01/06/2015. FRS 102 practical issues. FRS 102 practical issues. Introduction

Transcription

1 24 February 2015 Download the slides to accompany the webinar /FRFwebinarresources 24 February 2015 Introduction Sarah Dunn Technical Manager, Financial Reporting Faculty 1

2 Introduction Stephanie Henshaw Technical Standards Partner Francis Clark LLP Danielle Stewart Head of Financial Reporting Baker Tilly LLP Ask a question Participate in today s webinar send us a question Audio problems if you experience poor sound quality you may benefit from selecting Use Telephone from your Audio Mode settings Downloading the slides /FRFwebinars (/FRFwebinarresources) 2

3 Contents Presenting accounts under FRS 102 Goodwill Deferred tax on acquisitions Forward contracts Lease incentives The amortised cost method Deemed cost Distributable profits Poll 1 How have you found the implementation of FRS 102 so far? PRESENTING ACCOUNTS UNDER FRS 102 3

4 Presenting accounts under FRS 102 Formats CA 06 Other relevant regs FRS 102 Primary statements Notes Content Financial statements Specified in CA 06 Other relevant regs Some choice Terminology An entity may use titles for the financial statements other than those used in this FRS as long as they are not misleading. FRS What s in a name? FRS 102 CA 2006 Mandatory title under CA 2006? Statement of financial position Balance sheet No Statement of financial performance Statement of Comprehensive Income/ Statement of Changes in Equity Profit and loss account N/A No No but definitely not STRGL for SCI! Property, plant & equipment Tangible assets Yes Inventories Stocks Yes Revenue Turnover Income tax Tax on profit No Yes* *Except where the special nature of the company s business requires the directors to adapt the tit le used No, therefore some flexibility Yes* 4

5 GOODWILL Key differences FRS 10 FRS 102 Indefinite life permitted Rebuttable presumption that maximum life does not exceed 20 years Goodwill must have finite UEL Where no reliable estimate of UEL can be made, UEL is presumed to be not more than 5 years Do the accounts have to change? Considered reliable Existing amortisation applies Review basis for UEL Life not appropriate or previously indefinite Adjust prospectively No restatement of prior years 5

6 Implications of profit hit? Impact on profit for contractual purposes Bonuses Bank covenants (unless EBITDA) Reaction of other users Potential business partners Credit rating agencies Plus, for goodwill in entity accounts only Impact on distributable profit DEFERRED TAX ON ACQUISITIONS Key considerations Deferred tax on acquisitions Provide on difference between fair value and tax value of assets (excluding goodwill) and liabilities on acquisition Adjust goodwill by equivalent amount Note: applies to all acquisitions post transition 6

7 Transitional provisions and old acquisitions Restate pre-transition acquisitions under Section 19 Choice over earliest date Must include all subsequent acquisitions Permits separate recognition of intangibles from goodwill Do not restate any pre-transition acquisitions (35.10a) No separation of goodwill and intangibles No adjustment to carrying value of goodwill Deferred tax adjusted via reserves FORWARD CONTRACTS Key differences SSAP 20 FRS 102 Initially, exchange rate at date of transaction. Retranslate debtor/ creditor at year end rate, difference to P&L. Choice: trading transactions may use rate under matching forward contract. Initially, record at spot rate at date of transaction. In all cases, retranslate debtor or creditor at closing rate, difference to P&L. Record forward contracts (derivatives) at fair value, movements to P&L. 7

8 Fair values and forward currency contracts Over the total life of the contract fair value adjustments and gains/losses on exchange broadly match up Open contracts at year end do not match due to difference between spot rates and forward rates P&L impact for ineffectiveness B/S reflects new asset/liability for forward contract at fair value Does accounting reflect economic reality when objective is to remove exposure to currency risk? Alternative is hedge accounting (provided conditions are met) LEASE INCENTIVES Lease incentives What is the issue? UK GAAP: spread over the shorter of the lease term and the period till the next rent review Per FRS 102: spread over the lease term Can adopt from commencement of lease FRS 102 has transitional exemptions which may be useful 8

9 Lease incentives case study An example: 1m lease incentive on a 50 year lease with a 5 year rent review so currently spreading as 200k pa Now 3 years into the lease, so the entity has been taxed on 600k Under IFRS and FRS 102, will spread 1m incentive over 50 20k pa, so 3 years in, entity will only recognise 60k income Retrospective application means early adoption of FRS 102 takes 540,000 out of taxable profits in the year of transition Distributable profit impact is net of the tax effect THE AMORTISED COST METHOD OF MEASUREMENT Introduction FRS 102 requires financing transactions to be measured at the PV of the future payments, discounted at a market rate of interest for a similar loan This is known as the amortised cost method It is causing concern, because it is perceived to cause unnecessary complexity To understand when amortised costs applies, let s take a look at FRS 102 9

10 Financial instruments overview Type Initial measurement Subsequent measurement Financial instrument Basic Section 11 Non financing at transaction price Financing at amortised cost (PV of future payments) Transaction price less impairment Amortised cost less impairment Other Section 12 Fair value Fair value through profit and loss Treatment of financing transactions These can be bank loans, intercompany loans, shareholder loans, directors loans etc, as long as they have formal repayment terms. Old UK GAAP The loan is recognised at cost. If it is interest free then no interest is accounted for Per FRS 102 Any formal loan, with defined repayment terms, is measured at amortised cost, which means Discount the initial transaction to the present value of the payments using market rate If the coupon rate is below market rate, there will be a difference between the actual loan and the day 1 present value calculated this way Unwind this difference over the period of financing as notional interest in the P&L of the borrower Treatment of off-market loans Per FRS 102: discounting the loan creates a day 1 gain in the accounts of the borrower, and a day 1 loss in the accounts of the lender FRS 102 does not say how to account for these credits or debits. If they are intercompany loans, the amount of the discount is treated as increasing the cost of investment in the parent s accounts and as a capital contribution in the sub s accounts If sub lends to parent, dr: in sub is a distribution and cr: in parent is a distribution receivable ie, like a dividend If they are non related party loans that are below market rate, both the gain and the loss would normally be posted to the profit and loss account 10

11 When doesn t amortised cost apply? If a balance has arisen as a result of a trading account with a fellow group member OR The balance has no defined repayment terms ie, it is repayable on demand there will be no discounting the balance should sit in current assets/liabilities Amortised cost only causes strange entries when a loan is below the company s normal market rate of interest and the loan has formally agreed terms for repayment A rep. to the auditors for going concern is not a formal deferral, so a loan can still be repayable on demand DEEMED COST Fair value or revaluation as deemed cost Fair value as deemed cost: A first time adopter may elect to use an asset s fair value on the date of transition as its deemed cost at that date. Revaluation as deemed cost: A first time adopter may elect to use a previous GAAP revaluation, at or before the date of transition to FRS 102, as its deemed cost at the revaluation date. Applies to: PPE Investment property Intangible asset which meets the recognition and revaluation criteria of section 18 11

12 Fair value or revaluation as deemed cost The adjustment may be applied to individual assets doesn t have to apply to a whole class. Deferred tax will have to be provided on any uplift in value resulting from a fair value or revaluation as deemed cost adjustment. The adjustment will be credited to opening reserves and will be shown in the transition adjustment note but need not be disclosed in future years. Going forward, depreciation will be provided in the usual way on the deemed cost. DISTRIBUTABLE PROFITS Impact of new UK GAAP on distributable profits Already covered above: 1. Lease incentives 2. Goodwill Covered in this section 1. Investment properties 2. Deferred tax 3. Derivatives 12

13 Investment properties accounting treatment Old UK GAAP FRS 102 Old UK GAAP FRS 102 Where fair value can be reliably measured, Hold at open market (without undue cost or value with increases effort on an on-going and decreases in open basis), hold at fair value market value going to a with movements revaluation reserve through the P&L Depreciation not allowed Where fair value cannot be reliably measured, hold at depreciated cost Investment properties impact on distributable profits Even though gains and losses are shown in the P&L, this does not initially create or use distributable profits Only on sale will the gains/losses become realised On transition, deferred tax must be provided on accumulated revaluation gains. Will affect b/s total, but not distributable profits. Options on presentation in financial statements: Narrative note to highlight non-distributable profit Transfer the non-distributable element to a separate reserve Deferred tax accounting treatment Old UK GAAP FRS 102 Old UK GAAP FRS 102 Timing differences plus (a combination of balance sheet Timing differences and P&L driven) approach (P&L driven) More deferred tax recognised than old UK GAAP 13

14 Deferred tax Impact on distributable profits The effect of deferred tax on distributable profit is that it normally follows the treatment of the gain or loss to which it relates This is why the deferred tax on a revaluation is an unrealised loss Derivatives accounting treatment Old UK GAAP FRS 102 Old UK GAAP FRS 102 In most cases fair value disclosed Derivatives held on the balance sheet at fair value with fair value gains and losses through P&L Examples of derivatives: interest rate swaps, forward commodity and currency contracts, interest rate caps or collars, other hedging arrangements Derivatives Impact on distributable profits The gain or loss is realised when the position at the year end is capable of being closed out ie: settled This can have enormous impact on distributable reserves eg: Bank required interest rate swap (floating to fixed) as a condition of providing loan financing. Interest rate swap currently under water & a huge cost to the client of exiting the agreement but there is nothing in the contract to stop them doing so. On transition the swap will be recognised on balance sheet as a 16m liability. Under Tech 02/10 the loss on the swap will be realised if the contract or risk position can be offset in the market and normal market practice is to do so, as the swap is valued using only observable market data and could be closed out immediately. For a typical vanilla interest rate swap, THIS IS NORMALLY TRUE. 14

15 Poll 2 Which, if any, of the following areas will present the biggest challenge for you, or your clients? Any questions? Ask a question Participate in today s webinar send us a question Click here to see questions 15

16 /newukgaap Financial reporting at your fingertips Download the faculty s free app for iphone, ipad and Android devices. Visit /frfapp for more information. You can also follow to keep up-to-date with the latest financial reporting developments and breaking faculty news 140 characters at a time. Questions Stephanie Henshaw Technical Standards Partner Francis Clark LLP Danielle Stewart Head of Financial Reporting Baker Tilly LLP 16

17 Future events and webinars Events 28 April London Financial Instruments under new UK GAAP Details of our roadshow series coming soon /frfevents Webinars 18 March FRS 102 & financial instruments: hedging 19 May The new EU Accounting Directive what UK companies need to know now /webinars THANK YOU FOR ATTENDING Contact the Financial Reporting Faculty +44 (0) Please take the time to fill out our short survey A world leader of the accountancy and finance profession 17