New UK GAAP. Preparing your organisation for change

Transcription

1 New UK GAAP Preparing your organisation for change

2 Background to the change in UK GAAP

3 Accounting standards - the UK history SSAP 1 Accounting for the results of associated companies FRS 1 Cash flow statements Urgent issues task force UITF Abstracts Statements of Recommended Practice (SORPs)

4 Accounting standards - the history elsewhere IASC/IASB Development of IFRS IAS/IFRS in parallel IFRS used throughout the world US GAAP

5 Accounting standards - the history UK process of convergence Changes to various UK standards to align with IFRS 2005 UK listed companies moved to IFRS 2010 draft UK FRS for SMEs following IFRS for SMEs (2009)

6 Where are we now? Current UK GAAP 17 SSAPs 30 FRSs Over 50 UITF Abstracts c2,500 pages of UK GAAP 8 SORPs

7 Towards new UK GAAP But for periods commencing 1 January 2015:

8 New UK accounting standards Three UK Financial Reporting Standards: FRS 100 Application of Financial Reporting Requirements FRS 101 Reduced Disclosure Framework FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland FRS 102 replaces 2,500 with 350 pages All new but regular guidance (Editorial amendments and clarification statements, SENs) Draft updated SORPs

9 FRS 100 Application of Financial Reporting Requirements The structure Who can do what Full IFRS Full IFRS with reduced disclosure New UK GAAP new Financial Reporting Standard for Smaller Entities (FRSSE) (effective January 2015)

10 FRS 101 Reduced Disclosure Framework Relevant to subsidiaries and parent companies of groups applying EU-adopted full IFRS Exemptions available from IFRS Similar framework in FRS 102

11 FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland

12 FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland FRS 102 replaces current UK GAAP for all medium and large entities Small entities can choose new FRSSE FRS 102 Full EU-adopted IFRS First set of FRS 102-compliant accounts reconciliations and restatements Simplifying exemptions and exceptions

13 When will you be affected? Accounts for periods beginning on or after 1 January 2015 Restated comparative figures Know your Transition date start of the preceding financial period Year end First period affected Transition date 31 December 31 December January March 31 March April September 30 September October 2014

14 How will you be affected? Could affect reported profits This could have a knock on impact on Tax payable Bank covenants (eg net asset or profit levels) Ability to pay dividends Changes to format and content of accounts

15 Changes with FRS 102 the top ten countdown

16 10) Format and language of the financial statements Consider template used Do you use software to prepare your accounts? In first year include reconciliations in notes ixbrl tagging will use a new dictionary New taxonomy is not ready yet New standard uses IFRS terminology Can still use old headings as option

17 10) Format and language of the financial statements Old UK GAAP FRS 102 Profit and loss account Balance sheet Cash flow statement Income statement and also Statement of other comprehensive income Statement of financial position Statement of cash flows Statement of total recognised gains and losses Statement of changes in equity

18 9) Fair value as deemed cost Tangible fixed assets, investment property or an intangible, brought in at deemed cost either fair value at transition date or at previous GAAP value at transition date. A one-off opportunity to revalue an asset without having to revalue every year

19 9) Fair value as deemed cost Revalue a property at transition e.g. a property purchased many years ago for 500k now valued at 1m significant balance sheet boost Previous policy to revalue can be abandoned, keeping the asset at revalued amount and saving revaluation costs Over-depreciated plant/machinery could be revalued bringing items that are in use back on to the balance sheet

20 8) Defined benefit pension plans Interest on plan assets rather than expected return on plan assets recognised in P&L expected return on plan assets expectation of higher return from riskier investments e.g. 5-8% interest on plan assets based on high quality corporate bonds likely to be low at present e.g. 2% therefore reduced profit under FRS 102

21 8) Defined benefit pension plans Changes to group schemes Defined benefit surplus or deficit recognised in sponsoring entity s balance sheet or in balance sheet of group entity

22 7) Business combinations No profit or loss on changes in controlling interest that do not result in a loss of control Treated as transactions with equity holders in their capacity as equity holders Achieved by adjusting carrying amount of non-controlling interest Merger accounting is generally not permitted Current UK GAAP allows if certain conditions are met

23 6) Investment properties Option on accounting treatment if directors deem revaluation to involve undue cost or effort Changes in fair value measured in profit or loss Alignment with IFRS treatment for properties which are both occupied by the company and rented out

24 6) Investment properties e.g. A property has a cost of 1m and a value of 1.5m Currently Profit nil, revaluation reserve 0.5m Under FRS 102 this could be either of Profit nil, revaluation reserve nil Profit 0.5m, revaluation reserve nil

25 5) Deferred tax Called timing differences plus approach The plus is recognition of deferred tax extra items: revaluations of property, plant and equipment fair value adjustments on business combinations No discounting of deferred tax assets or liabilities allowed

26 4) Lease incentives Now spread the benefit over the full lease term unless the break is expected to be used Exception: carry on as before if the lease is already in place Consider treatment of new leases after your transition date

27 4) Lease incentives 100k rent a year, 6 months rent free at start 10 year lease, rent review /break after 5 years Under old rules, the 50k benefit is spread over 5 years so at end of year 2: Expense for year was 90k 30k accrual remains Under new rules, the 50k benefit is spread over 10 years at end of year 2: Expense for year was 95k 40k accrual remains

28 3) Useful life of goodwill and intangibles Life of goodwill under current UK GAAP assumed to be 20 years in many cases Under new rules, assumption is 5 years Unless a shorter/longer useful life can be justified Indefinite life of goodwill no longer allowed Under FRS 102, more intangible assets likely to be recognised than under current UK GAAP contracts/legal rights that are not separable would be treated as other intangibles rather than part of goodwill e.g. brands, customer lists

29 3) Useful life of goodwill and intangibles e.g. on 1 Jan 2013: trade and assets of a business purchased, and 100k goodwill recognised Year end is 31 December Under old GAAP: Useful life thought to be 20 years Amortisation per year - 5k Under FRS 102: Useful life revised to 5 years Carrying value at transition date was 95k New amortisation from 1 January 2014 is 19k per year

30 2) Holiday pay Must accrue for holiday benefit accrued but not used at year end Issue if staff costs are significant and a lot of holiday is carried over year end Make sure records are kept and retained for transition Integration of financial and non-financial data

31 2) Holiday pay e.g. employee on 40k per annum and 28 holiday days per calendar year (including bank holidays) At 30 June year end employee has earned 14 days holiday so far only used 7 days holiday (including 5 bank holidays) Therefore 7 further days to accrue 7 x 40k/(260 week days 28 holiday) = 1,207

32 1) Financial instruments Two main types Basic Non-basic Basic financial instruments measured at amortised cost Non-basic financial instruments measured at fair value Change in fair value is measured in profit or loss

33 1) Financial instruments Can bring items onto balance sheet that were not previously recognised e.g. foreign exchange forward contracts Unlisted shares group cross-guarantees Need fair value at transition date

34 Summary Top 10 for your entity will be different Analyse the impact for you Consider what action to take now

35 Tax implications of FRS 102

36 Tax implications of FRS 102 Changes fall into 2 categories i) Those that affect the quantum or timing of the corporation tax charge ii) Changes to accounting disclosures with no direct impact on tax payable

37 Tax implications of FRS 102 Changes that may impact on quantum or timing of tax charge

38 Investment property No immediate tax impact of revaluing investment properties under FRS 102 However, consider impact of holding investment property on eligibility for Entrepreneurs Relief and / or Business Property Relief If necessary, restructuring will be required to remove investments from the group to ensure continuing eligibility for these tax reliefs

39 Intangibles and goodwill Generally tax relief is available on the amortisation / impairment of goodwill and intangibles Changes in accounting under FRS 102 could accelerate or defer tax relief Consider impact of transitional adjustments impairments and / or write ups needed to bring accounts in line with FRS 102 will be taxable / deductible unless a fixed election has previously been made

40 Financial instruments FRS 102 is likely to require more financial instruments to be accounted for at fair value The loan relationships legislation generally taxes profits and losses on financial instruments (with some exceptions) regardless of whether the debit or credit is booked through the P&L or taken directly to reserves, changes in equity etc. Complex rules are currently under consultation so may change

41 Government grants Recognition criteria is moving from an accruals model to a performance model Grant income is generally taxed in line with the accounting treatment, so changes in accounts recognition will impact on timing of tax liability

42 Employment costs Holiday pay accrual - Tax treatment will normally follow accounts Pension schemes - Deductions on a paid basis - Auto enrolment EBTs - Complex tax treatment, deductions normally only allowed when taxable benefits are paid out to employees

43 Tax implications of FRS 102 Changes to tax accounting and disclosure requirements

44 Revaluations With FRS 19, deferred tax would not have been recognised on revaluations of property, plant, equipment or investment properties unless there was a binding commitment to dispose of the asset. FRS 102 instead requires deferred tax to be recognised on all timing differences whether arising within the profit or loss account or not.

45 Business combinations Changes from the introduction of FRS 102 mean more intangibles (separate to goodwill) will be recognised on the balance sheet. Deferred tax will need to be recognised on these acquired intangibles.

46 Investment in subsidiaries Deferred tax will need to be recognised on timing differences where income (or losses) from a subsidiary, associate, branch or share of a joint venture is recognised in the financial statements but will not be taxable until a future financial period. - This differs from existing practice where tax was only accrued on dividends where there was a binding commitment to remit them to the parent and is likely to result in the recognition of additional deferred tax liabilities.

47 Changes to the tax note FRS 19 requires a reconciliation of pre tax income multiplied by the tax rate, whereas FRS 102 requires a reconciliation to total tax - Timing differences will therefore no longer represent reconciling items An estimate of net deferred tax reversals expected to occur in the following financial year will need to be disclosed. - The aim of this is to give users of the accounts a clearer view of the cash flows surrounding deferred tax.

48 Preparing for the change

49 Approach Planning Diagnostics review Information gathering Systems and software Timetable Roles and responsibilities

50 Transition Date Date of transition FRS102 reporting date 1 Jan Dec Dec 2015 Current UK GAAP FRS102

51 Reconciliaton Date of transition FRS102 reporting date 1 Jan Dec Dec 2015 Profit Balance sheet

52 Approach Execution Opening balance sheet conversion Comparative period P&L conversion Disclosures Exemptions Reporting

53 Example 1 Capital and reserves reconciliation

54 Example 2 Profit and loss reconciliation

55 Areas for early consideration Fixed asset values Fair value at deemed cost Financial instruments Forward contract valuations Acquisition planning No need to restate post transition date acquisitions Holiday accrual calculation

56 Summary Transition date Do you have sufficient in-house resources What might affect my transition balance sheet that I need to think about now? Any changes to systems required? Plan for the change - talk to your service team now!