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Transition exemptions
Section 29 does not provide any exemption on transition therefore all adjustments have to be made retrospectively.
Principal transition adjustments
(1) Fair value adjustments and deferred tax on fair value adjustment where the fair value option is taken on accounting for investments in subsidiaries, joint ventures and associates. Under old GAAP investment in subsidiaries, joint ventures and associates a in the individual financial statements could only be carried at cost less impairment. However on transition to FRS 102, these is a choice to either carry these at cost less impairment, fair value through profit and loss or fair value through OCI. Where investments in subsidiaries, joint ventures or associates are recognised at fair value in the individual financial statements on transition to FRS 102, deferred tax will need to be recognised on transition as well as an adjustment to reflect the investment at its fair value. The deferred tax rate to be used depends on the tax rate that will be payable on settlement i.e. whether the investment is held for dividend income or for future sale. Where dividend is not taxable no deferred tax is required.
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.
(2) Investment in non-puttable ordinary and preference shares to be recognised at fair value
Under Section 11 where the investments are listed on the stock exchange or where other non-listed investments can be reliably measured, these should be accounted for at fair value on transition. Under old GAAP it is likely that these were carried at cost less impairment. The uplift in fair value will need to be recognised in reserves at the date of transition. Deferred tax will also need to be recognised on this uplift at the capital sales rate (CGT rate).
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
(3) A sale with unusual credit terms (not normal credit terms) and is therefore deemed a financing transaction
Under Section 11, where a financing transaction is included within a sale, the amount to be recognised within revenue is the cash price that would be charged where no unusual credit terms were provided. The deemed financing element is posted as interest/finance income in the P&L and released over the terms of the credit provided. Deferred tax will need to be recognised on transition in the opening balance sheet and will be reversed over the financing period. Under old GAAP, this sale was recognised at the gross amount and not present valued (i.e. sale recognised for 50,000).
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.
(3) Forward contracts, interest rate swaps (and other derivatives) not previously recognised under old GAAP instead disclosed requires recognition under Section 12 (hedging not adopted)
Under old GAAP (for non-FRS 26 adopters) derivatives such as forward contracts and interest rate swaps which were still open at the year-end reporting date were not recognised on the balance sheet instead they were disclosed. Section 12 requires such derivatives to be recognised at fair value on the balance sheet. Therefore at the date of transition where forward contracts, interest rate swaps etc. exist, an adjustment will be required to recognise these at fair value and where hedge accounting is not adopted the other side of the transaction will be to the profit and loss. It is also likely deferred tax will arise on the adjustments as they will not have been taxed in the past as they would not have been included in the profit under old GAAP.
Note in the example below we have assumed it was used to hedge debtors etc. at year end, however the same type of journal would be required where the forward contract was used to hedge future purchases or sales. The accounting would be the same.
Old GAAP allowed entities to use the average forward contract rate to retranslate the foreign currency balance at the year end. Section 30 does not allow this so if under old GAAP foreign entities applied this treatment, then they will have to make an adjustment on transition to show the foreign balances at the year-end spot rate and fair value the forward contract. An example of the adjustment required to show the balances at the spot rate is included in the transition adjustments section of Section 30 of this guide.
The examples below assume hedge accounting is not adopted.
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.
(4) Ability to apply hedge accounting under FRS 102 which was not available for non-FRS26 adopters under old GAAP
Under old GAAP non-FRS 26 adopters did not have the opportunity to apply hedge accounting. FRS 102 provides these entities with an opportunity provided the conditions in Section 12.18 are met. Note the documentation requirements of Section 12.18 (d) and (e) do not have to be met at the date of transition under Section 35.10(t) instead if these conditions are met by the date the first set of FRS 102 financial statements were authorised for issue then hedge accounting can be applied.
Cash flow hedge
On transition, the amount to be shown in the cash flow hedge reserve should reflect the extent the transaction has not yet affected the profit or loss. Under a cash flow hedge the fair value of the derivative (e.g. forward currency contract, interest rate swap – pay variable receive fixed and the hedged item) should be recognised in other comprehensive income. See example 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.
Fair value hedge
On transition, an adjustment will be required to recognise the fair value of the interest rate swap and the adjustment to reflect the carrying amount of the loan through profit and loss reserves. Under a fair value hedge, the fair value adjustments are recognised in the profit and loss. See example below
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.
(5) Spare parts reclassified from inventory to PPE
Section 17.5 which is the standard that deals with property, plant and equipment makes it clear that -spare parts are classified as property plant and equipment when they are expected to be used during more than one period or only used in connection with an item of property plant and equipment. Where this is the case the spare part is depreciated over its useful life which cannot be more than the useful life of the main asset for which the spare parts are utilised. Old GAAP provided less guidance therefore, some entities would have classified such spare parts as inventory instead of PPE. As a result on transition to FRS 102, such entities will need to recognise a transition adjustment to correct this.
Example 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).
(6) 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.
(7) Recognition of investment property for property rented to group companies and deferred tax
Where an entity leases property to another member of the group on transition this may require the property to be reclassified from property, plant and equipment to investment property and the property then to be shown at fair value. Under old GAAP, where a property was leased to another group company this was classified as property, plant and equipment and depreciated (it could not be classified as investment property). This example assumes that the property meets the definition of investment property.
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.
(8) Deferred tax recognised in the consolidated financial statements on unremitted income from an associate/joint venture where taxable in the hands of the parent
Section 29 requires deferred tax to be recognised on the unremitted earnings of an associate. A timing difference arises as in the consolidated financial statements under the equity method, the income or loss for the parents share is recognised in the profit and loss account which then increases or decreases the value on the balance sheet. This income/loss is not taxable/tax deductible in the tax computation, but it may be taxable in the future when dividend is received from the associate, hence this creates the timing difference. Whether deferred tax should be recognised will depend on whether any dividend received from the parent will be taxable for the parent company. Where the associate is an Irish company no tax will be payable and therefore no deferred tax needs to be recognised assuming the expected settlement will be from dividends received and not from a sale.
Whether it will be taxable then deferred tax will need to be recognised at the passive tax rate or where the investment is held for future sale the sales tax rate should be utilised. If this is the case a transition adjustment will need to be made on transition to FRS 102. Note deferred tax should only be recognised where the decision to distribute is not within the control of the entity.
Under old GAAP, no deferred tax was required to be recognised unless the associate had a constructive obligation/binding agreement to make a dividend payment.
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.
(9) Deferred tax impact of fair value or a previous valuation under old GAAP as deemed cost
Section 35.10 provides an exemption on transition which allows an entity to use the fair value at the date of transition as deemed cost or a previous GAAP revaluation as deemed cost.
For example a company previously choose the revaluation option and revalued the buildings under old GAAP. The date of transition is 1 January 2014. A previous valuation was performed on 31 December 2012 and was stated at CU500,000 which was included in the Irish GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is CU464,285. Under the exemption at the date of transition, the company can elect to use the CU464,285 as its deemed cost going forward. Depreciation will be charged over the remaining life from the date of transition i.e. 15 years. Note however, deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition.
Where under old GAAP the revaluation option was chosen and the 2014 financial statements included a revaluation but on transition a cost model is chosen, a transition adjustment will be required to reverse the previous valuation under old GAAP in the 2014 financial statement together with the reversal of the additional depreciation on this revaluation.
Example 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.
(10) Default 20 years used to amortise intangibles under old GAAP where a reliable estimate could not be determined (deferred tax impact if allowable for tax purposes).
All intangible assets are considered to have a finite life under FRS 102. The standard specifies that where a useful life cannot be determined then a useful life should not exceed 10 years for UK entities who have early adopted the September 2015 amendments to FRS 102. Where entities have not early adopted, a life not exceeding 5 years should be used, the 10 year period is mandatory for UK entities for periods beginning on or after 1 January 2016 (currently 5 years in Ireland until the EU Directive 2013/34 is enacted). Under old GAAP where a useful life could not be reliably determined a default rate of 20 years was mandated. Where intangible assets acquired prior to the transition to FRS 102 has been determined and presumably there was a basis for this as required by old GAAP, it is unlikely that this will have any impact as it will continue to be amortised over the period determined under old GAAP.
Where under old GAAP the default rate of 20 years was used as the useful life could not be determined and the carrying amount cannot be supported, then a transition adjustment will be required such that the default life of 10 years (5 years for Ireland and UK entities that have not early adopted the September 2015 FRS 102 amendments) should be used.
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.
(11) Deferred tax on revaluation whether a previous revaluation on intangibles is used or the fair value is used as deemed cost (not required under old GAAP)
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.
(12) Exemption taken not to restate business combinations prior to transition but adjustment required for deferred tax.
Where exemption 35.10(a) is availed of as stated above the company does not need to restate business combinations prior to the date of transition. However Section 29 still requires deferred tax to be recognised.
Under old GAAP, deferred tax was not required to be recognised on all differences between the fair value of the assets and liabilities acquired and the book value in the acquirees books. Section 19 requires deferred tax to be recognised on all differences with the exception of goodwill, As a result a transition adjustment is required on transition to recognise this deferred tax in profit and loss reserves brought forward.
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
(13) Adjustment required to combinations entered into after the date of transition assuming exemption for non-restatement of prior year combinations is claimed
Where companies have entered into a business combination after the date of transition i.e. in the comparative year or the current year, a transition adjustment will be required to restate the business combination to what it should have been under FRS 102. The principal differences that are likely to arise are:
- Under old GAAP, the creation of a separate intangible asset from goodwill was very difficult as it not only had to be measured reliably but also needed to be separable. Therefore where it did not meet the definition for recognition it was consumed within goodwill. Under FRS 102 the intangible does not have to be separable and therefore more intangible are likely to be recognised resulting in less goodwill requiring recognition.
- Possible amortisation to be recognised on intangibles where new intangibles are recognised under FRS 102 for the aforementioned reason which may result in an additional tax deduction or acceleration of a deduction due to it having a differing useful lives than goodwill.
- Less amortisation on goodwill where more assets are identified under FRS 102 than old GAAP for the aforementioned reasons. Where goodwill has been allowed as a deduction in the tax computation, there may be a deferred tax impact.
- The recognition of deferred tax balances for the difference between book value and fair value (other than on goodwill) whereas this was not required under old GAAP. Hence a transition adjustment will be required to recognise the deferred tax on acquisition and the carrying amount required at each year end.
- FRS 102 does not allow an indefinite useful life where old GAAP did, therefore a life will have to be determined at the acquisition date under FRS 102 and where this cannot be determined it should be set at a maximum of 10 years where the September 2015 amendments to FRS 102 are early adopted by UK companies. If not then a maximum of 5 years should be applied as the 10 year is not mandatory until periods beginning after 1 January 2016. (Currently 5 years in the Republic of Ireland until the EU directive is enacted which is expected in 2016). Not included in this example but included in example 24 below.
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.
(14) Adjustment required to combinations entered into pre date of transition assuming exemption is not claimed
Some entities may decide not to claim the exemption contained in Section 35.10(a) (possibly for tax purposes to get access to deductions for intangible assets acquired not previously recognised). The entity has a choice to apply the restatements back as far back as it likes. However from that date any combinations entered into date must be accounted for under FRS 102. The entity cannot pick and choose which ones to adjust. Under old GAAP it is likely that less intangible assets would have been recognised as FRS 102 is less strict in what can be classified as intangibles. The main reason for the variances will be:
- Under old GAAP, the creation of a separate intangible asset from goodwill was very difficult as it not only had to be measured reliably but also needed to be separable. Therefore where it did not meet the definition for recognition it was consumed within goodwill. Under FRS 102 the intangible does not have to be separable and therefore more intangible are likely to be recognised results in less goodwill requiring recognition.
- Possible amortisation to be recognised on intangibles where new intangibles are recognised under FRS 102 for the aforementioned reasons. This may also result in additional tax deductions or an acceleration of tax deductions.
- Less amortisation on goodwill where more assets are identified under FRS 102 than old GAAP for the aforementioned reasons.
- The recognition of deferred tax balances for the difference between book value and fair value (other than on goodwill) whereas this was not required under old GAAP. Hence a transition adjustment will be required to recognise the deferred tax on acquisition and the carrying amount required at each year end.
- FRS 102 does not allow an indefinite useful life where old GAAP did, therefore a life will have to be determined at the acquisition date under FRS 102 and where this cannot be determined it should be set at a maximum of 10 years assuming UK companies early adopt the September 2015 FRS 102 amendments. If a UK company does not early adopt it applies for periods beginning after 1 January 2016. (currently 5 years in the Republic of Ireland until the EU Directive is enacted which is expected in 2016).
- On transition where this exemption is not claimed there may be a possible adjustment to inventory as under old GAAP the value to be placed on any inventory where the inventory is not traded in a market in which the acquirer participates as both a buyer and a seller at the date of acquisition is the lower of replacement cost or net realisable value. Under FRS 102 fair value should be used regardless of whether the acquirer participates in an active market in which they are both buyers and sellers. This has not been incorporated into the below example but is included for reference purposes.
NOTE: even where the entity decides to restate prior business combinations as per Section 35.9(e) the entity cannot account for changes in the parents ownership interest in a subsidiary that do not result in a loss of control through the equity method as would be required under FRS 102. The accounting should remain the same as under Old GAAP for combinations where such acquisitions exists (i.e. Under old GAAP goodwill is recognised on acquisition and a disposal recognised on disposal).
Example 23: 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.
(15) Lease incentives entered into since the date of transition
Under FRS 102 the lease incentives are recognised over the life of the lease. This contrasts with old GAAP where the lease incentive was released over the shorter of the lease term or over the period from the commencement of the lease to the date of the first market rent review/break clause.
Assuming the entity takes the exemption in Section 35.10 to not retrospectively adjust lease incentive accruals prior to the date of transition the only adjustment required will be for any lease incentive received since the date of transition. In this case there will be an impact on the profit and loss for the reduction in the lease incentive credit and the related deferred tax to reflect the fact that tax may have been charged on the additional credit in the comparative year which will be reimbursed in the tax computation over its life. If the exception is not taken then a detailed exercise will need to be performed for each lease incentive similar to the below but will obviously be looking at incentives received pre transition.
Example 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.
(16) Inclusion of future operating losses in a provision for termination of operations
Under old GAAP, a provision could be made under FRS 3 for future operating losses to be incurred between the year end date and the date operations eventually cease. Under Section 21 recognition of such losses are not allowed. Where a provision for termination/closure has been included on the date of transition or the comparative year, these losses will have to be derecognised. This will include a deferred tax adjustment for a tax adjustment previously claimed which will not be allowed for tax purposes until the following year under FRS 102. The deferred tax will be released in line with when the adjustment is included in the future tax computations under the relevant tax authorities transition rates.
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.)
(17) Customer loyalty schemes not accounted for under old GAAP
Although customer loyalty schemes were required to be accounted for under old GAAP, application of this requirement was not always adhered to. Therefore on transition an entity that engages in loyalty schemes should ensure that the award credits are measured at its relative fair value and that they are accounted for as a separately identifiable component of the initial sales transaction and the amount deferred. Whether a prior year adjustment is required on transition should be considered given that it should always have been accounted for in this way under old GAAP.
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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
(18) 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.
(19) Government grants recognised when it is reasonable all conditions for the grant will be complied with compared to old GAAP where all the conditions had to be complied with (assuming it is revenue grant and it is taxable)
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.
(20) Impairment to be set against grossed up goodwill incorporating non-controlling interests not required to be included under old GAAP
When performing an impairment review of goodwill acquired in a business combination where a non-controlling interest exists, the carrying value of the goodwill is first grossed up to include goodwill attributable to any non-controlling interest. This was not required under old GAAP. Where an impairment of goodwill acquired in a business combination and a non-controlling interest has been booked under old GAAP in the consolidated financial statements at the transition date or since transition, a review will need to be performed to assess whether the impairment should be increased as a result of this change.
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.
(21) Deferred tax shown separately from the net defined benefit liability/asset.
Under Section 28 and Section 29, deferred tax should not be netted against the defined benefit liability/asset instead it should be shown separately in the deferred tax balance in the balance sheet. Under old Irish GAAP the deferred tax balance on the pension was netted against the carrying amount of the defined benefit pension. Therefore a reclassification adjustment will be required on transition to FRS 102.
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.
(22) Holiday accrual
Under old GAAP there was no specific requirement in the standard to accrue for holiday pay however in reality it probably should have been. FRS 102 specifically requires this to be accrued. Therefore on transition, the balance at 1 January 2014 will have to be restated to include the accrual and the deferred tax effect of this accrual. Deferred tax is included as although the deduction was not allowed previously it will be allowed in the future as part of the transition tax adjustments. There will also be an impact on the comparative figures. Note from 2015 on there will be no timing differences for posting for holiday accruals as for tax purposes it is an allowable deduction.
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.
(23) Group defined benefit pension scheme treated as defined contribution scheme under old GAAP now required to be brought on balance sheet
Under old GAAP, where a group company had a defined benefit pension scheme but the allocation of the assets and liabilities of the group could not be determined, then the entities within the group could account for the pension scheme as if it was a defined contribution scheme. FRS 102 does not provide this exemption. Instead it states that the assets and liabilities should be allocated between the group companies based on a contractual agreement or where this does not exist it should be accounted for by the entity in the group that is legally responsible for the plan.
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.
(24) Past service costs not-vested recognised in full under FRS 102
Under old GAAP where a plan change was made and the effect of this change resulted in some conditions not vesting, the un-vested cost would be recognised on a straight line basis over which the conditions vest. FRS 102 requires such a change to be recognised immediately in the valuation of the defined benefit obligation.
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.
(25) Determination of net interest on defined benefit scheme
Under old GAAP an entity recognised an expected return on plan assets in the profit and loss account. Under FRS 102 a net interest expense, based on the net defined liability, is recognised in the profit and loss account. There is no impact on the balance sheet the adjustment on transition is a transfer from interest expense/pension finance income/costs in the profit and loss to other comprehensive income in the comparative financial year. There will also be a reclassification from deferred tax in the profit and loss to deferred tax in other comprehensive income.
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.
(26) Use of contracted forward rates not permitted under Section 30
SSAP 20 allowed entities a choice to translate year end balances at the average forward contract exchange rate which covers the net foreign exchange exposure on the year end balance sheet. Section 30 does not allow this, instead all monetary assets must be retranslated to the year end rate. Instead these forward contracts are fair valued and brought under the remit of Section 12 – other financial instruments issues. An example of a transition adjustment to bring this in at fair value has been shown in Section 12 of this website. Please refer to that section for further details.
On transition to FRS 102, an entity will have to adjust the monetary assets and liabilities such that they are shown at the year end exchange rate. There will also be a deferred tax impact on this adjustment as previously the adjustment to state year end balances at forward rates would have been taxable/tax deductible.
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.
(27) Long term loans akin to an investment treated as a monetary asset
Under old GAAP no specific guidance was provided in relation to the treatment of long term loans. As a result many entities may have treated long term loans akin to an investment and therefore treated these as non-monetary assets. Under FRS 102, it is clear that such loans are monetary assets and therefore should be retranslated at each year end. As a result, transition adjustments are required to reflect this. It will include deferred tax on the adjustment where this adjustment was be taxed/tax deductible in the past and therefore will be payable/refundable over the next 5 years
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 rat
|
|
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.
(28) Foreign borrowings taken out to fund foreign investment
Under SSAP 20, it was possible in the individual financial statements of the investing company to retranslate a foreign investment where borrowings were taken out to purchase the investment. This resulted in the FX adjustments on the borrowings and the investments somewhat netting against each other. Section 12 of FRS 102 provides a lot more detailed criteria which must be met before this treatment can be adopted and states that it can only be done where a fair value hedge is in operation. Fair value hedges have been looked at in Section 12. Where the criteria for a fair value hedge is not met at the date of transition or at the comparative year end date, then a transition adjustment will be required to reverse the retranslation of the investment from the year end rate back to its historical rate. There will also be a deferred tax adjustment where a tax deduction was obtained or the adjustment was taxed in prior year computations.
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.
(29) Change from cost model to fair value model
Under previous GAAP, there was no specific guidance on accounting for biological assets, and therefore most entities followed the guidance on fixed assets (FRS15) and applied a cost model or the guidance on stock and long term contracts (SSAP9) and applied the lower of cost or net realisable value. Therefore if entities continue to use the cost model or the model they previously adopted there should be no real transition differences.
However, if an entity changes from fair value to cost or from cost to fair value, the change should be applied retrospectively, and the adjustments would be recognised in reserves. Deferred tax will be required to be recognised for the fact that the increase will be taxable as part of the tax transition rules.
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 reserve | 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.
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