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Disclosure of accounting policies
Extract from FRS102-Section 8.5
8.5 An entity shall disclose the following in the summary of significant accounting policies:
(a) the measurement basis (or bases) used in preparing the financial statements; and
(b) the other accounting policies used that are relevant to an understanding of the financial statements.
OmniPro comment
Section 8.5 makes it clear that only significant accounting policies need to be disclosed. Examples of accounting policies to be disclosed in the accounting policy note are:
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(i) |
Basis of preparation |
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(ii) |
Consolidation |
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(iii) |
Goodwill |
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(iv) |
Impairment |
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(v) |
Intangible assets |
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(vi) |
Contingent acquisition |
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(vii) |
Financial assets |
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(viii) |
General turnover accounting policy note |
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(ix) |
Government grants |
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(x) |
Dividend income |
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(xi) |
Dividend distribution |
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(xii) |
Currency |
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(xiii) |
Financial instruments |
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(xiv) |
Provisions |
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(xv) |
Contingencies |
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(xvi) |
Employee Benefits |
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(xvii) |
Preference share capital |
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(xviii) |
Share capital |
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(xix) |
Related party transactions |
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(xx) |
Interest income |
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(xxi) |
Taxation |
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(xxii) |
Property, plant and equipment |
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(xxiii) |
Inventories |
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(xxiv) |
Investment properties |
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(xxv) |
Leases |
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(xxvi) |
Intangible assets |
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(xxvii) |
Goodwill |
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(xxviii) |
Exceptional items |
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(xxix) |
Share based cost |
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(xxx) |
Investment properties |
Example 1: Extract of examples of accounting policies note below.
General information
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.
The significant accounting policies adopted by the Company and applied consistently are as follows:
(i) Basis of preparation
The Financial Statements are prepared on the going concern basis (NOTE CHANGE THIS HERE IF THE BASIS IS NOT GOING CONCERN AND PROVIDE THE BASIS FOR WHY THEY HAVE NOT BEEN PREPARED ON A GOING CONCERN), under the historical cost convention, [as modified by the revaluation of investment property, the revaluation of land and buildings and intangible assets] and the measurement of certain assets and liabilities measured at fair value and comply with the financial reporting standards of the Financial Reporting Council [and promulgated by Chartered Accountants XXX] and the [Companies Act 2014 (for Republic of Ireland Companies)] [Companies Act 2006 (for UK Companies)].
The financial statements are prepared in Euro which is the functional currency of the company. OR The company has chosen to present the financial statement in a currency that differs from its functional currency so that is can be easily consolidated into the parent company’s financial statements. The functional currency of the company is XXX.
(ii) Consolidation
DISCLOSURES REQUIRED WHERE CONSOLIDTED FINANCIAL STATEMENTS ARE NOT PREPARED
NOTE: the below is to be included where the parent company is exempt from consolidation due to its immediate parent company (which is in the eea) preparing consolidated financial statements
Consolidated accounts
The company has not prepared consolidated accounts for the period as, being a wholly owned subsidiary of the ultimate parent company, XXXXXX Limited, it is exempted from doing so under Section 9 of FRS 102 which is accommodated under Section 299 of the Companies Act 2006.
NOTE: the below is to be included where the parent company is exempt from consolidation due to its ultimate parent company (which is in or outside the eea) preparing consolidated financial statements
Consolidated accounts
The company has not prepared consolidated accounts for the period as, being a wholly owned subsidiary of the ultimate parent company, XXXXXX Limited, it is exempted from doing so under Section 9 of FRS 102 which is accommodated under Section 300 of the Companies Act 2014.
NOTE: the below is to be included where the parent company is exempt from consolidation due to the group being considered a small company under company law
Consolidation
The company and its subsidiaries combined meet the size exemption criteria for a group and the company is therefore exempt from the requirement to prepare consolidated financial statements by virtue of Section 297 of the Companies Act 2014. Consequently, these financial statements deal with the results of the company as a single entity.
NOTE: basis of consolidation disclosures required where consolidated financial statements are prepared
Basis of consolidation
The Group financial statements reflect the consolidation of the results, assets and liabilities of the parent undertaking, the Company and all of its subsidiaries, together with the Group’s share of profits/losses of associates and joint ventures. Where a subsidiary, associate or joint venture is acquired or disposed of during the financial year, the Group financial statements include the attributable results from, or to, the effective date when control passes, or, in the case of associates, when significant influence is lost.
Subsidiary undertakings
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are capitalised with the cost of the investment. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the group’s share of identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised as negative goodwill on the balance sheet and amortised through the profit and loss account in the period in which the non-monetary assets are recovered.
Associates and joint ventures
Associates are those entities in which the Group has significant influence over, but not control of, the financial and operating policies. Joint ventures are those entities over which the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic, financial and operating decisions. Investments in associates and joint ventures are accounted for using the equity method of accounting.
Under the equity method of accounting, the Group’s share of the post-acquisition profits or losses of its associates and joint ventures is recognised in the income statement. The income statement reflects, in profit before tax, the Group’s share of profit after tax of its associates and joint ventures in accordance with Section 14 of FRS102, ‘Investments in Associates’ and Section 15 of FRS 102, ‘Interests in Joint Ventures’. The Group’s interest in their net assets is included as investments in associates and joint ventures in the Group Statement of Financial Position at an amount representing the Group’s share of the fair value of the identifiable net assets at acquisition plus the Group’s share of post acquisition retained income and expenses. The Group’s investment in associates and joint ventures includes goodwill on acquisition. The amounts included in the financial statements in respect of the post acquisition income and expenses of associates and joint ventures are taken from their latest financial statements prepared up to their respective year ends together with management accounts for the intervening periods to the Group’s year end. The fair value of any investment retained in a former subsidiary is regarded as a cost on initial recognition of an investment in an associate or joint venture. Where necessary, the accounting policies of associates and joint ventures have been changed to ensure consistency with the policies adopted by the Group.
Transactions eliminated on consolidation
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the Group financial statements. Unrealised gains and income and expenses arising from transactions with associates and joint ventures are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that they do not provide evidence of impairment.
Business combinations and goodwill
All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of acquisitions that have occurred since XXXXX (INSERT DATE OF TRANSITION WHERE SECTION 35.10(A) EXEMPTION IS CLAIMED), goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, i.e. original cost less accumulated amortisation from the date of acquisition up to XXXXX, which represents the amount recorded under UK and Irish GAAP. Goodwill is now stated at cost or deemed cost less any accumulated amortisation and impairment losses. In respect of associates and joint ventures, the carrying amount of goodwill is included in the carrying amount of the investment.
(iii) Goodwill
Positive goodwill acquired on each business combination is capitalised, classified as an asset on the balance sheet and amortised on a straight line basis over its useful life of 10 years. Goodwill acquired in a business combination is, from the date of acquisition, allocated to each cash generating unit that is expected to benefit from the synergies of the combination. If an investment is disposed of any unamortised goodwill is subsumed within goodwill in the profit and loss on sale on discontinuance. Useful life is determined by reference to the period over which the values of the underlying businesses are expected to exceed the values of their identifiable net assets.
Goodwill is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable.
Negative goodwill represents the fair value of net assets on acquisition in excess of the fair value of consideration. Negative goodwill is capitalised and amortised through the profit and loss account in the period in which the non-monetary assets are recovered. In the case of fixed assets acquired, this is the period over which they are depreciated and in the case of stocks it is the period over which they are sold or otherwise realised.
(iv) Impairment
The carrying amounts of the Group’s/Company’s assets, other than inventories (which are carried at the lower of cost and net realisable value), deferred tax assets (which are recognised based on recoverability), investment properties (which are carried at fair value), and those financial instruments, which are carried at fair value, are reviewed to determine whether there is an indication of impairment when an event or transaction indicates that there may be. If any such indication exists, an impairment test is carried out and the asset is written down to its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Value in use is defined as the present value of the future pre-tax and interest cash flows obtainable as a result of the asset’s continued use. The pre-tax and interest cash flows are discounted using a pre-tax discount rate that represents the current market risk free rate and the risks inherent in the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. An impairment loss is recognised in the profit and loss account, unless the asset has been revalued when the amount is recognised in other comprehensive income to the extent of any previously recognised revaluation. Thereafter any excess is recognised in profit or loss.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis.
An impairment loss, other than in the case of goodwill, is reversed if there has been a change in the estimates used to determine the recoverable amount. If an impairment loss is subsequently reversed, the carrying amount of the asset (or asset’s cash generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the revised carrying amount does not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior periods. A reversal of an impairment loss is recognised in the profit and loss account.
(v) Intangible assets
Intangible assets acquired as part of a business combination are initially recognised at fair value being their deemed cost as at the date of acquisition. These generally include brand and customer related intangible assets. Computer software that is not an integral part of an item of computer hardware is also classified as an intangible asset. Where intangible assets are separately acquired, they are capitalised at cost. Cost comprises purchase price and other directly attributable costs.
Intangible assets with finite lives are amortised over the period of their expected useful lives in equal annual instalments, as follows;
Brands 5 to 10 years
Customer related 5 to 20 years
Supplier agreements 4 to 10 years
Computer related 3 to 7 years
Subsequent to initial recognition, intangible assets are stated at cost less accumulated amortisation and impairment losses incurred.
(vi) Contingent acquisition consideration
Any contingent consideration to be transferred by the group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with Section 21. Any adjustments to the estimated contingent consideration are accounted for as an adjustment to goodwill as a current period adjustment as it reflects a change in estimate and the adjusted goodwill is amortised from that date. Contingent consideration that is classified as equity is not remeasured and its subsequent settlement is accounted for within equity. To the extent that contingent acquisition consideration is payable after more than one year from the date of acquisition, it is discounted at an appropriate loan interest rate and, accordingly, carried at net present value on the Balance Sheet. An appropriate interest charge, at a constant rate on the carrying amount adjusted to reflect market conditions, is reflected in the Profit and Loss over the earnout period, increasing the carrying amount so that the obligation will reflect its settlement at the time of maturity.
(vii) Financial assets
Financial assets in subsidiaries and other financial fixed assets are stated at cost less provision for any diminution in value.
AND/OR
The company has adopted a policy of measuring investments in financial assets which can be reliably measured at their fair value, with changes in the fair value recognised in the profit and loss.
AND/OR
Financial assets which can be reliably measured are measured at their fair value, with changes in the fair value recognised in other comprehensive income and the revaluation reserve.
(viii) General turnover accounting policy notes
(viii) (a) Turnover
Turnover represents net sales to customers and excludes trade discounts and Value Added Tax.
Turnover from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on dispatch of the goods. Turnover from the provision of services is recognised in the accounting period in which the services are rendered and the outcome of the contract can be estimated reliably. The company uses the percentage of completion method based on the actual service performed as a percentage of the total services to be provided.
Revenue in relation to maintenance and support is recognised on a straight line basis over the term of the contract with any unearned revenue included in deferred revenue.
(viii) (b) Turnover accounting policy for an insurance broker
Turnover – commission income
Turnover represents commissions earned in the period together with overrider and profit commissions receivable. Commission income is recognised in the accounting period in which the policy commences. To the extent that future services need to be provided over the life of the policy which straddles an accounting period, revenue is deferred. Commission income in relation to claims handling is recognised in the accounting period in which the claims are settled. Overrider and profit commissions, if any, are recognised in line with the underlying agreements and amounts confirmed by product providers.
(viii) (c) Turnover accounting policy for a manufacturng company that produces, install and also engage in long term contracts using the stage of completion using the contract activity
Turnover
Turnover, excluding value added tax, represents the income received and receivable from third parties, in the ordinary course of business, for goods and services provided. Any discounts given to customers are deducted from turnover.
Revenue from the sale of products is recognised when the goods are dispatched to the customer. Revenue from the servicing of machines is recognised over the period of the performance of the service. Proceeds received in advance of product dispatch or performance of service are recorded as deferred revenue in the balance sheet.
Revenue from the sale of machines and manufactured steel components is recognised over the period of the design, build and installation contract. Where the outcome of a long-term contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by surveys of work performed to date. Variations in contract work are included to the extent that it is probable that they will result in revenue and they are capable of being reliably measured.
When the outcome of a long-term contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred and that it is probable it will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.
(viii) (d) Turnover accounting policy note where turnover is derived from investments
Turnover
Turnover represents dividends and other income received on investments held, net of irrecoverable withholding taxes. Dividends are recognised in the period to which the dividends relate.
(viii) (e) Turnover accounting policy for a software company
Turnover
Turnover, which excludes value added tax, represents the invoiced value of goods and services supplied and the value of long term contract work done, as outlined below.
The company usually sells its software as part of an overall solution offered to a customer, in which significant customisation and modification to the company’s software generally is required. As a result, revenue generally is recognised over the course of these long term projects.
Initial license fee for software revenue is recognised as work is performed, under the percentage of completion method of accounting. Subsequent license fee revenue is recognised upon completion of the specified conditions in each contract. Service revenue that involves significant ongoing obligations, including fees for customisation, implementation and modification, is recognised as work is performed, under the percentage of completion method of accounting.
Software revenue that does not require significant customisation and modification, is recognised upon delivery and installation. In managed service contracts, revenue from operation and maintenance of customers’ billing systems is recognised in the period in which the bills are produced. Revenue from ongoing support is recognised as work is performed. Revenue from third–party hardware and software sales is recognised upon delivery and installation, and recorded at gross or net amount according to whether the company acts as a Principal or as an Agent. Maintenance revenue is recognised ratably over the term of the maintenance agreement, which in most cases is one year or less. Losses are recognised on contracts in the period in which the liability is identified.
(viii) (f) Turnover accounting policy for a construction company
Turnover – contracting work
Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by reference to the proportion of costs incurred up to the date of the balance sheet to the estimated total costs. Variations in contract work, claims and incentive payments are included to the extent that it is probable that they will result in revenue and they are capable of being reliably measured.
When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred and that it is probable it will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.
(ix) Government grants
Example using an accruals model
Government grants are recognised at their fair value when it is reasonable to expect that the grants will be received and all related conditions will be met.
Grants that relate to specific capital expenditure are treated as deferred income which is then credited to the profit and loss account over the related asset’s useful (i.e. an accruals basis). Revenue grants are credited to the profit and loss account when receivable so as to match them with the expenditure to which they relate. Government grants received are included in ‘other income’ in profit or loss
Example using the performance model
Government grants are recognised when it is reasonable to expect that the grants will be received and all related conditions will be met.
Grants that relate to specific capital expenditure are treated as deferred income which is then credited to the profit and loss account once the performance conditions of the grant have been met. Revenue grants are credited to the profit and loss account when the performance conditions for the grant are fulfilled.
(x) Dividend income
Dividend income from subsidiaries is recognised when the Company’s right to receive payment has been established.
(xi) Dividend distribution
Dividend distribution to the company’s shareholders is recognised as a liability in the Company’s financial statements in the period in which the dividends are approved by the company’s shareholders.
(xii) Currency
(a) Functional and presentation currency
Items included in the financial statements of the company are measured using the currency of the primary economic environment in which the company operates (“the functional currency”). The financial statements are presented in stg/euro, which is the company’s functional and presentation currency and is denoted by the symbol “CU”. OR The company has chosen to present the financial statement in a currency that differs from its functional currency so that it can be easily consolidated into the parent company’s financial statements.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the spot exchange rates at the dates of the transactions.
At each period end foreign currency monetary items are translated using the closing rate. Non-monetary items measured at historical cost are translated using the exchange rate at the date of the transaction and non-monetary items measured at fair value are measured using the exchange rate when fair value was determined.
Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the profit and loss account within ‘finance (expense)/income’. All other foreign exchange gains and losses are presented in the profit and loss account within ‘Other operating (losses)/gains’.
(xiii) Financial instruments
The company has adopted Section 11 and Section 12 of FRS 102 when accounting for financial instruments.
(a) Trade and other debtors.
Trade and other debtors including amounts owed to group companies are recognised initially at transaction price (including transaction costs) unless a financing arrangement in exists in which case they are measured at the present value of future receipts discounted at a market rate. Subsequently these are measured at amortised cost less any provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the company will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. All movements in the level of the provision required are recognised in the profit and loss.
(b) Cash and cash equivalents.
Cash and cash equivalents include cash on hand, demand deposits and other short- term highly liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position.
(c) Other financial assets.
Other financial assets include investment which are not investments in subsidiaries, associates or joint ventures. Investments are initially measured at fair value which usually equates to the transaction price and subsequently at fair value where investments are listed on an active market or where non listed investments can be reliably measured. Movements in fair value is measured in the profit and loss.
Where fair value cannot be measured reliably or can no longer be measured reliably, investments are measured at cost less impairment.
The entity has taken advantage of the exemption contained in Section 35.10(u) not to comply with the fair value measurement requirements of Section 11-Basic Finance Instruments and Section 12-Other Financial Instruments Issues on the date of transition to FRS 102 of 1 January 2014 or in the comparative financial period presented. Instead the entity has continued to apply the accounting policy requirements for these financial instruments under old UK GAAP. A transition adjustment has been posted to equity on 1 January 2015 so as to comply with the requirements of Section 11 and Section 12 for the current financial year as required by Section 35.10(u). As a result of availing of this exemption, listed investment have been carried at cost less impairment in the comparative financial period presented and any forward exchange contracts are disclosed as required under old UK GAAP accounting rules. (THIS IS NOT APPLICABLE HERE BUT THIS IS INCLUDED FOR ILLUSTRATIVE PURPOSES)
(d) Trade and other creditors.
Trade and other creditors are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors, other creditors and amounts due to group companies are recognised initially at the transaction price net of transaction costs and subsequently measured at amortised cost using the effective interest method. Where a financing arrangement exists they are initially measured at the present value of future payments discounted at a reduced rate.
The entity has elected to adopt the exemption contained in Section 35.10(v) and to apply the rules detailed in Section 11 to debt instruments with related parties where a financing arrangement existed on the 1 January 2015 as opposed to the date of transition on 1 January 2014. As a result, a transition adjustment was posted to recognise the loans due to/from related parties at the present value of the minimum future payments and amortised cost utilising the prevailing market rate on the 1 January 2015 as permitted by Section 35.10(v)(c). For the comparative year presented these balances are carried at the amount recognised under old UK GAAP that being the amounts received/advanced less repayments. (THIS IS NOT APPLICABLE HERE BUT THIS IS INCLUDED FOR ILLUSTRATIVE PURPOSES)
(e) Borrowings.
Borrowings are recognised initially at the transaction price (present value of cash payable to the bank, including transaction costs). Borrowings are subsequently stated at amortised cost.
Interest expense is recognised on the basis of the effective interest method and is included in finance costs. OR
Borrowing costs – capitalisation rate
The company has adopted a policy of capitalising qualifying borrowing costs. The company capitalises general borrowing costs which are directly attributable to the acquisition of the qualifying asset. The capitalisation rate used is a weighted average of the rates applicable to the company’s general borrowings that are outstanding during the period. Given that weighted averages are utilised this results in a level of estimation. In determining the capitalisation rate the company excludes any specific borrowings related to obtaining non-qualifying assets.
Preference shares, which are mandatorily redeemable on a specific date, are classified as borrowings. The dividends on these preference shares are recognised in the profit and loss as a finance cost.
Borrowings are classified as current liabilities unless the Company has a right to defer settlement of the liability for at least 12 months after the reporting date.
(f) Derivatives.
Derivatives are initially recognised at fair value on the date the contract is entered into and subsequently re-measured at their fair value. Changes in the fair value are recognised in the profit and loss within finance costs or finance income as appropriate, unless they are included in a hedging arrangement.
Derivative financial instruments are not basic.
Hedge accounting is not applied.
OR where hedge accounting is applied
Derivative financial instruments are used to manage the Group’s exposure to foreign currency risk and interest rate risk through the use of forward currency contracts and interest rate swaps. These derivatives are generally designated as cash flow hedges in accordance with Section 12. The Group does not enter into speculative derivative transactions.
(g) Derecognition.
Financial liabilities are derecognised when the liability is extinguished, that being when the contractual obligation is discharged.
(h) Offsetting financial instruments.
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
(i) Compound financial instruments.
Compound financial instruments issued by the company comprise of convertible preference shares which can be converted to a set amount of ordinary shares at a future date. The liability component of the compound instrument is initially recognised at the fair value of a similar liability where the conversion to equity option is not available. Subsequently this is measured at amortised cost using the effective interest rate method. The equity component is measured the difference between the fair value of the liability component and the fair value of the instrument as a whole. The equity component is not re-measured. Transaction costs are apportioned to the equity and liability component as a proportion that each type instrument is to the total fair value of the compound instrument.
(j) Hedge accounting
Cash flow hedges
Subject to the satisfaction of certain criteria, relating to the documentation of the risk, objectives and strategy for the hedging transaction and the ongoing measurement of its effectiveness, cash flow hedges are accounted for under hedge accounting rules. In such cases, any unrealised gain or loss arising on the effective portion of the derivative instrument is recognised in the cash flow hedging reserve, a separate component of equity and posted to other comprehensive income. Unrealised gains or losses on any ineffective portion of the derivative are recognised in the income statement. When the hedged transaction occurs the related gains or losses in the hedging reserve are transferred to the Income Statement.
The company engages in hedge accounting for forward contracts in order to manage foreign currency fluctuations as well as interest rate swaps.
Changes in fair values of derivatives designated as cash flow hedges which meet the conditions for hedge accounting are recognised in directly equity through other comprehensive income to the extent that they are effective. Any ineffectiveness is charged to the profit and loss. Any gain or loss recognised in Other Comprehensive Income is transferred from equity to the profit and loss when the hedge relationship ends.
Cash flow hedges are those of highly probable forecasted future income or expenses. In order to qualify for hedge accounting, the Group is required to document the relationship between the item being hedged and the hedging instrument and demonstrate, at inception, that the hedge relationship will be highly effective on an ongoing basis. The hedge relationship must be tested for effectiveness on subsequent reporting dates.
There is no significant difference between the timing of the cash flows and income statement effect of cash flow hedges.
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit and loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the profit and loss.
(xiv) Provisions
Provisions are recognised when the company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount of the obligation can be estimated reliably.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as a finance cost.
The extent a legal or constructive obligation exists, the acquisition costs include the present value of estimated costs of dismantling and removing the asset and restoring the site. A change in estimated expenditures for dismantling, removal and restoration is added to/and or deducted from carrying value of the related asset. To the extent the change results in a negative carrying amount, the difference is recognised in the profit and loss. The change in depreciation is recognised prospectively.
OR where remediation provisions are required include the below:
(xiv) Environmental liabilities
Liabilities for environmental costs are recognised when environmental assessments determine clean-ups are probable and the associated costs can be reasonably estimated. Generally the timing of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of active sites. The amount recognised at the balance sheet date is the latest best estimate of the expenditure required.
Discounted liabilities in respect of environmental liabilities and closures costs have been classified between amounts due within one year and due after one year. Provisions for long term obligations are discounted at a rate of X%.
OR where closure costs include the below
(xiv) Closure costs
All costs associated with the decision to cease trading have been recognised in these financial statements. These include a write down of assets, provisions for expected closure costs together with profit and losses expected to be incurred up to date of cessation of trading.
(xv) Contingencies
Contingent liabilities, arising as a result of past events, are not recognised when (i) it is not probable that there will be an outflow of resources or that the amount cannot be reliably measured at the reporting date or (ii) when the existence will be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the company’s control. Contingent liabilities are disclosed in the financial statements unless the probability of an outflow of resources is remote.
Contingent assets are not recognised. Contingent assets are disclosed in the financial statements when an inflow of economic benefits is probable.
(xvi) Employee Benefits
The company provides a range of benefits to employees, including annual bonus arrangements, paid holiday arrangements and defined contribution pension plans.
(a) Short term benefits
Short term benefits, including holiday pay and other similar non-monetary benefits, are recognised as an expense in the period in which the service is received.
(b) Annual bonus plans
The company recognises a provision and an expense for bonuses where the company has a legal or constructive obligation as a result of past events and a reliable estimate can be made.
(c) Defined contribution pension plans
The Company operates a defined contribution plan. A defined contribution plan is a pension plan under which the company pays fixed contributions into a separate fund. Under defined contribution plans, the company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.
For defined contribution plans, the company pays contributions to privately administered pension plans on a contractual or voluntary basis. The company has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
(d) Defined benefit pension plan
Defined benefit pension scheme assets are measured at fair value. Defined benefit pension scheme liabilities are measured on an actuarial basis using the projected unit credit method. The excess of scheme liabilities over scheme assets is presented on the balance sheet as an asset or liability. Deferred tax is shown separately within deferred tax. The defined benefit pension charge to operating profit comprises the current service cost, past service costs, introductions, curtailments and settlements. The net interest cost on the scheme liabilities is presented in the profit and loss account as other finance expense. Actuarial gains and losses arising from changes in actuarial assumptions and from experience surpluses and deficits are recognised in other comprehensive income for the year in which they occur together with the return on plan assets, less amounts included in net interest.
(xvii) Preference share capital
Redeemable preference shares and the cumulative preference dividend reserve have been classified as liabilities in the balance sheet. The preference dividend is charged in arriving at the interest cost in the profit and loss account. (include the following where applicable) However no dividends will be paid on the cumulative preference shares until the company has positive profit and loss reserves.
(xviii) Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.
(xix) Related party transactions
The company discloses transactions with related parties which are not wholly owned with the same group. It does not disclose transactions with members of the same group that are wholly owned.
(xx) Interest income
Interest income is recognised using the effective interest method.
(xxi) Taxation
The company is managed and controlled in the XXXXX and, consequently, is tax resident in XXXX. Tax is recognised in the profit and loss account, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case tax is also recognised in other comprehensive income or directly in equity respectively.
(a) Current tax
Current tax is calculated on the profits of the period. Current tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date.
(b) Deferred tax
Deferred tax arises from timing differences that are differences between taxable profits and total comprehensive income as stated in the financial statements. These timing differences arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in financial statements.
Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred tax liability is settled. Deferred tax is recognised in the profit and loss account or other comprehensive income depending on where the revaluation was initially posted.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Current or deferred taxation assets and liabilities are not discounted.
NOTE: include the below if consolidated financial statements are being prepared
If a temporary difference arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction does not affect accounting or taxable profit or loss, no deferred tax is recognised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
(xxii) Tangible fixed assets
(a) Cost
Property, plant and equipmentare recorded at historical cost or deemed cost (note include valuation here where appropriate), less accumulated depreciation and impairment losses. Cost includes prime cost, overheads and interest incurred in financing the construction of tangible fixed assets. Capitalisation of interest ceases when the asset is brought into use.
Freehold premises are stated at cost (or deemed cost for freehold premises held at valuation at the date of transition to FRS 102 where the optional transition exemption under S.35.10(a) of FRS 102 has been applied) less accumulated depreciation and accumulated impairment losses.
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 OR The company has adopted the transition exemption under FRS 102 paragraph 35.10(C) and has elected to use the fair value as deemed cost.
The difference between depreciation based on the deemed cost charged in the profit and loss account and the asset’s original cost is transferred from the non-distributable reserve to retained earnings through equity.
Equipment and fixtures and fittings are stated at cost less accumulated depreciation and accumulated impairment losses.
Where investment property can no longer be reliably measured without undue cost or effort these assets are reclassified to property, plant and equipment at the carrying amount prior to the transfer and depreciated over the useful economic lives.
Spare parts that are acquired as part of an equipment purchase which are only to be used in connection with these specific assets are initially capitalised and amortised as part of the equipment. Spare parts which are expected to be used during more than one period are capitalised as property, plant and equipment.
NOTE: Policy to be included where a policy of revaluation has been chosen:
The company has adopted a policy of revaluing freehold premises. Freehold premises are included in the balance sheet at their fair value on the basis of a periodic professional valuation less accumulated depreciation. The difference between depreciation based on the revalued amount is charged in the profit and loss account and the asset’s original cost is transferred from revaluation reserve to retained earnings. Annually the carrying values are reviewed for appropriateness by the directors. Any changes in the value of freehold properties are reflected as a movement on the revaluation reserve except where the revaluation is below original cost in which case the balance is recognised in the profit and loss account.
To the extent a legal or constructive obligation exists, the acquisition costs include the present value of estimated costs of dismantling and removing the asset and restoring the site. A change in estimated expenditures for dismantling, removal and restoration is added to/and or deducted from carrying value of the related asset. To the extent the change results in a negative carrying amount, the difference is recognised in the profit and loss. The change in depreciation is recognised prospectively.
(b) Depreciation
Depreciation is provided on tangible fixed assets, on a straight-line basis, so as to write off their cost less residual amounts over their useful lives.
The estimated useful lives assigned to property, plant and equipment are as follows:
Freehold Premises 2% straight line on cost
Motor vehicles 25% straight line on cost Office equipment, fixtures & fittings 12½% straight line on cost
Computer equipment 25%/33⅓% straight line on cost
Service equipment and spare parts 10% straight line on cost
The company’s policy is to review the remaining useful lives and residual values of property, plant and equipmenton an on-going basis and where indicators exist adjust the depreciation charge to reflect the remaining estimated life and residual value.
Fully depreciated property, plant & equipment are retained in the cost of property, plant & equipment and related accumulated depreciation until they are removed from service. In the case of disposals, assets and related depreciation are removed from the financial statements and the net amount, less proceeds from disposal, is charged or credited to the income statement.
(xxiii) Stocks
Stocks comprise consumable items and goods held for resale. Inventories are stated at the lower of cost and net realisable value. Cost is calculated on a first in, first out basis and includes invoice price, import duties and transportation costs. Net realisable value comprises the actual or estimated selling price less all further costs to completion or to be incurred in marketing, selling and distribution.
At the end of each reporting period inventories are assessed for impairment. If an item of stock is impaired, the identified inventory is reduced to its selling price less costs to complete and sell and an impairment charge is recognised in the profit and loss account. Where a reversal of the impairment is recognised the impairment charge is reversed, up to the original impairment loss, and is recognised as a credit in the profit and loss account.
(xxiv) Investment properties
The group/company owns a number of freehold office buildings that are held to earn long term rental income and for capital appreciation. Investment properties are initially recognised at cost. Investment properties whose fair value can be measured reliably without undue cost or effort are measured at fair value. Changes in fair value are recognised in the profit and loss account.
(xxv) Leases
(a) Finance leases
Leases in which substantially all the risks and rewards of ownership are transferred by the lessor are classified as finance leases.
Property, plant and equipmentacquired under finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments and are depreciated over the shorter of the lease term and their useful lives. The capital element of the lease obligation is recorded as a liability and the interest element of the finance lease rentals is charged to the profit and loss account on an annuity basis.
Each lease payment is apportioned between the liability and finance charges using the effective interest method.
(b) Operating leases
Leases in which substantially all the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.
(c) Lease incentives
Incentives received to enter into a finance lease reduce the fair value of the asset and are included in the calculation of present value of future minimum lease payments.
Incentives received to enter into an operating lease are credited to the profit and loss account, to reduce the lease expense, on a straight-line basis over the period of the lease.
NOTE: Extract for a leasing company
Gross earnings
Gross earnings comprises the finance charge element of lease rentals, the profit or loss generated on the termination of lease agreements and administration fees pertaining to lease agreements. Gross earnings are stated net of trade rebates and trade discounts, and exclusive of value added tax.
Finance lease and hire purchase agreements
Finance charges are allocated to periods so as to give a constant rate of return on the net cash investment in the lease. The total net investment included in the balance sheet represents total lease payments receivable, net of finance charges relating to future periods. Bad debts are charged to the profit and loss account in the period in which they occur. Recoveries of bad debts previously charged to the profit and loss account are credited to the profit and loss account upon recovery of the bad debt. The net investment in finance lease and hire purchase agreements is stated net of a bad and doubtful debt provision.
(xxvi) Intangible assets
Intangible assets acquired separately from a business are capitalised at cost. Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if the fair value can be measured reliably on initial recognition. Intangibles assets as part of an acquisition are not recognised where they arise from legal or other contractual rights, and where there is no history of exchange transactions. Intangible assets excluding development costs, created within the business are not capitalised and instead expenditure is charged against profit in the year.
Subsequent to initial recognition, intangible assets are stated at cost less accumulated amortisation and impairments.
Intangible assets are amortised on a straight line basis over their estimate useful lives is included within administration expenses in the profit and loss. The useful economic life is determined to be the life over which economic benefits are utilised. The carrying value of intangible assets are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. The useful economic lives of intangible assets are as follows:
|
Development Costs |
5 Years Straight Line |
|
Patents |
10 Years Straight Line |
|
Customer Lists |
7 Years Straight Line |
The company’s policy is to review the remaining economic lives and residual values of intangible assets on an on-going basis and to adjust the amortisation charge to reflect the remaining estimated life where applicable and residual value where indicators of a change are present.
(xxvii) Goodwill
Inproperty, plant and equipmentcomprises purchased goodwill which represents the excess of the fair value of consideration paid for the acquisition of a XXXX business, over the fair value of identifiable assets acquired. Goodwill is amortised to the profit and loss account on a straight line basis over its useful economic life. The estimated useful economic lives of goodwill is up to XX years. Useful life is determined by reference to the period over which the values of the underlying business are expected to exceed the value of their identifiable net assets.
Goodwill is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable.
(xxviii) Exceptional items
Exceptional items are those that the Directors’ view are required to be separately disclosed by virtue of their size or incidence to enable a full understanding of the Company’s’ financial performance. The Company believe that this presentation provides a more informative analysis as it highlights one off items. Such items may include significant restructuring costs. The Group/Company has adopted an income statement format that seeks to highlight significant items within the Group/Company results for the year.
OR the below can be used
The Group has adopted an income statement format that seeks to highlight significant items within the Group results for the year. Such items may include restructuring, impairment of assets, profit or loss on disposal or termination of operations, litigation settlements, legislative changes and profit or loss on disposal of investments. Judgement is used by the Group in assessing the particular items, which by virtue of their scale and nature, should be disclosed in the income statement and notes as exceptional items.
(xxix) Share based costs
The company participates in a number of equity-settled, share based compensation plans operated by its parent company, XXXXX Limited. The fair value of the employee services received in exchange for the grant of the options or shares is recognised as an expense. The parent undertaking does not immediately recharge the company for these expenses so they are shown as a capital contribution from the parent undertaking within other reserves. Where any subsequent recharge is not, in the opinion of the directors, clearly linked to the share based payment charge, the amount is treated in a manner similar to a management recharge.
The total amount to be expensed over the vesting period is determined by reference to the fair value of the options, shares or Restricted Stock Units (RSU’s) granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options or shares that are expected to vest. At each balance sheet date, the entity revised its estimates of the number of options of shares that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.
Fair value of options is measured using the Black Scholes model.
(xxx) Investment properties
The group owns a number of freehold office buildings that are held to earn long term rental income and for capital appreciation. Investment properties are initially recognised at cost. Investment properties whose fair value can be measured reliably are measured at fair value. Changes in fair value are recognised in the profit and loss account.
For investment properties which cannot be reliably measured without undue cost or effort these are included within property, plant and equipment and depreciated.
Biological assets
The acquisition of land for forest projects is originally recorded at cost in accordance with Section 17 of FRS 102. Biological assets are stated at fair value, less estimated point of sale costs at each period end. The fair value is determined using the present value of expected net cash flows from the asset, discounted at a current market rate other than for young seedling stands. The fair value of the young seedling stands is the actual reforestation cost of those stands.
The gain or loss in fair value of these biological assets is reported in net profit. The measurement of biological growth in the field is an important element of this valuation. Initially at the start of the plantation cycle the fair value is equal to the standard costs of preparing and maintaining a plantation, including the appropriate cost of capital, assuming efficient operations. Towards the end of the plantation cycle the fair value depends solely on the discounted value of the expected harvest, less estimated point of sale costs. The calculation takes into account the growth potential, environmental restrictions and other reservations of the forests. Felling revenues and maintenance costs are calculated on the basis of actual costs and prices, taking into account the company’s projection of future price development.
Periodic changes resulting from growth, felling, prices, discount rate, costs and other premise changes are included in operating profit in the profit and loss account.
Biological assets – Forestry
The acquisition of land for forest projects is originally recorded at cost in accordance with Section 17 of FRS 102. Biological assets are measured at the lower of cost and estimated selling price less costs to complete and sell.
Depletion represents the costs of forests clearfelled during the year, calculated as the proportion that the area harvested bears to the total area of similar forests. The depletion amount is charged to the profit and loss account and is based on cost.
Biological assets – Livestock
Livestock are measured at the lower of cost and net realisable value. The purchase price of livestock bought in is measured at the purchase price plus directly attributable purchase costs. Own reared stock is measured at cost based on the selling price of the livestock less an appropriate margin based on industry norms to bring the value back to the estimated cost price.
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