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Contents
35.2 First-time adoption – Extract from FRS102: Section 35.3-35.6.
35.2.1.2 Illustration of transition dates.
35.2.1.3 Complete set of financial statements.
35.2.1.4 Statement of compliance and statement that these are first set under FRS 102.
35.2.1.5 Disclosure where an entity is applying the reduced disclosure framework.
35.3 Procedures for preparing financial statements at the date of transition.
35.3.1 Extract from FRS102: Section 35.7-35.8.
35.3.2.2 Practical adjustments on transition to FRS 102.
35.4 Mandatory exceptions to retrospective application – derecognition.
35.4.1 Extract from FRS102: Section 35.9(a).
35.4.2.1 Derecognition defined.
35.5 Mandatory exceptions to retrospective application – accounting estimates.
35.5.1 Extract from FRS102: Section 35.9(c)
35.5.2.1 Non retrospective adjustment account estimates.
35.5.2.2 Retrospective adjustments to a prior period material error.
35.6 Mandatory exceptions to retrospective application – discontinued operations.
35.6.1 Extract from FRS102: Section 35.9(d).
35.7 Mandatory exceptions to retrospective application – non-controlling interest.
35.7.1 Extract from FRS102: Section 35.9(e).
35.8 Optional exemptions – business combinations.
35.8.1 Extract from FRS102: Section 35.10(a).
35.8.2.2 Possible adjustments even where the exmption is claimed – deferred tax.
35.8.2.3 Adjustments to business combinations where it occurs after the date of transition.
35.9 Optional exemptions – Share based payment transactions.
35.9.1 Extract from FRS102: Section 35.10(b).
35.10 Optional exemptions – Fair value or revaluation as deemed cost.
35.10.1 Extract from FRS102: Section 35.10(c) and Section 35.10(d).
35.10.2.2 Previous GAAP revaluation as deemed cost.
35.10.2.3 Fair value as deemed cost.
35.10.2.4 Revaluation option chosen under old GAAP, reverting to the cost model on transition.
35.11.1 Extract from FRS102: Section 35.10(f).
35.12 Optional exemptions – Compound financial instruments.
35.12.1 Extract from FRS102: Section 35.10(g).
35.13.1 Extract from FRS102: Section 35.10(l).
35.14 Optional exemptions – Dormant companies.
35.14.1 Extract from FRS102: Section 35.10(m).
35.14.2.2 When is an entity considered dormant?
35.15 Optional exemptions – Deferred development costs as a deemed cost.
35.15.1 Extract from FRS102: Section 35.10(n).
35.15.2.2 What happens if an entity expensed developments costs in the past?
35.16 Optional exemptions – Borrowing costs.
35.16.1 Extract from FRS102: Section 35.10(o).
35.17 Optional exemptions – lease incentives.
35.17.1 Extract from FRS102: Section 35.10(p).
35.17.2.2 Leases incentives received since the date of transition.
35.18 Optional exemptions – Public benefit entity combinations.
35.18.1 Extract from FRS102: Section 35.10(q).
35.19.1 Extract from FRS102: Section 35.10(r).
35.20 Optional exemptions – Hedge accounting – deemed meeting of hedge documentation conditions.
35.20.1 Extract from FRS102: Section 35.10(t).
35.21.1 Extract from FRS102: Section 35.10(u) and Section 35.10(v).
35.22 Impracticability – In transition.
35.22.1 Extract from FRS102: Section 35.11.
35.22.2.1 What is defined as impracticable.
35.22.2.2 What is the exemption.
35.24.1 Extract from FRS102: Section 35.12-35.15.
35.24.2.2 Sample Accounting policy note detailing first time disclosure.
35.24.2.3 Transition exemption not (application of Section 35.12 to 35.15 of FRS 102).
35.24.2.4 Transition note – (applying requirements of Section 35.12 to 35.15 of FRS 102).
35.24.2.4.1.1 Holiday pay accrual.
35.24.2.4.1.2 Rent free period for operating leases.
35.24.2.4.1.3 Revaluation of tangible assets.
35.24.2.4.1.4 Sales on unusual credit terms.
35.24.2.4.1.5 Capitalisation of borrowing costs.
35.24.2.4.1.6 Investment Property carried at fair value.
35.24.2.4.1.7 Deferred taxation.
35.24.2.4.1.8 Revaluation of tangible assets.
35.24.2.4.1.9 Revaluation of tangible assets.
35.24.2.4.1.10 Past service costs – Defined benefit scheme.
35.24.2.4.1.11 Defined benefit scheme previously accounted for as a defined contribution scheme.
35.24.2.4.1.12 Net interest charge on defined benefit schemes.
35.24.2.4.1.13 Recognition of pension surplus.
35.24.2.4.1.14 Acquisition of non-controlling interest.
35.24.2.4.1.15 Restatement of prior acquisitions.
35.24.2.4.1.16 Loans and advances to group/related companies/directors.
35.24.2.4.1.17 Loans and advances from group/related companies/directors.
35.24.2.4.1.19 Traded investments.
35.24.2.4.1.20 Computer software.
35.24.2.4.1.21 Prior year adjustment – material error.
35.24.2.4.1.22 Statement of cash flows.
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The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
35.11 Optional exemptions – Individual and separate financial statements – carrying amount as deemed cost
35.11.1 Extract from FRS102: Section 35.10(f)
35.10(f) Individual and separate financial statements
When an entity prepares individual or separate financial statements, paragraphs 9.26, 14.4 and 15.9 require the entity to account for its investments in subsidiaries, associates, and jointly controlled entities either at cost less impairment or at fair value.
If a first-time adopter measures such an investment at cost, it shall measure that investment at one of the following amounts in its individual or separate opening statement of financial position, as appropriate, prepared in accordance with this FRS:
(i) cost determined in accordance with Section 9 Consolidated and Separate Financial Statements, Section 14 Investments in Associates or Section 15 Investments in Joint Ventures; or
(ii) deemed cost, which shall be the carrying amount at the date of transition as determined under the entity’s previous GAAP.
35.11.2 OmniPro comment
The exemption in Section 35.10(f) of FRS 102 allows entities to deem the carrying amount stated for investments in subsidiaries, associate and joint ventures under previous GAAP as its deemed cost. Alternatively, where an entity intends to apply fair value accounting from transition, it can treat that amount as its deemed cost. Note however where an entity does not intend to apply fair value accounting going forward it cannot use the fair value as deemed cost going forward. If a fair value option is chosen an adjustment will be required on transition.
Alternatively as stated in Section 35.10(f)(i) of FRS 102 the entity can chose to apply FRS 102 guidance i.e. to state the investment:
- At cost less impairment
- Fair value through the profit and loss account
- Fair value through other comprehensive income
See examples below which show how this would be accounted for.
Under old GAAP investment in subsidiaries 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 are cost less impairment, fair value through profit and loss or fair value through OCI. Where investments in subsidiaries 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. In reality it may be the sales tax rate.
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 P&L Reserves with Deferred Tax (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 if any should be used in the above example if the sale of the shares would be exempt from CGT and they were to be settled through sale then no deferred tax would be required.
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.
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Examples
Example 3: compliance statement on adoption of FRS 102.
Example 5: Acquisition not resulting in a change of control after date of transition.
Example 6: Disposal resulting in no change in control in the subsidiary after date of transition.
Example 12: Previous GAAP revaluation as deemed cost.
Example 13: Fair value as deemed cost.
Example 14: Revaluation option chosen under old GAAP, reverting to the cost model on transition.
Example 16: Adoption of fair value through profit and loss on transition
Example 17: Adoption of fair value through other comprehensive income on transition
Example 18: Lease incentives since date of transition.
Example 19: Extract from the accounting policy note.
Example 20: Extract from the notes to the financial statements – Transition exemption rate.
Example 21: FRS 102 Principle Adjustments.
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