FRS 102. Complete set of Financial Statements

Transcription

1 Complete set of Financial Statements 1. Statement of Financial Position (SOFP) 2. Statement of Comprehensive Income (Income Statement (Profit or Loss) & a statement of Other Comprehensive Income 3. Statement of Cash-flows 4. Statement of Changes in Equity 5. Notes; comprising accounting policies & other explanatory notes o o o o o requires the Companies Acts formats to be presented Can use other Titles for Statements Statement of Profit or Loss & Other Comprehensive Income can be one statement, comprising the P&L and the Other Comprehensive Income (OCI) or two separate statements Statement of Cash-Flows is mandatory Statement of Changes in Equity can be omitted if the only changes in Equity for the period are; Profit or Loss, Other Comprehensive Income, Prior year adjustments & dividends. In that case, replace it with Statement of Income and Retained Earnings 1

2 OCI Other Comprehensive Income All recognized income & expenses are recognized in the P&L except the following stated items, which are recognized in the OCI I. Revaluation Gain on PPE / retained in Revaluation Reserve in SOFP (Note- Revaluation Loss to P&L unless reversing a previous Revaluation Gain on same asset & amount still held in Revaluation Reserve, if so; recognize in OCI to that extent) II. Re-measurement Gain or loss on Net Defined Benefit Pension Fund Assets & Liabilities. (Held in Retained Earnings in SOFP) III. Gain on Fair Value adjustment of Equity Financial Assets (where option to classify adjustments on specific equity instruments adapted by the company)/ held in retained earnings. IV. Effective part of a Gain or Loss on a Cash Flow hedge (retained in separate reserve in SOFP) V. FX gain or loss on the Revaluation of a foreign entity s Opening Net Assets & Profit & Loss at year end (retained in separate reserve in SOFP) Statement of Changes in Equity (SOCE) All transactions with the Equity shareholders are dealt with in the SOCE. In particular, dividends are shown as a movement in Equity (rather than as an expense in the P&L) Typical movements include: P&L for the year Other Comprehensive income for the year New share issues Dividends paid during the year. Transfers between reserves Statement of Changes in Equity can be omitted if the only changes in Equity for the period are; Profit or Loss, Other Comprehensive Income, Prior year adjustments & dividends. In that case, replace it with Statement of Income and Retained Earnings 2

3 Basis of preparation of the Financial Statements The Financial Statements should include a compliance statement that they have been prepared in accordance with. The Financial Statements should state the principal measurement basis used (normally historic cost) Judgments & Estimates The key areas of estimation uncertainty and critical judgments in applying accounting policies should be disclosed Fair Presentation Financial Statements shall present fairly the: Financial Position Financial Performance (P&L, OCI); and Cash-Flows The application of the and additional disclosure when necessary is presumed to meet the requirement of Fair Presentation An Entity shall present additional line items, headings and subtotals in the statement of Profit or Loss, if such presentation is relevant to the understanding of the entity s Financial performance Quasi Exceptional Items When items of Income or expense are material, the entity shall disclose their nature and amount separately. This could be on the face of the P&L or by note Circumstances that would give rise to the separate disclosure include; I. Write-downs of inventories to NRV and reversals II. Write-downs of PPE to Recoverable Amount and reversals III. Restructuring of the activities & reversals of excess provisions IV. Gains/Losses on disposal of PPE V. Disposal of Investments VI. Discontinued Activities VII. Litigation Settlements VIII. Other Reversals of provisions 3

4 & Irish GAAP Practical Transition Issues There are significant recognition and measurement differences, and therefore likely transition adjustments that will arise between current Irish GAAP and the These differences will have an impact on the reported profit from the date of the transition, and on the Statement of Financial Position. This will in turn affect taxable profits and distributable profits. Loan covenants which are tied to the reported accounts may also be affected. Accordingly it will be necessary to plan the transition in advance. This would involve preparing dual accounts for 2014 and choosing the most effective options that suit the entity s needs. This will give the company adequate time to have a planned changeover. The starting point is the opening Balance Sheet of 01 January This Balance Sheet will be restated using the and used as Comparatives for 2015 Certain areas are very similar and only have minor differences; Provisions & Contingencies; (Section 21) & FRS 12 Events after the Balance Sheet date; FRS (Section 32) & FRS 21 Related Parties; (Section 33) & FRS 8 Inventories; (Section13) & SSAP 12 Below we summarize the major changes on transition for other items in the Balance Sheet & P&L 4

5 Tangible fixed assets/ PPE Historic Cost or Valuation is both permitted, less accumulated depreciation and Impairment losses in both cases. Measurement bases not changed. Historic Cost or Valuation is both permitted, less accumulated depreciation and Impairment losses in both cases. (Must apply Revaluation model to all assets of the same class & valuations must be kept up to date) Changes Present Value of Estimated Decommissioning Costs are included as part of the Cost of PPE (if material) & depreciated Valuation basis is the Best Use value (existing use in Irish GAAP) which should lead to higher values Profit : Extra depreciation if capitalization of decommissioning costs required. Higher PPE if capitalization of decommissioning costs required. Transition Rules There are transition rules that allow the entity to use Fair Value at transition date or an existing Valuation on or before the transition date as the deemed cost. (If an existing Valuation is deemed to be Cost, then there is no requirement to continue to revalue the asset) Decommissioning Costs which need to be capitalized can be measured at the transition date using the estimates at that date) 5

6 Investment Property Open Market Valuation, with adjustments recognized in the STRGL. Fair Value through the P&L. (i.e. adjustments recognized in P&L); Unless there is no reliable Fair Value or it involves excessive time or effort. In this case, cost less accumulated depreciation and impairment losses can be used. Must apply accounting policy consistently to all Investment Properties Profit: Fair Value adjustments reported in the P&L. (This is a major change) No change in values. Transition Rules Revaluation surpluses at transition date to be transferred to Retained Earnings. 6

7 Leased Assets Same classification and accounting in as Irish GAAP. Finance Leases Finance Leases has specific criteria where Present Value of minimum lease payments are equal to, or greater than 90% of Fair Value as a guide. Operating Lease Rent Holidays or premiums spread over the period to the next break on a straight line basis. Finance Lease is recognized when the lease terms transfers substantially all the risks and rewards of ownership to the lessee. Eight cases identified which indicate that the lease is a finance lease rather than an Operating lease. No 90% test for the Present Value of the minimum lease payments Operating Lease Rent Holidays or premiums spread over the lease period on a straight line basis. (Irish GAAP spread over period to next break clause) : Should be no change in the classification of leases between Financial & Operating leases. No change in P&L and Balance Sheet Transition Rules No need to change to Lease classification for existing leases at transition date. No need to change P&L expense for rent holidays differences for existing leases. 7

8 Goodwill Existing Irish GAP i. Capitalized and amortized over useful life. Rebuttal presumption that useful life does not exceed 20 years. However, Useful life could be indefinite thereby eliminating the amortization charge. ii. Negative Goodwill is recognized in the SOFP and released to the P&L over the life of the non monetary assets acquired in the combination i. Goodwill amortized and assumed to have a definite life, with a default period of 5 years if the useful life cannot be determined. iii. Negative Goodwill is recognized in the SOFP and released to the P&L over the life of the non monetary assets acquired in the combination. : Profit; Higher amortization charge will result in lower reported profits. Goodwill value will be written off earlier. It may result in loan to value covenants breaches. Transition Rules i. There are transition rules that allow the entity not to use the FRS rules on combinations before the transition date. However, Goodwill previously not amortized will need to be amortized from the from the transition date over remaining useful life (if reliable estimate) or five years. 8

9 Intangibles i. Internal intangible asset can be recognized provided it has a Readily Ascertainable Market ii. iii. Value. Intangible assets may be deemed to have an indefinite life, and thereby not be amortized. If so, it will undergo an annual impairment review. Intangible assets may be revalued i. Internal Intangibles must be identifiable (capable of being separated and transferred or derived from contractual terms) & meet the Probability of future economic benefits test. ii. Internally generated brands, logos, customer lists & similar assets cannot be capitalized. iii. Purchased or acquired intangibles cannot have an indefinite life; if life cannot be determined it is presumed to be 5 years. iv. Recognized Intangibles shall be measured at Cost less depreciation or option to use Fair Value if there is an Active market by Fair Value (using Revaluation Model; annual depreciation & Gain or Loss to the OCI & Revaluation Reserve) v. Greater recognition of Intangible Assets in a business combination (rather than being grouped unidentified in Goodwill) Profit : i. Less Intangibles will be recognized; related expenditure will be expensed in P&L ii. Extra amortization charge for assets previously assumed to have an indefinite life. i. Less Intangible Assets as difficult to recognize Internal Intangible Assets. ii. Recognized Intangibles written off earlier. iii. Lower values placed on Intangible assets. Could result in loan to value covenants breaches Transition Rules i. There are transition rules that allow the entity to use Fair Value at transition date (if active market) or an existing Valuation on or before the transition date as the deemed cost of External Intangible Assets. ii. Estimated useful life will be revisited for all Intangible assets at transition date. 9

10 Development Costs Choice to capitalize Development Expenditure in the SOFP, (provided it meets strict criteria) Or Expense in the P&L. No change Choice to capitalize in the SOFP, (provided it meets similar strict criteria) or expense in the P&L Profit Explicit ban on capitalizing Training activities, advertising activities, legal & secretarial costs in startups, relocation costs & opening costs. This will result in more expenses in the P&L. Less Intangible Assets will be recognized in many entities. Transition Rules No exemptions permitted. Intangibles must be recognized and or re-measured under & a corresponding adjustment to Retained earnings 10

11 Borrowing Costs Choice to capitalize as part of Tangible Fixed Assets in the SOFP, (provided it meets strict criteria) or expense in the P&L.. Choice to capitalize as part of PPE in the SOFP, (provided it meets strict criteria) or expense in the P&L. Very little change in Profit & Loss or Transition Rules i. Can choose to capitalize interest as part of PPE from the transition date as an accounting policy. No retrospective adjustment required. 11

12 Impairment of Assets General principle in both Irish GAAP & If there is an indication of Impairment, assets must be formally reviewed to ascertain if the asset is impaired. (An asset is impaired if its recoverable amount is less than its carrying value. Recoverable amount is defined the higher of Fair Value less selling expenses & value in use) Any impairment is written off to the P&L unless there is a revaluation surplus in Reserve for the same asset. In that case, the impairment loss is recognized in the OCI to the extent of the Revaluation Reserve and the balance recognized in the P&L If Recoverable amount is not ascertainable for an individual asset, then it is reviewed as part of the appropriate Cash Generating Unit for that asset. If the Cash Generating Unit is impaired, then the loss is recognized in the P&L & the CGU assets are reduced in a prescribed order. Impairments can reverse as economic conditions improve. The amount to be reversed is limited to the original amount impaired adjusted for depreciation that would have been provided for if the original impairment had not been recognized. For CGU impairment, the order of write off is I. Obviously impaired asset II. Goodwill III. Intangible assets IV. pro-rata other tangible assets with the condition that any individual asset cannot be written down below it s recoverable amount For CGU impairment, the order of write off is; I. Goodwill II. pro-rata other tangible assets with the condition that any individual asset cannot be written down below it s recoverable amount Profit No difference between two standards Impairment allocated differently to assets in the CGU. Transition Rules No exemptions permitted. 12

13 JVs and Associate Companies i. In Consolidated Accounts; Equity accounting for both JVs and Associates. ii. In own accounts; recognize at Cost less impairment i. In Consolidated Accounts; Equity accounting for both JVs and Associates. ii. In own accounts, choice of; a) Cost model less impairment. (Dividends from pre-acquisition reserves recognized in P&L, not deducted from cost) b) Fair Value with adjustments in the P&L c) Fair Value with adjustments in the OCI Profit : i. Differences if Fair Value model chosen in own accounts. i. Differences if Fair Value model chosen I own accounts. Transition Rules i. If Fair Value Method is chosen, then adjustment recognized in Retained Reserves. 13

14 Deferred Tax Uses Timing Differences based on amounts recognized in the P&L to amounts recognized in the Tax return. Discounting to reflect time value is permitted. Unrelieved Tax Losses and other Deferred Tax assets only recognized if it is probable will be recovered against reversal of Deferred Tax liabilities or future taxable profits. Use Timing Differences plus a number of additions. Discounting not permitted Provide Deferred Tax for Revaluation of Non- Current Assets, Fair Value adjustments on Acquisition and Retained Earnings in Foreign Subsidiaries if it is likely that those earnings will be repatriated. Unrelieved Tax Losses and other Deferred Tax assets only recognized if it is probable will be recovered against reversal of Deferred Tax liabilities or future taxable profits. Profit : Main difference will be seen in OCI as result of recognizing Deferred Tax on the Revaluation of PPE. Larger Deferred tax balances recognized as no discounting & deferred tax on revaluations Transition Rules The deferred Tax asset or liability will be recalculated by identifying all Timing differences and providing for Deferred Tax at the enacted Tax rate. 14

15 Pensions Defined Benefit Schemes Defined Benefit Schemes i. Requires Projected Unit Credit method for calculating Pension Obligations in Defined Benefit schemes. ii. Expected return on Pension Fund Assets included in P&L expense charge, with the variance to iii. iv. Actual Return recognized as part of the Actuarial Gains & Losses. Actuarial Gains and Losses recognized in the STRGL Past service costs only recognized as they vest Defined Benefit Schemes i. Requires Projected Unit Credit method for calculating Pension Obligations in Defined Benefit schemes. ii. Past Service Costs are recognized in full (without the requirement to have vested) iii. Recognize interest income on scheme s assets using the same discount rate as used to discount liabilities. (rate for high quality corporate bonds at the start of the year) iv. Recognize Re-measurement Actuarial Gains and Losses in P&L or Other Comprehensive Income Defined Contribution Schemes No obligation on the entity to make any additional contributions beyond the annual payment. Multi-employer Defined Benefit Schemes treated as Defined Contribution Scheme if insufficient information available to account for the scheme with detailed disclosures Profit : Higher cost as; Defined Benefit Assets returns in P&L measured at the same rate as Liabilities & Past service costs recognized immediately Similar figure except that provision made for Past costs not yet vested Transition Rules - none 15

16 Basic Financial Instruments Basic Financial Instruments exclude Derivatives, Compound Instruments, assets and liabilities that have embedded derivatives. Basic Financial Instruments include; Cash, overdrafts, ordinary shares, loans, fixed and variable loans where repayments based on pre agreed rates, trade debtors and other receivables, and plain vanilla liabilities. It excludes complex loans, compound instruments, Derivatives, options, warrants, futures and forward contracts. i. Depends on whether the entity has adapted FRS 26 (Recognition and Measurement). For most companies, Cost less impairment has been the normal accounting policy. i. Basic Financial Instruments (Financial Assets and liabilities) are measured at Amortized Cost using the effective interest rate, except for a. Shares that have a published price. Use market value with changes recognized in the Profit & Loss. b. Other shares are measured at Cost less impairment. c. Financing transactions are measured at the Present Value of the future payments discounted at a market rate of interest for similar debt. d. Non Current liabilities and Receivables are discounted at their present value. Profit : i. Fair Value adjustments on Quoted Investments will be recognized in the in P&L. ii. The finance cost of Financing Transactions will be recognized over the period the finance is extended at a constant rate i. Fair Values recognized for Quoted Shares. ii. Present Values for non-current monetary Receivables and liabilities & for financing transactions. Transition i. No separate rules for transition. Revalue assets at prescribed rules and take adjustment to Retained Earnings. 16

17 Complex Financial Instruments It includes complex loans, compound instruments, Derivatives, options, warrants, futures and forward contracts. Commitments to make a loan to other entities ii. Depends on whether the entity has adapted FRS 26 (Recognition and Measurement). For most companies, Cost less impairment has been the normal accounting policy. ii. Complex Financial Instruments (debt assets & liabilities) are measured at Fair Value with adjustments recognized in the P&L, except where a reliable measurement of Fair Value is not available. Profit : i. Fair Value adjustments will be recognized in the in P&L. ii. Forward Contracts for foreign currency are measured at Fair Value as an asset or liability (FX transactions cannot be measured at the forward contract rate, but rather at the spot rate) i. Fair Values recognized for Quoted Shares. ii. Derivatives are recognized at Fair Values. iii. Forward Contracts for foreign currency are measured at Fair Value as an asset or liability Transition ii. No separate rules for transition. Derivatives that heretofore may not have been recognized are included at Fair Value & adjustment to Retained Earnings. 17

18 Share Options i. FRS 20 recognizes an expense over the vesting period that is based on the fair value at the date of the grant. This value takes into account the probability of market conditions being achieved; however, it does take account of probability of performance conditions being achieved. This is accounted for by measuring the expense as the Grant price multiplied by the options that vest or are likely to vest. i. No difference. Profit : i. No difference i. No difference. Transition ii. An First time adaptor need not apply Section 26 rules to equities granted prior to the transition date, or to liabilities that were settled prior to the transition date. This exemption should not be required by Irish entities. 18

19 Revenue Recognition i. Revenue Recognition based on FRS 5 Note G. ii. Revenue is recognized when the entity has earned the right to Consideration. i. Revenue is recognized at the Fair Value of the consideration. ii. When payment of the consideration is deferred as part of a Financing Transaction, the agreed price is discounted to its present value. iii. The recognition point for the Sale of Goods is when the risks and rewards are transferred to the purchaser, normally on delivery of the goods. iv. The recognition point for Rendering of Services Contracts is when the services are rendered and the ultimate outcome of the contract can be reliably measured. The revenue is measured by using the % of completion method normally on a Cost incurred as a % of total estimated costs Profit : i. Much clearer rules for complex transactions. E.g. bundled transactions where a number of products delivered at different times. i. Deferred Revenue provisions may be required for undelivered separate obligations in bundled transactions Transition i. No separate rules for transition. Entities should review their Revenue Recognition policies in particular in relation to transactions that include more than one component delivered at different times. Also, consider Loyalty Points or Award schemes and the need for a Provision on transition 19

20 Government Grants i. Grants recognized when reasonably assurance that will be received & conditions will be ii. complied with. Grant release to the P&L is matched to the related expenditure. Grants for Fixed Assets are released to the P&L over the life of the asset. two methods i. Grants recognized when reasonably certain of receipt. ii. Grants recognized in full in the P&L when performance conditions are met. iii. If the Government Grant becomes repayable, it should be recognized as a liability. Or i. Grants recognized when reasonably assurance that will be received & conditions will be complied with. ii. Grant release to the P&L is matched to the related expenditure. Grants for Fixed Assets are released to the P&L over the life of the asset. Profit : i. No change if second method used i. Cannot net off capital grants against cost of the related assets. Restate grants previously netted off against assets as Deferred Income & adjust for depreciation of asset & release of deferred income on the grants. Will be the same figure so no effect in the Retained reserves Transition i. No separate rules for transition. 20

21 Foreign Currency Transactions i. SSAP 20 permits choice of the spot rate or the Forward contract rate for FX transactions. ii. Closing FX assets and liabilities can be valued at the closing rate or the Forward contract rate. i. All transactions must be measured at the spot (or average) FX rate ruling at the date of the transaction. ii. FX monetary assets and liabilities must be translated at the closing rate and a Gain or Loss taken to the P&L iii. FX gains and losses are recognized in the P&L Profit : i. If company using the forward rate to translate transactions in the P&L, the use of the spot/average rate will result in changes. i. If Company using forward rate at the Balance Sheet date for FX monetary assets & liabilities, then the use of the closing rate at period end will cause changes. ii. However, the Forward Contract will be recognized as a Financial Asset/liability and the option to designate a Hedge will mean very little change in the net position. Transition i. The entity may elect to deem these Cumulative Exchange Differences to be zero at the transition date. These differences would become part of Retained Earnings. 21

22 Foreign Currency Translation iii. SSAP 20 uses the Closing Rate Method for independent foreign subsidiaries and the Temporal iv. Method for dependent foreign subsidiaries. The Closing Rate P&L permits the year end rate to be used to translate the Foreign Currency P&L iv. All companies must identify their functional currency; the currency they initially keep their records v. Must use spot rate (or average rate) for FX transactions at the date of the transaction vi. These accounts are then translated to the presentation currency of the Group using the closing Rate method for the Balance Sheet & the Average Rate for the P&L. vii. FX gains & losses arising from using the Balance Sheet closing rate as against using last years closing rate for the opening Balance Sheet & the average rate for the P&L are recognized in the OCI & a separate Reserve in the Balance Sheet. viii. Goodwill & fair value adjustments arising on consolidation are considered FX assets & liabilities and are re-translated at the closing rate Profit : iii. If Group was using the closing rate to convert the P&L account, the change to the average rate will cause differences. i. The change of rate in the P&L will mean that Retained Earnings in the Balance Sheet will be different; the corresponding adjustment will be to the Cumulative Exchange Differences also in Equity. Transition ii. The entity may elect to deem these Cumulative Exchange Differences to be zero at the transition date. These differences would become part of Retained Earnings. 22

23 Accounting Policies, estimates and errors. v. Only Fundamental errors detected in subsequent years are restated as prior year adjustment in prior year accounts. ix. Material errors detected in subsequent years are restated as prior year adjustments in prior year s accounts. Profit : i. Revision of earlier P&Ls will be more prevalent. i. Prior year Balance Sheets will need to be restated for material errors. Heretofore, only adjusted for fundamental errors. Transition i. No separate rules for transition. Any material errors detected at transition relating to earlier years will be adjusted in the opening Balance Sheet by adjusting Retained Earnings. 23