FRS 102: NEW UK GAAP How To Make Implementation Easy! OCTOBER 2014
2 French Duncan SEMINAR 6 OCTOBER 2014 Introductions Timetable Administration
3 French Duncan OVERVIEW New standards coming for accounting periods commencing 1 January 2015 UK Standards being aligned with international standards Full IFRS FRS 102 Listed Groups/other entities All other entities FRSSE likely to be incorporated within FRS 102 with reduced disclosures for qualifying companies consultation ongoing.
4 French Duncan TIMETABLE FOR CHANGE Indicative timetable for a 31 December reporter 2013 December 2014 December 2015 December Opening balance sheet (1 January 2014) Comparative year balance sheet (31 December 2014) Financial statements for the year ended 31 December 2015 First non-uk GAAP financial statements
5 French Duncan TIMETABLE FOR CHANGE Indicative timetable for a 31 March reporter 2014 March 2015 March 2016 March Opening balance sheet (1 April 2014) Comparative year balance sheet (31 March 2015) Financial statements for the year ended 31 March 2016 First non-uk GAAP financial statements
6 French Duncan FRS 102 THE BUSINESS IMPLICATIONS Loan covenant tests Bonus/share schemes Acquisition criteria/assessment Resource (Training)\Cost (Group structure) Financial instruments Distributable reserves (revaluations/pension scheme liabilities)
7 French Duncan HOW TO MAKE IMPLEMENTATION EASY! Focus on the key areas of change Fixed Assets Investment Properties Leases Goodwill Holiday Pay Pensions Grants Financial instruments Foreign Currency Intercompany loans
8 French Duncan KEY CHANGES FIXED ASSETS Depreciation year of purchase available for use Residual Values assess on current values Property, plant and equipment Transitional arrangements (valuation) Revaluation (sufficient regularity) Revaluation basis (fair value/existing use value) Capitalisation policy Depreciation- component approach Subsequent expenditure
9 French Duncan KEY CHANGES FIXED ASSETS Transition Example Facts Property A acquired on 31 December 1980 for 100,000. Revalued regularly, current value 150,000. Decision not to continue with a policy of revaluation Options: Elect to use the most recent revaluation ( 150,000) as it s deemed cost Restate to original cost 100,000
10 French Duncan KEY CHANGES INVESTMENT PROPERTIES Gains/losses on revaluation through P & L Provision for Deferred Tax The significant assumptions and methods used to determine fair value to be disclosed Group Properties (individual company accounts)
11 French Duncan KEY CHANGES INVESTMENT PROPERTIES Revaluation Example - Facts On 1 January 2015, the carrying amount of an investment property was 1.0m. An updated valuation of 1.6m is received on 31 December 2015. SSAP 19 Under SSAP 19, the gain of 0.6m would be recognised as follows: Dr Investment property 0.6m Cr Investment property revaluation reserve (STRGL) 0.6m The revaluation is transferred to a revaluation reserve. FRS 102 Under FRS 102, the gain of 0.6m would be recognised as follows: Dr: Investment property 0.6m Cr: Profit and loss 0.6m The revaluation is transferred to profit and loss
12 French Duncan KEY CHANGES INVESTMENT PROPERTIES (Example) Deferred Tax Profit and loss account (Current) 000 Rental 1,000 Operating Profit 400 Taxation* (80) PBT 320 FRS102 000 Rental 1,000 Operating Profit 1,000 Taxation* (200) PBT 800 STRGL Revaluation gain 600 Revaluation gain - Balance Sheet Net Assets 2,000 Net Assets 1,880 * Tax Rate 20%
13 French Duncan KEY CHANGES - LEASES Operating lease incentives - Straight line - Period (lease term) non-cancellable period Operating lease disclosures total future lease payments by years Classification - 90% test present value of minimum lease payments - Substantially all the risks and rewards of ownership Initial recognition (fair value/minimum lease payments)
14 French Duncan KEY CHANGES - LEASES Classification Example: Facts (specialist plant) Company A leases a bespoke piece of machinery from Company B. The machinery was constructed for use in Company A s specialist business, to its specification and is used in producing an item for which Company A holds the patent, so a third party would not legally be able to use the machinery without significant alteration. The lease is for a period of seven years and the expected useful life of the machinery is at least 10 years. The present value of the minimum future lease payments is 70% of the asset s fair value at inception. SSAP 21 The present value of the minimum lease payments is only 70% of the fair value of the asset at the inception of the lease, therefore, it may be classified as an operating lease. FRS 102 Under FRS 102, the lease would pass the condition set out in paragraph 20.5(e) (assets of specialised nature)and so would be classified as a finance lease.
15 French Duncan KEY CHANGES LEASES Lease Incentives Example: Facts Company A leases a property for 10 years with a market rent review at the end of year 5. At the outset of the lease the landlord agreed to a 2 year rent free period. The annual rental year 3 to 10 is 100,000 per annum. UITF 28 The lease incentive is allocated over the lease term on a shorter period ending on the date from which a market rental is payable normally the first break period/rent review in this case 5 years annual charge of 60,000 in year 1 to 5 and 100,000 thereafter. FRS 102 The incentive should be amortised over the period of the lease annual charge of 80,000 over 10 years.
16 French Duncan KEY CHANGES GOODWILL UEL not to exceed 5 years if no reliable estimate No indefinite useful life Goodwill/intangibles
17 French Duncan KEY CHANGES HOLIDAY PAY Example: Facts Employees of Company A are permitted 24 days annual leave which must be taken in the holiday year which commences on 1 April. Company A s financial year end is 31 December. At 31 December an employee, pro-rata is entitled to have taken 18 days holiday. Company A calculates from holiday records that outstanding holiday (i.e. holiday not taken from an allowance of 18 days) is 56 days for all employees at the same grade. Company A considers that it is appropriate to make an accrual for the 56 days outstanding holiday measured at the average salary per day. Overall impact On the date of transition to FRS 102, a new provision would be recognised for short-term employee benefits with a corresponding adjustment to opening retained earnings. In future years, assuming the annual holiday allowance, the pattern of holidays taken and holiday year remain constant, the movement in the provision from one year to the next will probably be limited.
18 French Duncan KEY CHANGES PENSIONS Defined benefit obligations - on one balance sheet in group scheme - independent actuary/annual valuation - profit/loss charge Multi employer schemes (funding agreement liability)
19 French Duncan KEY CHANGES GOVERNMENT GRANTS Performance model/accrual model SSAP 4 (Accrual model) The grant is deferred and shown as a liability. It is then released to the profit and loss account over the expected useful life of the related asset. Recognition of depreciation charge on the factory ( 600,000 / 50 years) Dr Depreciation (P&L) 12,000 Cr Fixed assets 12,000 Release the grant to the P&L ( 200,000 / 50 years) Dr Deferred grants 4,000 Cr P&L (grant income) 4,000 FRS 102 Performance model or accrual model Where the entity elects to apply the performance model, the whole grant is recognised in profit or loss immediately where there are no provisions requiring deferral of the grant received.
20 French Duncan KEY CHANGES FINANCIAL INSTRUMENTS BASIC Cash and bank accounts Trade and other accounts receivable/payable Loans from banks or other third parties Loans to and from group companies OTHER Options and forward contracts Interest rate swaps Investments in convertible debt Rights, warrants and future contracts AMORTISED COST INVOICE PRICE/NPV FAIR VALUE HEDGE ACCOUNTING PROVISIONS
21 French Duncan KEY CHANGES FOREIGN EXCHANGE Forward contracts are financial instruments Year end rate not contract rate Presentational currency Hedge accounting
22 French Duncan 1 KEY CHANGES FOREIGN EXCHANGE Example A UK entity sells goods to a US customer on 1 November 20X1. The invoice is for $100,000 for settlement in 3 months i.e. 31 January 20X2. On 1 November 20X1, the entity enters into a forward contract to sell $100,000 on 31 January 20X2 at a contracted rate of $1.62: 1. The entity has a 31 December year end. Details of GBP to USD exchange rates are below: Date Spot rate Forward rate 1 November 20X1 1.6 1.62 31 December 20X1 1.57 1.59 31 January 20X2 1.55 n/a
23 French Duncan 1 KEY CHANGES FOREIGN EXCHANGE Summary of impact on financial statements Year ended 31 Dec 20X1 SSAP 20 FRS 102 Profit and Loss Sales 61,728 62,500 FX Gain - 1,194 Loss on derivative - (1,165) 61,728 62,529 Balance sheet Debtors 61,728 63,694 Derivative liability - (1,165) 61,728 62,529
24 French Duncan 1 KEY CHANGES FOREIGN EXCHANGE Summary of impact on financial statements Year ended 31 Dec 20X2 SSAP 20 FRS 102 Profit and Loss Sales - - FX Gain - 822 Loss on derivative - (1,623) (801) Balance sheet Brought forward retained profit 61,728 62,529 Carried forward retained profit 61,728 61,728
25 French Duncan KEY CHANGES INTERCOMPANY LOANS Included within scope of section 11 Valued at the present value of the future payments discounted at a market rate of interest for a similar debt instrument (fixed repayment date) On demand at transaction cost (financing)
26 French Duncan KEY CHANGES INTERCOMPANY LOANS Example: Facts 1 January 20X1 an inter group loan of 10,000 is received, repayable on 31 December 20X2. Interest at 5%, market interest 10%. NPV of loan at 1 January is: Discount Cash flow NPV Year 20X1 0.9091 500 454 Year 20X2 0.8264 10,500 8,678 9,132 Amortised cost Interest (10%) Cash flow 31 December 20X1 9,132 913 ( 500) 9,545 20X2 9,545 954 ( 10,500) -
27 French Duncan KEY CHANGES OTHER AREAS Acquisitions Intangibles Prior period adjustments Presentational currency
28 French Duncan KEY CHANGES THE PROFIT AND LOSS ACCOUNT Fair values Depreciation Holiday pay Leases Foreign exchange Pension Charge Operating Profit EBITDA /X X Statement of Comprehensive Income (Statement of Income)
29 French Duncan KEY CHANGES CASH FLOW STATEMENT A cash flow statement prepared under FRS 102: reconciles the movement in cash and cash equivalents, not just cash; groups cash flows into fewer headings (i.e. cash flows from operating, investing and financing activities); reconciles profit to cash flows from operating activities starting from profit for the year rather than operating profit; and has fewer supporting notes.
30 French Duncan KEY CHANGES CASH FLOW STATEMENT FRS 1 Operating activities Dividends received Return on investments and servicing of finance Taxation Capital expenditure and financial investments Acquisitions and disposals Equity dividends paid Management of liquid resources Financing FRS 102 Operating activities Investing activities Financing activities
31 French Duncan KEY CHANGES CASH FLOW STATEMENT OPERATING ACTIVITIES INVESTING ACTIVITIES FINANCING Taxation Sale or purchase of goods Fixed Assets Acquisitions/disposals Share Capital, Loans Finance leases Interest paid Interest received Dividends paid Dividends received
32 French Duncan TRANSITION 31 December year end (31 December 2015) Restate opening balance at date of transition (1 January 2014) Restate comparative balance sheet (31 December 2014) Prepare reconciliation of equity at 1 January 2014 and 31 December 2014 Prepare reconciliation of profit or loss for year ending 31 December 2014
33 French Duncan TRANSITION Example Reconciliation of equity At 1 Jan 2014 At 31 Dec 2014 000 000 Capital and reserves (as previously stated) 2,678 2,807 Recognition of derivative financial instruments (2) 1 Re-measurement of stock using spot exchange rate - (1) Short-term compensated absences (5) (6) Capital and reserves (as restated) 2,671 2,801 Reconciliation of profit or loss for the year Year ended 31 Dec 2014 Profit for the year (as previously stated) 129 Recognition of derivative financial instruments 3 Re-measurement of stock using spot exchange rate (1) 000 Short-term compensated absences (1) Profit for the year (as restated) 130
34 French Duncan PRESENTATION/DISCLOSURES Balance sheet Statement of financial position Profit and loss account Income statement (under the twostatement approach) or statement of comprehensive income (under the single-statement approach) which would include the income statement and statement of comprehensive income being presented as one statement Statement of total recognised gains and losses Statement of comprehensive income Cash flow statement Statement of cash flows
35 French Duncan TERMINOLOGY Tangible assets Debtors Creditors Minority interests Capital and reserves Net realisable value Stock Interest payable and similar charges Interest receivable and similar income Property, plant and equipment Trade receivables Trade payables Non-controlling interests Equity Estimated selling price less costs to complete and sell Inventory Finance costs Finance income/investment income
36 French Duncan KEY CHANGES SORPs Charities Registered Social Landlords Further and Higher Education Investment Trust Companies and Venture Capital Trusts Pensions Limited Liability Partnerships
37 French Duncan CONCLUSION In summary
38 French Duncan QUESTIONS?
Contact us Glasgow 133 Finnieston Street, Glasgow, G3 8HB t +141 (0) 221 2984 Edinburgh 56 Palmerston Place, Edinburgh, EH12 5AY t +131 (0) 225 6366 f +141 (0) 221 2980 f +131 (0) 220 1041 And also: Kirkintilloch, Hamilton, Falkirk and Dumbarton Stirling Macfarlane Gray House Castlecraig Business Park, Stirling, FK7 7WT t +1786 (0) 451 745 f +1786 (0) 472 528 And also: Hamilton and Dumbarton This proposal is made by French Duncan LLP and is in all respects subject to the negotiation, agreement and signing of a specific contract/letter of engagement. French Duncan LLP, a limited liability partnership registered in Scotland SO00004. A list of partners is available for inspection at the registered office: 133 Finnieston Street, Glasgow, G3 8HB