 tax computation. The deferred tax journal required is:
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
61 |
|
|
Cr Deferred Tax Asset |
|
61 |
|
(CU305/5 years) |
|
|
Being journal to reflect the 1/5th release of deferred tax to reflect the fact that a tax deduction will be claimed for CU610 (CU3,049/5 years) in the 2015 tax computation assuming it is a taxable adjustment in line with the transition revenue guidelines. The remaining deferred tax will be released over the following 4 years as the tax deduction is claimed in the tax computation.
Example 59: Foreign borrowings taken out to fund foreign investment
The date of transition is 1 January 2014. Company A (who has a CU functional currency) purchased a 100% UK subsidiary, Company B for FC100,000 retranslated to CU125,000 at 2 January 2014. Company A took out a FC loan of FC100,000 to fund the purchase of Company B. The spot rate of CU to FC at 31 December 2014 was CU1=FC0.75. Assume deferred tax of 10% and the carrying amount of the FC loan at the end of 2014 was FC90,000. Under old GAAP the company was allowed to retranslate the investment of FC100,000 at the year end rate as it met the conditions as it had taken out foreign borrowings specifically to fund this investment. Therefore under old GAAP the FX movement on the investment was set against the FX gain/loss on the FC loan. As a result of this treatment the carrying amount of the investment in old GAAP books at 31/12/14 was CU133,333 (FC100,000/0.75). Assume this adjustment was taxed/tax deductible in the prior year for the purpose of this example.
Section 30 does not allow the treatment adopted under old GAAP as it does not meet the requirements for a fair value hedge under Section 12. As a result the investment cannot be retranslated at the year end rate, instead it must remain at historical cost. The journals required on transition are:
At 31 December 2014
Under old GAAP the journal posted was to Dr investment CU8,333 (CU133,333-CU125,000 being the historic cost) and Cr foreign exchange gain in P&L or OCI for CU8,333. Under FRS 102 this treatment is not allowed so this journal would have to be reversed such that the investment remains to be shown at CU125,000 being the original historic cost. The journal required is:
|
|
CU |
CU |
|
Dr Foreign Exchange Gain/OCI |
8,333 |
|
|
Cr Investment in Company B |
|
8,333 |
Being journal to reverse previous posting under old GAAP.
|
|
CU |
CU |
|
Dr Deferred Tax Asset |
833 |
|
|
Cr Deferred Tax in P&L (CU8,333*10%) |
|
833 |
Being journal to reflect deferred tax for tax paid in 2014 now being repayable assuming it was taxable initially.
This deferred tax will be released over a 5 year period from 2015 in line with the tax transition guidance. The journal required in 2015 is
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
167 |
|
|
Cr Deferred Tax Asset (CU833/5 years) |
|
167 |
Being journal to reflect the release of deferred tax to reflect the fact that a tax deduction will be claimed for CU1,667 (CU8,333/5 years) in the 2015 tax computation assuming it is a tax deductible amount.
If in the above example this adjustment was not taxed/deducted in the prior year tax computations there would be no deferred tax or current tax implication.
Note a journal would be required to be posted to retained earnings on transition if an entity has treated an investment in the above way under old GAAP. For simplicity in the example above we have assumed an investment was acquired post the transition date.
Example 60: Cost model to a fair value model
Company A holds cattle as biological assets. Under old GAAP, these were valued at cost under SSAP9. On transition to FRS 102, the entity decides to apply the fair value model. The total cost of biological assets stated in the balance sheet at 1 January 2014 being the date of transition was CU100,000 and at the 31 December 2014 and 2015 was CU130,000. The fair value of the cattle was CU125,000. Assume deferred tax rate of 10%. The fair value at 31 December 2014 and 2015 was CU150,000. The transition adjustments required are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Biological Assets |
125,000 |
|
|
Cr Inventory |
|
100,000 |
|
Cr Deferred Tax Liability (CU25,000*10%) |
|
2,500 |
|
Cr Profit and Loss Reserves Net of Deferred Tax |
|
22,500 |
Being journal to reflect the uplift to fair value and transfer to a separate line item including the deferred tax impact.
Journals required for the year ended 31 December 2014 assuming the above journals are posted to opening reserves
|
|
CU |
CU |
|
Dr Biological Assets (CU150,000-CU125,000) |
25,000 |
|
|
Dr Change in Fair Value of Biological Assets in P&L |
CU5,000* |
|
|
Cr Inventory (CU130,000 as stated at end of 2014 less CU100,000 journal posted in the journals on transition of CU100,000) |
|
CU30,000 |
Being journal to reflect uplift on value to fair value including the deferred tax impact and the related reclassification adjustment.
* (being movement that should have been posted to the P&L of CU25,000 credit (i.e. CU150,000 this year vs CU125,000 in prior year) less what has already been posted under old GAAP of CU30,000 credit (CU130,000 in current year vs CU100,000 in stock at date of transition) already posted to the P&L.
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU5,000*10%) |
500 |
|
|
Cr Deferred Tax in P&L |
|
500 |
Being journal to reflect deferred tax on movement in the year which will be taxable over the next 5 years.
Journals required for the year ended 31 December 2015 assuming the above journals are posted to opening reserves
As the fair value and carrying amount under the old GAAP at 31 December 2015 has remained the same as 2014, no reclassification is required. The only journal required will be to release 1/5th of deferred tax assets recognised up to 31 December 2014 to reflect the fact that 1/5th of the tax deduction will be obtained in the 2015 tax return. The remaining amount will be released over the following 4 years in line with when the deduction is allowed in the tax computation. The journal required is:
|
|
CU |
CU |
|
Dr Deferred Tax Liability ((CU150,000 being the fair value at 31 December 2014 – CU130,000 being the carrying amount under old GAAP at that date) – (CU20,000/5 yearsx10%)) |
400 |
|
|
Cr Deferred Tax in P&L |
|
400 |
Being journal to reflect the release of the deferred tax liability for the year so as to match the 1/5th deduction allowed in the 2015 tax computation.
Example 60A: Close company surcharge
Company A is a close company. The date of transition is 1 January 2014. Under old GAAP the entity did not account for the close company surcharge in the year it arose on the basis that a dividend would be paid within 18 months of the year end to avoid it.
Assume there was a close company surcharge payable of €50,000, €30,000, €35,000 and €40,000 for the 31 December 2012, 2013, 2014 and 2015 year end respectively which had not been accrued under old GAAP.
Assume that a dividend had not been paid or declared for the 2012 and 2013 years up to 1 January 2014 and no dividend had been declared for the 2014 and 2015 years. Assume the:
– 2012 dividend was declared and paid in 2014 year and therefore the close company surcharge was avoided.
– 2013 dividend was declared and paid in 2015 year and therefore the close company surcharge was avoided.
Under FRS 102 Section 29.14 the close company surcharge is required to be provided for in the year to which it relates unless a dividend is declared pre-year end regardless of whether a dividend will be paid to avoid this surcharge.
The transition adjustments required are:
1 January 2014
| CU | CU | |
| Dr profit and loss reserves | 80,000 | |
| Cr close company surcharge provision | 80,000 |
Being journal to reflect the close company surcharge provision for the 2012 and 2013 year under FRS 102
The journals required on 31 December 2014 assuming the above journals are posted to reserves etc are:
| CU | CU | |
| Dr corporation tax in P&L | 35,000 | |
| Cr close company surcharge provision | 35,000 |
Being journal to reflect close company surcharge for 2014 not previously accounted for under old GAAP
| CU | CU | |
| Dr close company surcharge provision | 50,000 | |
| Cr corporation tax in P&L– adjustment in respect of prior year | 50,000 |
Being journal to reverse the provision recognised for the 2012 surcharge as it is no longer payable.
The journals required on 31 December 2015 assuming the above journals are posted to reserves etc are:
| CU | CU | |
| Dr corporation tax in P&L | 40,000 | |
| Cr close company surcharge provision | 40,000 |
Being journal to reflect close company surcharge for 2015 not previously accounted for under old GAAP
| CU | CU | |
| Dr close company surcharge provision | 30,000 | |
| Cr corporation tax in P&L– adjustment in respect of prior year | 30,000 |
Being journal to reverse the provision recognised for the 2013 surcharge as it is no longer payable.
If we assume in the above example that the dividend to avoid the 2012 surcharge was not paid and therefore the surcharge was paid over in 2014 and recognised as a charge in the 2014 P&L under old GAAP. The journal required would be to:
| CU | CU | |
| Dr close company surcharge provision | 50,000 | |
| Cr corporation tax in P&L | 50,000 |
Being journal to reflect the set off of provision posted for the surcharge under FRS 102 against the charge posted under old GAAP.
The same approach would be adopted in the 2015 year if the 2013 surcharge was not avoided.
Example 61: Extract from the accounting policy note and notes to the financial statements
(a) Taxation
The company is managed and controlled in the location and, consequently, is tax resident in location. Tax is recognised in the profit and loss account, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case tax is also recognised in other comprehensive income or directly in equity respectively.
(i) Current tax
Current tax is calculated on the profits of the period. Current tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date.
(ii) Deferred tax
Deferred tax arises from timing differences that are differences between taxable profits and total comprehensive income as stated in the financial statements. These timing differences arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in financial statements.
Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Current or deferred taxation assets and liabilities are not discounted.
INCLUDE THE BELOW IF CONSOLIDATED FINANCIAL STATEMENTS ARE BEING PREPARED
If a temporary difference arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction does not affect accounting or taxable profit or loss, no deferred tax is recognised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Extract from notes to the financial statements – tax note
|
|
2015 CU |
2014 CU |
|
|
|
|
|
a) Analysis of tax expense in profit and loss: |
|
|
|
Current tax: |
|
|
|
Irish corporation tax on profit/(loss) on ordinary activities |
XXX |
XXX |
|
Adjustment in respect of prior years |
XXX |
XXX |
|
Foreign tax |
XXX |
XXX |
|
|
XXXX |
XXXX |
|
|
|
|
|
Deferred tax: |
|
|
|
Origination and reversal of timing differences |
|
|
|
Adjustment in respect of prior periods |
|
|
|
Impact of change in tax rate |
XXXX |
XXXX |
|
Tax on profit on ordinary activities (see note 9(c)) |
1,500,000 |
1,000,000 |
(i) During the year the Irish Government changed the capital gains tax rate from X% to X% which was substantively enacted on 2016. The year end deferred tax asset/liability has been measured at X% being the tax rate in force at the year end date. The impact of applying the updated rate of x% would result in the deferred tax asset/liability increasing by X%.
|
b) Analysis of tax expense in other comprehensive income: |
|
|
|
Deferred tax: |
|
|
|
Actuarial loss on pension scheme |
XXXX |
– |
|
Impact of change in tax rate |
XXXX |
XXXX |
|
Tax included in other comprehensive income |
XXXX |
XXXX |
c) Reconciliation of the expected tax charge at the statutory tax rate to the actual tax charge at the effective rate
The assessed tax charge for the year/period is different to the statutory rate of corporation tax in the Republic of Ireland of 10% (2014: 10%). The differences are explained below:
|
|
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
Profit/(loss) on ordinary activities before tax |
9,463,690 |
(XXX) |
|
|
|
|
|
Profit/(loss) on ordinary activities multiplied by statutory rate of corporation tax in Republic of Ireland of 10% (2014: 10%) |
946,369 |
(XXX) |
|
|
|
|
|
Effects of: |
|
|
|
Expenses not deductible for tax purposes |
132,138 |
– |
|
Income taxed at passive rate |
1,349 |
– |
|
Indexation on capital gains |
1,349 |
– |
|
Effect of deferred tax not previously recognised |
(9,280) |
– |
|
Adjustment in respect of prior years |
(9,280) |
– |
|
Other Deferred tax at a higher rate |
3,618 XXX |
– XXX |
|
Higher rate of tax on foreign earnings |
565,875 |
– |
|
|
1,500,000 |
– |
d) Factors that may affect future tax charges
The company has tax losses carried forward of CUXXXX (2014: CUXXX) that are available indefinitely for offset against future taxable profits. The directors have reviewed the potential deferred tax asset of CUXXX at 31 December 2015 (2014: CUXXX) and have concluded that it is inappropriate to recognise it in the company’s balance sheet at this time.
Extract from notes to the financial statements – deferred tax note (balance sheet) classified as Provision for liabilities in the balance sheet
Deferred tax
The deductible and taxable temporary differences at the year/period end dates in respect of
which deferred tax has been recognised are analysed as follows:
|
|
2015 CU |
2014 CU |
|
|
|
|
|
Deferred tax liabilities/(assets) (deductible temporary differences) |
|
|
|
Capital allowances in excess of depreciation |
– |
– |
|
Provisions |
– |
– |
|
Post-employment benefits |
– |
– |
|
Tax losses carried forward |
– |
– |
|
Other deductible temporary differences |
– |
– |
|
|
– |
– |
Movement in deferred tax assets and liabilities, during the year, were as follows:
|
|
Capital allowance |
Provisions |
Tax losses carried forward |
Post- employment benefit |
Other |
Total |
|
|
CU |
CU |
CU |
CU |
CU |
CU |
|
2015 |
|
|
|
|
|
|
|
At 1 January 2015 |
– |
– |
– |
– |
– |
– |
|
Recognised in profit and loss |
177,328 |
307,132 |
307,132 |
– |
– |
484,460 |
|
Acquisitions |
– |
– |
– |
– |
– |
– |
|
Recognised in other comprehensive income |
177,328 |
307,132 |
307,132 |
– |
– |
484,460 |
|
Disposals |
– |
– |
– |
– |
– |
– |
|
Foreign exchange and other |
– |
– |
– |
– |
– |
– |
|
At 31 December 2015 |
177,328 |
307,132 |
307,132 |
– |
– |
484,460 |
|
|
Capital allowances |
Provisions |
Tax losses carried forward |
Post- employment benefit |
Other |
Total |
|
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
At 1 January 2014 |
– |
– |
– |
– |
– |
– |
|
Recognised in profit and loss |
177,328 |
307,132 |
307,132 |
– |
– |
484,460 |
|
Acquisitions |
– |
– |
– |
– |
– |
– |
|
Recognised in other comprehensive income |
177,328 |
307,132 |
307,132 |
– |
– |
484,460 |
|
Disposals |
– |
– |
– |
– |
– |
– |
|
Foreign exchange and other |
– |
– |
– |
– |
– |
– |
|
At 31 December 2014 |
177,328 |
307,132 |
307,132 |
– |
– |
484,460 |
- The net deferred tax liability/asset expected to reverse in the 2016 year is CUXXXX. The reversal relates to the timing difference on tangible fixed assets and capital allowances through depreciation and amortisation. The above amount also incorporates the expected usage of losses carried forward.
- The unused tax losses are as year end as detailed above. There are no unused tax credits. There is no expiry date with regard to these losses.
- No deferred tax is recognised on unremitted profits of its associates as there is no liability to tax on these when remitted.
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