CCH Transition Guide. FRS 102 and FRS 105. Anne Cowley ACA and Paul Davies ACA, Wolters Kluwer

Transcription

1 CCH Transition Guide FRS 102 and FRS Anne Cowley ACA and Paul Davies ACA, Wolters Kluwer

2 Preface FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland has now been in publication for four years, albeit that it only took effect in 2015 and has seen several updates some more signi cant than others in that time. By now, most large and medium-sized UK companies have completed their transition processes and adopted the standard in full. Indeed, the rst sets of FRS 102 accounts have now started to ow in, meaning that we can start to see how these companies are tackling transition and the requirements of the standard in practice. Meanwhile, small entities are in the process of adopting FRS 102, with or without the optional reduced disclosures available in Section 1A, for the rst time. While able to bene t from the minimal mandatory disclosure requirements set out in Section 1A, the full recognition and measurement requirements of FRS 102 otherwise apply. Those companies small enough to qualify as micro-entities can alternatively adopt FRS 105 The Financial Reporting Standard Applicable to the Micro-Entities Regime, a much simpli ed standard in terms of accounting and disclosure. In this revised transition guide, we therefore turn our focus to the transition challenges faced by small companies adopting FRS 102 (with or without Section 1A) for the rst time and by microentities opting to apply FRS 105. The guide takes a holistic and eminently practical approach to the transition process, looking not only at the accounting and tax implications but also the wider business considerations, all of which are illustrated in a fully worked case study. This product is now owned and updated by our in-house technical experts at Wolters Kluwer and we extend our thanks to Bill Telford for his excellent work in writing and updating this product in previous years. Anne Cowley ACA Paul Davies ACA May 2017 v

3 Preface Page v Section 1 Transition Guide: framework and scope Framework and scope Transition to a new GAAP A note on terminology Structure of this guide and approach adopted 6 Section 2 Consider the wider effects of transition Taxation Deferred taxation Employment costs and the impact on pro t related pay, bonuses, etc Distributable pro ts Banking covenants Increasing balance sheet total Be time conscious 14 Section 3 Identify which GAAP you are transitioning to (Step 1) The project plan Selecting the standard to apply International Financial Reporting Standards (IFRS) FRS 101 Reduced Disclosure Framework FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland FRS 105 The Financial Reporting Standard Applicable to the Micro-Entities Regime Transition Ltd 25 Section 4 Identify rst reporting date and the date of transition under new GAAP (Step 2) Identifying the key dates First reporting date Transition date Postponing transition Early transition Tax-related transition considerations Transition Ltd 30 Section 5 Recognition and measurement principles in FRS 102 and FRS De nitions Recognition of assets and liabilities Measurement of assets and liabilities Fair value considerations Present value and discounted cash ows 35 Section 6 Decide on the form and content of nancial statements (Step 3) Old UK GAAP or FRS 102 terminology? One or two statement approach to the income statement? Is a cash ow statement required? 43 vii

4 6.4 Is a statement of changes in equity (SOCE) or statement of income and retained earnings (SOIRE) required? Are group accounts to be prepared? Transition Ltd 46 Section 7 Identify relevant sections of new GAAP (Step 4.1) General principles The checklists Transition Ltd 48 Section 8 Consider the accounting policy choices (Step 4.2) Investments in subsidiaries, associates and joint ventures The cost or valuation model PP&E and intangible assets Development costs Financial instruments Designation of certain debt instruments Hedging Financial guarantee contracts Government grants Borrowing costs Use of a presentation currency Biological assets Transition Ltd 54 Section 9 Consider the exemptions available on transition (Step 4.3) Exceptions vs exemptions Mandatory exceptions Optional exemptions Impracticable restatement Transition Ltd 65 Section 10 Review agreements, contracts and other issues which may need to be amended (Step 5) Leases Employee bene ts Financial instruments Functional currency Transition Ltd 72 Section 11 Restate the transition-date balance sheet (Step 6) Restating the balance sheet Dealing with errors Transition Ltd 74 Section 12 Restate the comparative gures (Step 7) Transition Ltd 77 Section 13 Prepare draft gures for the rst year of new GAAP (Step 8) Transition Ltd 79 Section 14 Prepare the tax computations (Step 9) Tax transitional adjustments Transitional adjustments for trading income general rules Transitional adjustments for trading income special rules 83 viii

5 14.4 HMRC guidance Transition Ltd 84 Section 15 Finalise new GAAP nancial statements (Step 10) Provide the explanation and reconciliations required by FRS Section 16 Supplementary guidance for groups Requirements for group accounts What is a subsidiary? Acquisition accounting General prohibition on the use of merger accounting Classi cation and treatment of non-controlling interest Business combination achieved in stages Changes in parent s ownership Associates (Section 14 of FRS 102) Interests in joint ventures (Section 15 of FRS 102) 94 Section 17 Supplementary guidance for specialised activities Specialised activities under old UK GAAP and FRS SORPs and FRS Public bene t entities Agriculture Specialised activities and transition 99 Section 18 Case study: Transition Ltd Note Note Freehold properties Investment properties Plant and machinery Investments Stocks Debtors Creditors due within one year Current taxation Creditors due after more than one year Financial instruments Taxation Dividends 104 Section 19 Transition Ltd restatement of balance sheet at the date of transition and at 31 December Approach to transition Freehold property Investment property Plant and machinery Investments Stock and work in progress Debtors Financing transactions Foreign exchange debtors and forward currency contracts Bank and cash Creditors due within one year 117 ix

6 19.12 Current taxation liability Creditors due after more than one year Provision for deferred tax Share capital Revaluation reserve freehold property Revaluation reserve investment property Retained earnings Restated balance sheets 123 Section 20 Transition Ltd restatement of pro t and loss account for year ended 31 December Turnover Cost of sales Administration costs Interest payable Finance income Fair value adjustments pro t and loss account Current taxation pro t and loss account Deferred taxation pro t and loss account Revaluation gain on freehold property included in OCI Revaluation gain on investment property included in OCI Current tax in other comprehensive income Deferred tax in other comprehensive income Restated pro t and loss account and statement of comprehensive income for the year ended 31 December Reconciliation of movements in equity for the year ended 31 December 2015 as restated 128 Section 21 Transition Ltd rst year under FRS Transition Ltd Adjustment income/expense computation 130 Section 22 Transition Ltd nancial statements for the year ended 31 December 2016 (extracts) Balance sheet Statement of comprehensive income (two statement approach) Statement of changes in equity Reconciliations 134 APPENDICES Appendix 1 Transition Ltd project plan 137 Appendix 2 Application of FRS Appendix 3 FRS 102 accounting choices 145 Appendix 4 FRS 102 transition exemptions 147 Appendix 5 Application of FRS Appendix 6 FRS 105 transition exemptions 153 Appendix 7 Example accounts 155 A7.1 About the example accounts 155 A7.2 Unaudited accounts of Simpli edco Ltd under FRS 102, Section 1A 156 A7.3 Unaudited accounts of Micro Company Ltd under FRS INDEX 171 x