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Example 1: Transition date
Company A has a 31 December year end. Therefore the first financial statements in conformity with FRS 102 is for the year ended 31 December 2015. The date of transition is therefore the 1 January 2014. Therefore the balances at 1 January 2014 form the opening balances (statement of opening position) under FRS 102 and will need to be restated to conform to FRS 102. The year end 31 December 2014 will also have to be restated.
Example 2: Transition date
Company A usually had a 31 December year end. However the prior year financial statements were prepared for the 18 month period 1 July 2013 to 31 December 2014. The date of transition is therefore the 1 July 2013.
Example 3: compliance statement on adoption of FRS 102
‘This is the first set of financial statements prepared by XXXXX Limited in accordance with accounting standards issued by the Financial Reporting Council, including the FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”). The company transitioned from previously extant UK and Irish GAAP to FRS 102 as at 1 January 2014. An explanation of how transition to FRS 102 has affected the reported financial position and financial performance is given in note X‘.
Example 4: compliance statement for companies applying the FRS 102 small entities financial statements (only applicable to UK Companies at this time as the Republic of Ireland government have not yet enacted EU Directive 2013/34)
Example wording to be included in the small entities financial statements below (note not mandated but the inclusion illustrates best practice.)
‘‘This is the first set of financial statements prepared by XXXXX Limited in accordance with accounting standards issued by the Financial Reporting Council, including the FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”). The company transitioned from previously extant UK and Irish GAAP to FRS 102 as at 1 January 2014. An explanation of how transition to FRS 102 has affected the reported financial position and financial performance is given in note X.
‘The FRC issued amendments to FRS 102 called ‘Amendments to FRS 102-Small entities and other minor adjustments’ which can be applied for accounting periods beginning on or after 1 January 2016 with early adoption permitted. The company has adopted these amendments in these financial statements on the basis that it meets the requirements of a small company.’
Where the exemptions are being claimed by qualifying entities as detailed in Section 1 of FRS 102, the entity should provide a disclosure to this effect. The below provides proposed wording for such a statement.
Example 4A: Disclosure where an entity is applying the reduced disclosure framework
‘FRS 102 sets out a reduced disclosure framework for a ‘qualifying entity’ as defined in FRS 102 which addresses the financial reporting requirements and disclosure exemptions in the financial statements of qualifying entities that otherwise apply the recognition, measurement and disclosure requirements of FRS 102.
The company is a qualifying entity for the purposes of FRS 102. Note X gives details of the company’s parent and from where its consolidated financial statements prepared in accordance with (insert GAAP) GAAP may be obtained. The company has notified its shareholders in writing about, and they do not object to, the use of disclosure exemptions availed of by the company in these financial statements.’
Example 5: Acquisition not resulting in a change of control after date of transition
Prior to 1 January 2014, Parent A owned 55% of Company B which was consolidated in the financial statements. On 2 January 2014 the parent acquired the remaining 45% from the non-controlling party for CU1,300,000. The date of transition to FRS 102 is 1 January 2014. In the 2014 financial statements under old GAAP the parent calculated the goodwill acquired as a result of this transaction and reflected the additional fair value of assets and liabilities acquired at that date. Under old GAAP as a result of this transaction goodwill of CU200,000 was recognised and PPE uplift of CU100,000 was booked. The useful life of the PPE and goodwill is 10 years, hence the NBV of this goodwill and PPE was CU180,000 and CU90,000 at 31 December 2014. The NBV of this goodwill and PPE was CU160,000 and CU80,000 at 31 December 2015.
The transition journals required to show the correct treatment under FRS 102 in 31 December 2014 accounts are:
|
|
CU |
CU |
|
Dr Equity-Profit and Loss Reserves |
300,000 |
|
|
Cr Goodwill |
|
200,000 |
|
Cr Fixed Assets – PPE |
|
100,000 |
Being journal to reverse old GAAP posing
|
|
CU |
CU |
|
Dr Goodwill – Balance Sheet |
20,000 |
|
|
Cr Goodwill Amortisation P&L (CU200,000/10yrs) |
|
20,000 |
|
Dr Fixed Assets PPE |
10,000 |
|
|
Cr Depreciation P&L (CU100,000/10yrs) |
|
10,000 |
Being journal to reverse depreciation and amortisation charged for 2014 under old GAAP
An adjustment will also be required in 31 December 2015 financial statements to reverse any amortisation/depreciation charged on the additional goodwill/PPE revaluation if the consolidated accounts have already been produced. The journals will be the same as the above.
Example 6: Disposal resulting in no change in control in the subsidiary after date of transition
Parent A previously owned 100% of Company B which was consolidated in the financial statements for the year ended 31 December 2014. During the year the company disposed of 25% to a third party for CU300,000. The original cost of the investment in the individual entity accounts was CU1,300,000. The net assets of the subsidiary at the date of disposal was CU800,000 plus goodwill of CU50,000 in the consolidated accounts. Assume there were no fair value adjustments as the fair value of the net assets at the original date of acquisition were equal to the entity’s net assets.
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Profit on Disposal of 25% of Subsidiary in P&L |
87,500 |
|
|
Cr Equity -Profit and Loss Reserves ((CU850,000*25%)= CU212,500 – CU300,000) |
|
87,500 |
Being journal to reflect disposal as an equity transaction and not show the profit on disposal in the consolidated financial statements.
An adjustment will also be required in the 2015 TB where a disposal took place during the year and consolidated financial statements have been prepared under old GAAP.
Example 7: Adjustments for deferred tax on business combinations prior to date of transition where transition exemption availed of
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 1 January 2013. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year. Assume the amortisation on intangibles and PPE is over a period of 10 years from the date of acquisition.
Details of the book value and fair value at the time of acquisition is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
Book value
|
Fair value |
Fair value |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
|
Intangible Assets |
CUnil |
CU100,000 |
CU100,000 |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
|
Total Net Assets |
CU410,000 |
CU775,000 |
CU748,500 |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
|
Goodwill |
|
CU225,000 |
CU251,500 |
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
|
Date of Acquisition |
Book Amount at Date of Transition |
|
Uplift in Property, Plant and Equipment |
CU150,000 |
CU135,000** |
|
Uplift in Intangible Assets |
CU100,000 |
CU90,000** |
|
Uplift in Inventory |
CU20,000 |
CU0** |
|
Uplift in Cash |
CUnil |
N/a |
|
Uplift in Contingent Liabilities |
(CU10,000) |
CU0** |
|
Uplift in Debtors |
CU5,000 |
CU0** |
|
Uplift in Creditors |
CUnil |
CUN/a |
|
Total Timing Difference* |
CU265,000 |
CU225,000 |
|
Deferred Tax* |
CU26,500 |
CU22,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value at acquistion is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is on the date of acquisition under FRS 102 = CU26,500+CU60,000=CU86,500
At date of transition is CU22,500 (CU225,000*10%)
**Carrying amount of fair value adjustment in the consolidated financial statements at date of acquisition is:
PPE = CU135,000 (CU150,000/10yrs*9yrs being the years left on the asset at date of transition).
Intangibles = CU90,000 (CU100,000/10yrs*9yrs being the years left on the asset at date of transition).
Other non-monetary assets is nil as it is assumed the difference has reversed.
Therefore the deferred tax which would have been recognised under FRS 102 was CU22,500.
The journals required on transition are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
22,500 |
|
|
Cr Deferred Tax Liability |
|
22,500 |
Being journal to recognise the deferred tax on fair value differences at date of transition
Note goodwill is not adjusted instead profit and loss reserves is adjusted as Goodwill cannot be adjusted where the exemption is claimed.
Journals to be posted at 31 December 2014 assuming the above journal is posted to reserves:
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
2,500 |
|
|
Cr Deferred Tax in P&L ((CU150,000+CU100,000)/10yrs)*10%) |
|
2,500 |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences in consolidated financial statements
Journals to be posted at 31 December 2015 assuming the above journal is posted to reserves:
The same journal will be required for 31 December 2015 as for 2014 above
Example 8: Adjustments to business combinations where it occurs after the date of transition
- 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.
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 2 January 2014. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred. Assume the useful life of goodwill is 10 years.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year and the useful life of PPE is 10 years.
Details of the book value and fair value at the time of acquisition for Old GAAP and FRS 102 purposes is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
|
Book value |
Fair value |
Fair value |
Difference |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
CUNil |
|
Intangible Assets |
CUnil |
CUnil |
CU100,000 |
(CU100,000) |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
CUNil |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
CUNil |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
CUNil |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
CUNil |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
CUNil |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
CU26,500 |
|
Total Net Assets |
CU410,000 |
CU675,000 |
CU748,500 |
(CU73,500) |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
CUNil |
|
Goodwill |
|
CU325,000 |
CU251,500 |
CU73,500 |
Given the threshold for identifying intangible is not as stringent under FRS 102 as it does not have to be separable from goodwill, under FRS 102, intangibles of CU100,000 should have been recognised. Assume the useful life of intangibles is 5 years.
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
Uplift in Property, Plant and Equipment |
CU150,000 |
|
Uplift in Intangible Assets |
CU100,000 |
|
Uplift in Inventory |
CU20,000 |
|
Uplift in Cash |
CUnil |
|
Uplift in Contingent Liabilities |
(CU10,000) |
|
Uplift in Debtors |
CU5,000 |
|
Uplift in Creditors |
CUnil |
|
Total Timing Difference |
CU265,000 |
|
Deferred Tax (CU265,000*10%)* |
CU26,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
Adjustment required to the comparative financial statements:
At 31 December 2014
|
|
CU |
CU |
|
Dr Intangible Assets (CU100,000 less nil) |
100,000 |
|
|
Cr Goodwill (CU325,000-CU251,500) |
|
73,500 |
|
Cr Deferred Tax Liability (as above) |
|
26,500 |
Being journals required to post adjustments so as to show the correct fair values and goodwill under FRS 102
Journal for change in amortisation
|
|
CU |
CU |
|
|
|
|
|
Dr Amortisation of Intangibles in P&L*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to Old GAAP figures posted being different.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquistion. However under old GAAP the goodwill of CU325,000 was depreciated over 10 years so therefore depreciation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed.
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be recognised.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
6,015 |
|
|
Cr Deferred Tax in P&L ((CU4,515 +CU1,500) |
|
6,015**** |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences and release of monetary assets in the year in consolidated financial statements
****Reversal of the timing difference of inventory (CU20,000), contingent liability (CU10,000) and debtors (CU5,000) = (CU20,000-CU10,000+CU5,000)*10%= CU1,500
Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charge in the year = (CU25,150+CU20,000)*10%=CU4,515.
Adjustments required in the 31 December 2015 year end accounts assuming the above journals are posted into reserves where relevant:
The same type of journals would be posted for the amortisation/depreciation on intangible, goodwill and PPE in the 2015 as the 2014 year assuming consolidated financial statements have first been performed under old GAAP. Deferred tax of CU4,515 would only be posted as the monetary differences have been reduced to nil in the prior year.
If the intangible was allowed for tax purposes an adjustment may be required on the corporation tax computation for the tax deduction not previously allowable on goodwill. This deduction would be obtained in line with the tax transition rules issued by the tax authorities.
The above example assumes shares were acquired, the principals would be the same for a trade acquisition (when meets the definition of a business as per Section 19). Deferred tax may not be as applicable as it may have already have been provided or the intangible is allowed for capital allowance purposes with the deduction claimed being equal to the amortisation for the year.
Example 9: Adjustments to business combinations where it occurs before date of transition but exemption Section 35.10(a) not claimed
2. 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).
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 1 January 2013. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred. Assume the useful life of goodwill is 10 years.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year and the useful life of PPE is 10 years.
Details of the book value and fair value at the time of acquisition for old GAAP and FRS 102 purposes is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
|
Book value |
Fair value |
Fair value |
Difference |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
CUNil |
|
Intangible Assets |
CUnil |
CUnil |
CU100,000 |
(CU100,000) |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
CUNil |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
CUNil |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
CUNil |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
CUNil |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
CUNil |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
CU26,500 |
|
Total Net Assets |
CU410,000 |
CU675,000 |
CU748,500 |
(CU73,500) |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
CUNil |
|
Goodwill |
|
CU325,000 |
CU251,500 |
CU73,500 |
Given the threshold for identifying intangibles is not as stringent under FRS 102 as it does not have to be separable from goodwill, under FRS 102, intangibles of CU100,000 should have been recognised. Assume the useful life of intangibles is 5 years.
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
Uplift in Property, Plant and Equipment |
CU150,000 |
|
Uplift in Intangible Assets |
CU100,000 |
|
Uplift in Inventory |
CU20,000 |
|
Uplift in Cash |
CUnil |
|
Uplift in Contingent Liabilities |
(CU10,000) |
|
Uplift in Debtors |
CU5,000 |
|
Uplift in Creditors |
CUnil |
|
Total Timing Difference |
CU265,000 |
|
Deferred Tax (CU265,000*10%)* |
CU26,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
Adjustment required:
At 1 January 2014
|
|
CU |
CU |
|
Dr Intangible Assets (CU100,000 less nil) |
100,000 |
|
|
Cr Goodwill (CU325,000-CU251,500) |
|
73,500 |
|
Cr Deferred Tax Liability (as above) |
|
26,500 |
Being journals required to post adjustments so as to show the correct fair values and goodwill under FRS 102
Journal for change in amortisation
|
|
CU |
CU |
|
|
|
|
|
Dr Amortisation of Intangibles in P&L Reserves*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L Reserves** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to old GAAP figures posted being different up to the date of transition so that the correct NBV is shown.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquisition. However under old GAAP the goodwill of CU325,000 was amortised over 10 years so therefore amortisation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed to profit and loss reserves for 1 year (being the period from the date of acquisition to the date of transition of 1 January 2014).
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be reversed for 1 year (being the period from the date of acquisition of 1 January 2013 to the date of transition of 1 January 2014) to profit and loss reserves.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
6,515 |
|
|
Cr Profit and Loss Reserves ((CU4,515+CU1,500) |
|
6,515**** |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences and release of monetary assets in consolidated financial statements up to the date of transition
****Reversal of the timing difference of inventory (CU20,000), contingent liability (CU10,000) and debtors (CU5,000) = (CU20,000-CU10,000+CU5,000)*10%= CU1,500
Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charged in the year = (CU25,150+CU20,000)*10%=CU4,515.
Journals required to be posted at 31 December 2014 assuming the above journals are brought forward
Journal for change in amortisation
|
|
CU |
CU |
|
Dr Amortisation of Intangibles in P&L*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to old GAAP figures posted being different.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquistion. However under old GAAP the goodwill of CU325,000 was amortised over 10 years so therefore amortisation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed.
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be reversed.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,515 |
|
|
Cr Deferred Tax in P&L |
|
4,515**** |
Being journal to reflect the reversal of deferred tax to match depreciation/amortisation posted on fair value differences in the year in consolidated financial statements not accounted for under old GAAP.
****Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charged in the year = (CU25,150+CU20,000)*10%=CU4,515.
Adjustments required in the 31 December 2015 year end accounts assuming the above journals are posted into reserves where relevant:
The same type of journals would be posted in the 2015 as the 2014 year assuming consolidated financial statements have first been performed under old GAAP.
If the intangible was allowed for tax purposes an adjustment may be required on the corporation tax computation for the tax deduction not previously allowable on goodwill. This deduction would be obtained in line with the tax transition rules issued by the tax authorities.
Example 10: Transition adjustment for goodwill previously determined infinite where Section 35.10(a) is claimed
Company A had goodwill with a carrying amount on transition of CU10,000. This was not previously amortised under old GAAP as it was deemed to have an infinite life. The useful life is now determined to be 10 years. Assume transition exemption 35.10(a) is claimed and the date of transition is 1 January 2014 and the goodwill was not previously allowed for tax purposes. Assume this is a UK entity which has early adopted the September 2015 amendments to FRS 102.
The adjustment to be recognised in the 31 December 2014 books is:
|
|
CU |
CU |
|
Dr Goodwill Amortisation |
CU1,000 |
|
|
Cr Goodwill Accumulated Amortization (CU10,000/10yrs being remaining UEL) |
|
CU1,000 |
Being journal to recognise amortisation on goodwill as under old GAAP it was considered infinite.
The same journal will be required in the 31 December 2015 TB and the above journal should be posted to the profit and loss reserve.
Example 11: Transition adjustment for goodwill where previously used the default life 20 years where Section 35.10(a) is claimed
Company A had goodwill with a carrying amount on transition of CU10,000. This was previously amortised under old GAAP at the default rate of 20 years. There are 15 years remaining at the date of transition. If in the unlikely event that the remaining useful life cannot be justified and a life cannot be determined then the default rate under FRS 102 of 10 years should be used (5 year in Ireland until the EU directive is enacted and 5 year for UK entities who have not early adopted the September 2015 FRS 102 amendments). The useful life is now determined to be 10 years. Assume transition exemption 35.10(a) is claimed, the date of transition is 1 January 2014 and the UK entity has early adopted the September 2015 FRS 102 amendments.
The adjustment to be recognised in the 31 December 2014 books is:
|
|
CU |
CU |
|
Dr Goodwill Amortisation |
500 |
|
|
Cr Goodwill Accumulated Amortisation |
|
500* |
Being journal to recognise the additional amortisation on goodwill required under FRS 102.
*under old GAAP the amortisation charge for 2014 would have been CU500 (CU10,000/20yrs).
On transition to FRS 102, the life was determined to be 10 years by default. Therefore the amortisation should have been CU1,000 (CU10,000/10yrs). Therefore an adjustment is required in 31 December 2014 to increase the charge by CU500.
The same journal will be required in the 31 December 2015 TB.
If in the above example the remaining useful life of goodwill was less than 10 years then it may be appropriate to use the lower useful life. If this was an Irish entity or a UK entity which has not early adopted the September 2015 FRS 102 amendments a default rate of 5 years should be used in the example above.
Example 12: Previous GAAP revaluation as deemed cost
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 |
|
Cr Deferred Tax in Profit and Loss |
|
1,095 |
|
Dr Deferred Tax in Balance Sheet ((CU464,285-CU300,000)/15yrs=CU10,952) * 10%) |
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.
Example 13: Fair value as deemed cost
A company previously chose the cost model under old GAAP. The date of transition is 1 January 2014 and the company intends to continue to use the cost model under FRS 102. The useful life of this asset was determined to be 20 years. The original cost was 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 14: Revaluation option chosen under old GAAP, reverting to the cost model on transition
A company previously chose the revaluation option and revalued the buildings under Old GAAP. On transition to FRS 102 the company decided to revert back to the cost model. The date of transition is 1 January 2014. The original cost of the property was CU300,000 purchased 5 years from the date of transition. A previous valuation was performed on 31 December 2012 and was stated at CU500,000 which was included in the Old 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. Assume the CU300,000 was allowed for capital allowance purposes. The journals posted to reflect this are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Revaluation Reserve |
243,750** |
|
|
Cr PPE |
|
239,285* |
|
Cr Profit and Loss Reserves (CU243,750-CU239,285) |
|
4,465 |
Being journal to restate the balance to a cost basis and eliminate the revaluation reserve
* total of the adjustment is the difference between the carrying amount at 1 January 2015 and the amount this would have been stated at if no revaluation policy had of occurred.
Original cost = CU300,000/20yrs * 15yrs being the number of years remaining up to 1 January 2014 = CU225,000. Therefore the adjustment required is =CU464,285-CU225,000= CU239,285
**the value in the revaluation reserve at 1 January 2014 assuming depreciation each year was transferred to the revaluation reserve. Total revaluation posted at 31 December 2013 was CU300,000/20yrs * 16yrs being the years held at cost up to date of revaluation=NBV of CU240,000. The uplift at that time was CU500,000-CU240,000= CU260,000.
Therefore the additional depreciation on this revaluation during 2013 was CU16,250 (CU260,000/16yrs being number of years remaining at time of revaluation on 31/12/12 * 1 yr being the length of time from revaluation to date of transition = CU16,250. Total carrying amount in reserve at 1 January 2014 was CU243,750 (CU260,000-CU16,250).
Note deferred tax is not effected here as under old GAAP deferred tax would only have been recognised on the cost. The revaluation was a permanent difference.
Example 15: Deferred tax on revaluation where a previous revaluation is used as deemed cost for intangibles
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 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 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
|
|
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.
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–Deferred Tax |
|
333 |
Being journal to reflect release of deferred tax for depreciation charged in the year. This deferred tax journal will also be required in the 2015 year.
No adjustment is required for depreciation as the depreciation charge in 2014 and 2015 is equal to what should have been charged.
Example 16: 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 gain 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 17: Adoption of fair value through other comprehensive income on transition
If we take example 16 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 realized through receipt of future dividends the tax rate on the receipt of the dividend should be used for the deferred tax rate in the above example.
Example 18: 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 adjustment as the tax computation has not been submitted to tax authorities at the time of preparing the financial statements. 1/5th of the deferred tax asset of CU500 recognized in 2014 will have to be released in 2015 for the fact that a deduction will be obtained in the tax computation for this 1/5th in 2015. The journal required is:
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
100 |
|
|
Cr Deferred Tax Asset |
|
100 |
Being journal to release 1/5th of the deferred tax asset to match the tax deduction claimed that year.
Example 19: Extract from the accounting policy note
‘OmniPro Sample FRS 102 Limited is primarily engaged in the provision of construction services to both the private and commercial sectors. From their operations base and depot in Construction Place, Builders Lane, Dunblock, Any County they also sell pre-cast concrete products to private individuals and the construction industry. The company is supplied with the pre-cast concrete products by a wholly owned subsidiary company, which operates independently from a separate location.
The company is a limited liability company incorporated and domiciled in XXX. The company is tax resident in XXX.
This is the first set of financial statements prepared by OmniPro Sample FRS 102 Limited in accordance with accounting standards issued by the Financial Reporting Council, including the FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”). The company transitioned from previously extant UK and Irish GAAP to FRS 102 as at 1 January 2014. An explanation of how transition to FRS 102 has affected the reported financial position and financial performance is given in note X.
The significant accounting policies adopted by the Company and applied consistently in the preparation of these financial statements are set out below.
Example 20: Extract from the notes to the financial statements – Transition exemption rate
- TRANSITION TO FRS 102
Prior to 1 January 2014 the company prepared its financial statements under previously extant UK and Irish GAAP. From 1 January 2013, the company has elected to present its annual financial statements in accordance with FRS 102 and the Companies Act 2014.
The comparative figures in respect of the 2014 financial statements have been restated to reflect the company’s adoption of FRS 102 from the date of transition at 1 January 2014.
Set out below are the changes in accounting policies which reconcile profit for the financial year ended 31 December 2014 and the total equity as at 1 January 2014 and 31 December 2014 between UK and Irish GAAP as previously reported and FRS 102.
In preparing this financial information, the company has applied certain exceptions and exemptions from full retrospective application of FRS 102 as noted below.
Exceptions
Derecognition of financial assets and liabilities
In accordance with FRS 102, as a first-time adopter, the company did not retrospectively recognise financial assets and liabilities previously derecognised under UK and Irish GAAP before the date of transition.
Accounting estimates
In accordance with FRS 102, as a first-time adopter, the company did not revise estimates on transition to reflect new information subsequent to the original estimates.
Non-controlling interests
In accordance with FRS 102, as a first-time adopter, the company did not revise how it previously accounted for changes in non-controlling interests prior to the date of transition.
Exemptions
Business combinations
The company has elected not to apply Section 19 of FRS 102 retrospectively to business combinations effected before 1 January 2014.
Rent free period for operating leases
Under previous UK and Irish GAAP operating lease incentives such as rent free periods, were spread over the shorter of the lease period or the period to when the rental was set to a fair market rent. FRS 102 requires that such incentives to be spread over the lease period. The company has taken advantage of the exemption for existing leases at the transition date to continue to recognise these lease incentives on the same basis as previous UK and Irish GAAP. Accordingly the FRS 102 accounting policy has been applied to new operating leases entered into since 1 January 2014.
Investments in subsidiaries
The company has adopted the carrying value of subsidiary investments under UK and Irish GAAP on the date of transition as their deemed at the date of transition as permitted by FRS 102.
Share based payment transactions
The company has elected not to apply Section 26 Share based payment to equity instruments granted before the date of transition to FRS 102. FRS 20 has been applied to instruments granted prior to the date of transition.
Revaluation as deemed cost
The company previously adopted a policy of revaluing freehold premises and they were stated at their revalued amount less any subsequent depreciation and accumulated impairment losses. The company has adopted the transition exemption under FRS 102 paragraph 35.10(d) and has elected to use the previous revaluation as deemed cost.
Example 21: FRS 102 Principle Adjustments
The reconciliation of the profit and loss prepared in accordance with UK and Irish GAAP and in accordance with FRS 102 for the year ended 31 December 2014 and the reconciliation of the amount of total equity at 31 December 2014, before and after the application of FRS 102, is as follows:
|
|
Profit for the |
Total equity |
Total equity |
|
|
year ended |
as at |
as at |
|
|
31-Dec |
01-Jan |
31-Dec |
|
|
2014 |
2014 |
2014 |
|
|
CU |
CU |
CU |
|
|
|
|
|
|
As reported under Irish GAAP |
132,818 |
587,000 |
719,818 |
|
Accounting policy changes |
|
|
|
|
Impact of: |
|
|
|
|
– Holiday pay accrual (a) |
(12,000) |
(62,000) |
(74,000) |
|
– Revaluation of freehold premises (f) |
– |
XXXX |
– |
|
– Additional depreciation on uplift as a result of revaluation of freehold premises (f) |
(XXXX) |
– |
– |
|
– Rent free period for operating leases (b) |
(32,000) |
– |
(32,000) |
|
– Pension – recognition of group scheme (n) |
– |
– |
– |
|
– Restatement of previous business combination – goodwill derecognised and reversal of amortisation |
– |
– |
– |
|
– Restatement of previous business combination – intangibles recognised and additional amortisation |
– |
– |
– |
|
– Recognition of deferred tax on business combinations entered into prior to transition |
– |
– |
– |
|
– Present valuing non-market rate loans/ financing transactions |
– |
– |
– |
|
– Pension unrecognised service costs |
– |
– |
– |
|
– Derivatives (t) |
– |
– |
– |
|
Deferred tax impact of: |
|
|
|
|
– Holiday pay accrual |
1,000 |
6,000 |
7,000 |
|
– Reversal of intangible asset (c) |
|
9,375 |
9,375 |
|
– Rent free period for operating leases (b) |
4,000 |
0 |
4,000 |
|
– Revaluation of freehold premises (f) |
|
|
|
|
– Pension adjustments (k) |
|
|
|
|
– Revaluation of freehold premises (e) |
– |
(25,000) |
25,000 |
|
|
93,818 |
440,375 |
534,193 |
|
Correction of material errors |
XXXX |
XXXX |
XXXX |
|
Current tax effect on the correction error |
(XXXX) |
(XXXX) |
(XXXX) |
|
|
XXXX |
XXXX |
XXXX |
|
As reported under FRS 102 |
93,818 |
440,375 |
534,193 |
(a) Holiday pay accrual
UK and Irish GAAP
Under previous UK and Irish GAAP provisions for holiday pay accruals were not recognised and holiday pay was charged to the Profit and Loss account as it was paid.
FRS 102
FRS 102 requires short-term employee benefits to be charged to the profit and loss account as the employee service is received.
Impact
This has resulted in the company recognising a liability for holiday pay of CU62,000 on transition to FRS 102. In the year to 31 December 2014 an additional charge of CU12,000 was recognised in the profit and loss account and the liability at 31 December 2014 was CU74,000.
(b) Rent free period for operating leases
UK and Irish GAAP
Under previous UK and Irish GAAP operating lease incentives, such as rent free periods were spread over the shorter of the lease period or the period to when the rental was set to a fair market rent.
FRS 102
FRS 102 requires that such incentives to be spread over the lease period. The company has taken advantage of the exemption for existing leases at the transition date to continue to recognise these lease incentives on the same basis as previous UK and Irish GAAP. Accordingly the FRS 102 accounting policy has been applied to new operating leases entered into since 1 January 2014.
Impact
This has resulted in an increased operating lease charge of CU32,000 for the year 31 December 2014 with a corresponding increase in the accrued lease liability at 31 December 2014.
(c) Revaluation of tangible assets
Under previous UK and Irish GAAP the company had a policy of revaluing freehold premises. On transition to FRS 102 the company has elected to use the previous revaluation of certain premises at 31 December 2013 as the deemed cost for that asset. There is no effect on the balance sheet on transition. In the year ended 31 December 2014 the revaluation for the year ended 31 December 2014 is no longer recognised in Other Comprehensive income. As the revaluation was effected at the end of the financial year there was no change to the depreciation charge for the year ended 31 December 2014.
(d) Sales on unusual credit terms
UK and Irish GAAP
Under previous UK and Irish GAAP the company sold goods worth CU52,000 with unusual credit terms before the date of transition. The credit provided is for a period up to 31 December 2016. The normal cash price for these goods would be CU36,000.
FRS 102
FRS 102 requires the company to recognise this sale as a financing transaction with an associated interest element on the transaction
Impact
This has resulted in a decrease in debtors of CU11,305 on transition to FRS102 with deemed income earned in 2014 of CU5,307.
(e) Capitalisation of borrowing costs
UK and Irish GAAP
Under previous UK and Irish GAAP the company adopted a policy of capitalising qualifying borrowing costs. On transition to FS 102, the company elects to expense all borrowing costs going forward.
FRS 102
FRS 102 requires the company to expense borrowing costs going forward.
Impact
This has resulted in a reduction of property, plant and equipment of CU60,000 on transition to FRS 102 and a resulting decrease in depreciation charged in 2014 of CU15,000.
(f) Investment Property carried at fair value
UK and Irish GAAP
Under previous UK and Irish GAAP investment property was carried at open market value with movements in value recognised in the STRGL revaluation reserve unless there was a downward revaluation which was considered permeant, in which case it was recognised in the profit and loss. Deferred tax was not required to be recognised on the revaluation unless there was a binding agreement to sell.
FRS102
FRS 102 requires movement on investment property to be recognised in the profit and loss where it can be reliably measured without cost or effort. Section 29 requires deferred tax to be recognised on the uplift at the sales tax rate. On transition an adjustment was made to be recognised deferred tax of CU24,750 on the uplift. A further CU33,000 was recognised in 2014 for the deferred tax uplift at X%. An adjustment was also required to reclassify the movement in 2014 from the revaluation reserve to the profit and loss account. A reclassification was also required at the date of transition to reclassify the CU75,000 uplift from the revaluation reserve to profit and loss reserves.
(g) Deferred taxation
The company has accounted for deferred taxation on transition as follows:
(i) Holiday pay accrual – Deferred tax of CU7,750 has been recognised at X% on the liability recognised on transition at 1 January 2014. In the year ended 31 December 2014 the company has recognised a credit of CU1,500 in the profit and loss account to reflect the additional deferred tax asset as a result of the increase of the holiday pay accrual.
(ii) Rent free period for operating leases – In the year ended 31 December 2014 the company has recognised a credit of CU4,000 in the profit and loss account in respect of the deferred tax on the increased operating lease charge.
(iii) Revaluation of freehold premises – Under previous UK and Irish GAAP the company was not required to provide for taxation on revaluations. Under FRS 102 deferred taxation is provided on the temporary difference arising from the revaluation at the tax rate the asset is expected to be realised. A deferred tax charge of CU18,750 arose on transition to FRS 102 and was set against other reserves. The CU375 of this deferred tax in 2014 represents the deferred tax impact of deprecation charged on the uplift in that year.
(iv) Transfer of spare parts to Property, plant and equipment – Under previous UK and Irish GAAP the company carried spare parts as part of stock, on transition to FRS 102 these spare parts are now carried within property, plant and equipment. A deferred tax asset of CU1,000 has been recognised for the tax deduction not allowed in the comparative year at X% (which will be allowed in the future).
(v) Sale with unusual credit terms – Under previous UK and Irish GAAP the company recognised finance income upfront on the sale of products with extended credit terms. On transition to FRS 102 this finance income must be removed and apportioned when earned by the company. A deferred tax asset of CU1,413 was recognised for the reduction in income on transition to FRS 102 at X% which will be released as the finance income credited to the profit and loss. CU663 of this asset was released in the 2014 year to set off against the finance income released.
(vi) Revaluation of investment property – A deferred tax liability of CU24,750 was recognised on transition for the uplift in value. The deferred tax rate used was the sales tax rate of X%. A further CU33,000 was recognised in the year 2014 to reflect deferred tax on the further uplift booked in 2014.
(h) Revaluation of tangible assets
Under previous UK and Irish GAAP the company did not have a policy of revaluing freehold premises. On transition to FRS 102 the company has elected to use the revaluation of certain premises at 31 December 2013 as the deemed cost for that asset and continue to adopt a policy of non-revaluation from that date as permitted under Section 35 of FRS 102. The property is depreciated over its useful economic life from that date. Therefore as a result of availing of this exemption, property, plant and equipment has increased by CUXXX and a non-distributable reserve created for the same amount at 1 January 2014 (date of transition). Deferred tax of CUXXX was also recognised on the difference between the fair value and the tax cost.
In the year ended 31 December 2014, additional depreciation of CUXXXX had to be charged to the profit and loss account on the uplift in the value of the property. A deferred tax credit of CUXXX was released to the profit and loss account in the 31 December 2014 for the additional depreciation recognition in the P&L.
(i) Revaluation of tangible assets
Under previous UK and Irish GAAP the company did not have a policy of revaluing freehold premises. On transition to FRS 102 the company has elected to adopt a revaluation policy going forward. The property is depreciated over its useful economic life from that date. Therefore as a result of this election, property, plant and equipment has increased by CUXX and a revaluation reserve created for the same amount at 1 January 2014 (date of transition). In addition deferred tax of CUXXX was recognised and set against the revaluation reserve.
In the year ended 31 December 2014, additional depreciation of CUXXXX had to be charged to the profit and loss account on the uplift in the value of the property and the movement during the year ended 31 December 2014 was posted net of the deferred tax of CUXXX through other comprehensive income to the revaluation reserve.
(j) Past service costs – Defined benefit scheme
UK and Irish GAAP
Under previous UK and Irish GAAP, past service costs were recognised in profit and loss on a straight line basis over the period in which the increases in benefit vest.
FRS 102
FRS 102 requires that all past service costs are recognised immediately.
Impact
As a result of this difference, on transition, an unrecognised past service cost of CUXXXX was recognised in profit and loss reserves and the defined benefit liability increased accordingly. Deferred tax of CUXX was recognised on this adjustment.
(k) Defined benefit scheme previously accounted for as a defined contribution scheme
The company is a member of a group defined benefit plan that shares risks between entities under common control.
UK and Irish GAAP
Under previous UK and Irish GAAP, this scheme was accounted for as a defined contribution scheme.
FRS 102
Under FRS 102, at least one member of the group companies must account for this as a defined benefit scheme, that being the entity that is legally responsible for the plan or alternatively the obligation is split between each group company based on a pre-defined legal split.
Impact
As a result of this difference, as this company is legally responsible for the scheme, the net deficit of CUXXXX was included in the balance sheet at the date of transition with a corresponding debit to profit and loss reserves on 1 January 2014.
As a result of this change in the year ended 31 December 2014 comparative there was an additional charge to profit and loss of CUXXX (being the difference between the contributions paid and the defined benefit accounting in the profit and loss) and an additional CUXXX debited to other comprehensive income for the re-measurement in line with Section 28. The liability on the defined benefit liability at 31 December 2014 was CUXXX. The related deferred tax asset of CUXXX was recognised on the balance sheet at the date of transition and a deferred tax asset of CUXXX for the year ended 31 December 2014 with CUXXX of the movement in deferred tax posted to the profit and loss and the remaining CUXXX posted to other comprehensive income.
(l) Net interest charge on defined benefit schemes
UK and Irish GAAP
Under previous UK and Irish GAAP, interest on the defined benefit pension schemes was based on the difference between the expected return on plan assets and the interest cost on the liabilities.
FRS 102
Under FRS 102, that interest must be calculated based on the net pension deficit/surplus using the discount rate.
Impact
As a result of this difference, the profit decreased by CUXXX and the amount posted to other comprehensive income increased by the same amount. It had no effect on the net asset position or the defined liability carrying amount in the balance sheet.
(m) Recognition of pension surplus
UK and Irish GAAP
Under previous UK and Irish GAAP, the criteria for recognition of a defined benefit surplus was much more prescriptive. A surplus could only be recognised where there is a formal signed agreement with the trustees in relation to the reduction in future contributions or a refund.
FRS 102
FRS 102 allows a surplus to be recognised where it can show that it will be able to recover the surplus either through reduced contributions in the future or through refunds from the plan
Impact
As a result of this difference, the additional defined benefit surplus of CUXXX has been recognised at the date of transition on 1 January 2014 and a corresponding credit posted to retained earnings net of deferred tax of CUXXX. As a result the defined pension surplus at 31 December 2014 increased by the same amount.
(i) Reclassification of deferred tax
UK and Irish GAAP
Under previous UK and Irish GAAP, the deferred tax balance on the pension was netted against the carrying amount of the defined benefit pension.
FRS 102
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.
Impact
A reclassification adjustment of CUXXX was posted from the defined benefit liability to deferred tax included in provisions and liabilities at 31 December 2014.
(n) Acquisition of non-controlling interest
UK and Irish GAAP
Under previous UK and Irish GAAP, the acquisition of non-controlling interests were accounted for as full acquisitions. Therefore the acquisitions were accounted for under acquisition accounting and goodwill recognised, and on disposal the profit/loss on disposal was recognised in the consolidated financial statements.
FRS 102
Section 9 requires that acquisitions or disposals in interests of subsidiaries that does not result in a change/loss of control after the transition date are accounted for as equity transactions.
Impact
As a result of this difference and given that during the year ended 31 December 2014 a non-controlling interest was acquired, at 31 December 2014, goodwill of CUXXX and a fair value uplift on property, plant and equipment of CUXXXX were derecognised. CUXXXX was recognised in retained earnings attributable to the shareholders of the company.
OR
As a result of this difference and given that during the year ended 31 December 2014 a X% non-controlling interest was disposed of, a transition adjustment was made to transfer the profit recognised on the disposal of CUXXX on this interest from the profit and loss account in that year to profit and loss reserves.
(o) Restatement of prior acquisitions
FRS 102 enables preparers of financial statements to avail of an exemption in respect of legacy business combinations and these can be accounted for based on previous GAAP at the transition date. The group has chosen not to avail of this exemption. The group has elected to restate all acquisitions since XX/XX/XX which includes the acquisitions of XX Limited
UK and Irish GAAP
Under previous UK and Irish 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. Deferred tax was not recognised on the difference between fair value of net assets compared to its book value.
FRS 102
Under FRS 102 the intangible does not have to be separable and therefore more intangibles are likely to be recognised resulting in less goodwill requiring recognition. Deferred tax is required to be recognised on the difference between fair value of net assets compared to its book value (other than goodwill).
Impact
At the 1 January 2014, additional intangibles relating to brand names and customer relationships with a net book value of CUXXX have been recognised, reducing the net book value of goodwill recognised of CUXXX.
Additional amortisation of CUXXX was recognised during the year ended 31 December 2014. The impact was to reduce the profit for the year and the net assets by CUXXX.
A deferred tax liability of CUXXX was recognised on the difference between the fair value of net assets acquired and the book values at the date of transition. A movement of CUXXX was posted during the year ended 31 December 2014.
OR
FRS 102 enables preparers of financial statements to avail of an exemption in respect of legacy business combinations and these can be accounted for based on previous GAAP at the transition date. The group has chosen to avail of this exemption. However no exemption is provided for the recognition of deferred tax on such business combinations.
UK and Irish GAAP
Under previous UK and Irish GAAP, deferred tax was not recognised on the difference between fair value or net assets compared to its book value.
FRS 102
Under FRS 102 deferred tax is required to be recognised on the difference between fair value of net assets compared to its book value (other than goodwill).
Impact
As a result of this difference, a deferred tax liability of CUXX was recognised on the 1 January 2014 with the corresponding amount posted to retained earnings. Profit for the year ended 31 December 2014 was reduced by CUXXX has a result of the movement on the deferred tax on this acquisition during that year.
(p) Loans and advances to group/related companies/directors
UK and Irish GAAP
Under UK and Irish GAAP, financial instruments at non-market rates or transactions which included a financing arrangement could be stated at the amount actually given.
FRS 102
Under FRS 102, debtors including loans receivable are classified as basic financial instruments and must be carried at amortised cost. Long term loans advanced to third parties have been assessed under the requirements of Section 11 of FRS 102 and a number of these loans were given at non-market rates and therefore are required to be measured at the present value of the future payments discounted at the market rate of interest for a similar debt instrument at the inception of the arrangement.
Impact
As a result of this difference, this has resulted in a difference between the amount previously recognised for these loans and the present value of the loan at a market rate of interest. The impact is as follows:
- The carrying amount of long term debtors decreased by CUXXX at 1 January 2014 with a corresponding debit to profit and loss reserves. There is no deferred tax impact of these adjustments as these are not taxable.
- The carrying amount decreased by CUXXX at 31 December 2014 with a corresponding credit to interest income in the profit and loss account to reflect the unwinding of the interest income showing the movement in the loan from 1 January to 31 December 2014. There is no deferred tax impact of these adjustments as these are not taxable.
(q) Loans and advances from group/related companies/directors
UK and Irish GAAP
Under UK and Irish GAAP, financial instruments at non-market rates or transactions which included a financing arrangement could be stated at the amount actually given.
FRS 102
Under FRS 102, creditors including loans payable are classified as basic financial instruments and must be carried at amortised cost. Long term loans received from various parties have been assessed under the requirements of Section 11 of FRS 102 and a number of these loans were received at non-market rates and therefore are required to be measured at the present value of the future payments discounted at the market rate of interest for a similar debt instrument at the inception of the arrangement.
Impact
As a result of this difference, this has resulted in a difference between the amount previously recognised for these loans and the present value of the loan at a market rate of interest. The impact is as follows:
- The carrying amount of long term loans/credits decreased by CUXXX at 1 January 2014 with a corresponding credit to profit and loss reserves. There is no deferred tax impact of these adjustments as these are not taxable.
- The carrying amount decreased by CUXXX at 31 December 2014 with a corresponding debit to interest expense in the profit and loss account to reflect the unwinding of the interest expense/discount showing the movement in the loan from 1 January to 31 December 2014. There is no deferred tax impact of these adjustments as these are not taxable.
(r) Derivative financial instruments (Forward foreign currency contracts and interest rate swaps)
UK and Irish GAAP
Under previous UK and Irish GAAP there was no requirement to recognise derivative financial statements at fair value, instead they were disclosed. For interest rate swaps, the net interest was accrued.
Alternatively, an entity could choose to retranslate the year end foreign currency balances at the average forward rate that covers the net exposure.
FRS 102
FRS 102 requires these derivatives to be recognised at fair value on the balance sheet with movement year on year recognised in the profit and loss where hedge accounting is not adopted. Year-end foreign currency balances cannot be retranslated at a forward rate, instead the year end spot rate must be used.
Impact
The fair value of forward foreign exchange contracts equated to a loss of CUXXX at 1 January 2014 and to a profit of CUXXX at 31 December 2014. As a result at the date of transition, creditors were increased by CUXX at 1 January 2014 and the profit and loss reserve was debited with the same amount. Deferred tax of CUXX was recognised on this adjustment with the corresponding entry posted to profit and loss reserves.
The movement between the loss at the 1 January to 31 December 2014 was posted to the profit and loss thereby increasing profits by CUXXX. Deferred tax of CUXXX was recognised in the profit and loss account on this movement.
AND WHERE APPLICABLE IF CONTRACTED RATES USED TO RETRANSLATE FOREIGN CURRENCY BALANCES AT THE YEAR END DATE
An adjustment at the date of transition of CUXXX and CUXXX was made to reduce debtors and creditors respectively so as to show the foreign currencies at the year-end spot rate as opposed to the contracted rate. The net impact was posted to profit and loss reserves brought forward. Deferred tax of CUXX was also recognised on this balance.
For the year ended 31 December 2014, CUXXX and CUXXX was made to reduce debtors and creditors respectively so as to show the foreign currencies at the year-end spot rate. The net impact was posted to foreign exchange costs in the profit and loss. Deferred tax of CUXXX was recognised in the profit and loss for the tax effect on the movement between the prior year adjustment and the current year end adjustment.
OR WHERE HEDGE ACCOUNTING IS ADOPTED
The company uses financial instruments to hedge the company’s exposure to currency fluctuations. As these meet the requirements for hedge accounting and can be treated as a cash flow hedge under FRS 102, the movement in the fair value of the hedge is accounted for through reserves. As a result, at 1 January 2014 the fair value of such derivatives at that date was CUXXX. This asset was recognised on the balance sheet and the adjustment posted to the cash flow hedge reserve.
At 31 December 2014, the fair value of CUXXX was recognised in the balance sheet with the movement on the prior year posted to other comprehensive income and then to the cash flow hedge reserve.
(s) Traded investments
UK and Irish GAAP
Under previous UK and Irish GAAP entities could carry traded investments in shares at cost.
FRS 102
Under Section 11 of FRS 102, such investments must be carried at their fair value with the movement in fair value recognised in the profit and loss. Section 29 also requires deferred tax to be recognised on the difference between the tax value and the carrying amounts.
Impact
On transition to FRS 102 on 1 January 2014, the carrying value of financial assets which were actively traded on a stock exchange was increased by CUXXX with the corresponding amount being posted to profit and loss reserve. Deferred tax of CUXXX was recognised on this adjustment with the corresponding amount posted to profit and loss reserves brought forward.
At 31 December 2014, the carrying value of financial assets which were actively traded on a stock exchange was increased by CUXXX with the corresponding amount being posted to the profit and loss. The deferred tax liability was increased by CUXXX at 31 December 2014 to reflect the difference between the tax value and the carrying amount at that date.
(t) Computer software
UK and Irish GAAP
Under previous UK and GAAP, website development costs and software were classified as property, plant and equipment.
FRS 102
Website development costs and software where the software is not an integral part of the hardware is required to be classified as intangibles under FRS 102.
Impact
Computer software, with a book value of CUXXX at 1 January 2014 has been reclassified from property, plant and equipment to intangible assets. The amount reclassified at 31 December 2014 was CUXXX. There is no impact on the profit or equity.
(u) Prior year adjustment – material error
The prior year adjustment is due to the omission of inventory located in an outside warehouse being excluded from the inventory at 31 December 2014 and 31 December 2013. The value of the inventory at 31 December 2014 was CU100,000 and the value of the inventory at 31 December 2013 was CU95,000. The financial statements for 2014 has been restated to correct this error.
The prior year adjustment resulted in an increase to the inventory balance at 31 December 2013 and 2014 of CU95,000 and CU100,000 respectively. This has resulted in the cost of sales for 31 December 2014 year end increasing by CU5,000 and the profit and loss reserves increasing by CU85,500 being the net of tax adjustment. The current tax liability in the comparative year has increased by CUXXX as a result of this adjustment.
(v) Statement of cash flows
UK and Irish GAAP
Under UK and Irish GAAP, cash flows were presented separately for operating activities, returns on investment and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid and financing.
FRS 102
Under FRS 102, cash flows are required to be shown separately for three categories only, namely, operating, investing and financing. Additionally the cash flow statement reconciles to cash and cash equivalents whereas under previous UK and Irish GAAP the cash flow statement reconciled to cash. Cash and cash equivalents are defined in FRS 102 as “cash on hand and demand deposits and short term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value” whereas cash is defined in FRS 1 as “cash in hand and deposits repayable on demand with any qualifying institution, less overdrafts from any qualifying institution repayable on demand”.
Impact
Cash flows from taxation and returns on investments and servicing of finance shown under UK and Irish GAAP are included as operating activities under FRS 102.
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