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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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35.8 Optional exemptions – business combinations
35.8.1 Extract from FRS102: Section 35.10(a)
35.10 An entity may use one or more of the following exemptions in preparing its first financial statements that conform to this FRS:
(a) Business combinations, including group reconstructions
A first-time adopter may elect not to apply Section 19 Business Combinations and Goodwill to business combinations that were effected before the date of transition to this FRS. However, if a first-time adopter restates any business combination to comply with Section 19, it shall restate all later business combinations. If a first-time adopter does not apply Section 19 retrospectively, the first-time adopter shall recognise and measure all its assets and liabilities acquired or assumed in a past business combination at the date of transition to this FRS in accordance with paragraphs 35.7 to 35.9 or if applicable, with paragraphs 35.10(b) to (v) except for:
(i) intangible assets other than goodwill – intangible assets subsumed within goodwill shall not be separately recognised; and
(ii) goodwill – no adjustment shall be made to the carrying value of goodwill.
35.8.2 OmniPro comment
35.8.2.1 Overview
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 intangibles are likely to be recognised resulting in less goodwill requiring recognition. Therefore without this exemption in Section 35.10(a) of FRS 102 entities would have to review all prior business combinations and identify the additional intangibles that would be recognised under Section 19.
The exemption in Section 35.10(a) of FRS 102 allows entities to not restate the business combinations and goodwill recognised on business combinations entered into prior to the date of transition. Goodwill cannot be adjusted on transition where this exemption is taken. Without this exemption entities would have the difficult task of determining the fair values of assets and liabilities at the date of acquisition for every business combination entered into prior to the date of transition.
35.8.2.2 Possible adjustments even where the exemption is claimed – deferred tax
Under old GAAP, deferred tax was not required to be recognised on all differences between the fair value of the assets and liabilities acquired and the book value in the acquirees books. Section 19 requires deferred tax to be recognised on all differences with the exception of goodwill. Even where the above exemption is taken, entities will still be required to recognise deferred tax under Section 29 on the differences between the book values of the acquirer and the fair values at the original date of acquisition (except goodwill). The adjustment would be posted to profit and loss reserves brought forward as goodwill cannot be adjusted (if exemption not carried then it is posted to goodwill).
In addition, if under FRS 102, assets or liabilities were not recognised under the rules of old GAAP, an adjustment to retained earnings will be required where this adjustment is required. It is unlikely for adjustments to be required in this area where the previous entity adopted old GAAP as the requirements for measurement and recognition were similar other than the requirement to recognise deferred tax.
See illustration of the deferred tax adjustments below:
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 monetary and 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
35.8.2.3 Adjustments to business combinations where it occurs after the date of transition
Example 8: Adjustments to business combinations where it occurs after the date of transition (i.e. in comparative period)
- 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 intangibles 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 life 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 10years.
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.
35.8.2.4 Adjustments to business combinations where it occurs before date of transition but exemption Section 35.10(a) not claimed
Example 9: Adjustments to business combinations where it occurs before date of transition but exemption Section 35.10(a) not claimed
- 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) of FRS 102 (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 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 intangibles 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.
- 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/disposals exists (i.e. Under old GAAP goodwill is recognised on acquisition and a profit/loss 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.
35.8.2.5 Transition adjustment for goodwill previously determined infinite where Section 35.10(a) is claimed
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 Section 35.10(a) of FRS 102 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 | 1,000 | |
|
Cr Goodwill Accumulated Amortization (CU10,000/10yrs being remaining UEL) |
1,000 |
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.
35.8.2.6 Transition adjustment for goodwill where previously used the default life 20 years where Section 35.10(a) is claimed
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.
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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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