Welcome FRS 102 CIMA Webinar December 2014 Presented by: Adrian Gibbons BSc ACA 0845 450 5555 www.swat.co.uk Making your practice compliant, efficient and profitable Contents The Reporting Framework 2015 & 2016 FRS 102 Overview FRS 102 Section 3 Financial Statements FRS 102 Section 5 Statement of Comprehensive Income FRS 102 Section 6 Changes to Equity FRS 102 Section 7 Cash Flows 2 Contents FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill 3 1
Contents The Reporting Framework 2015 & 2016 FRS 102 Overview FRS 102 Section 3 Financial Statements FRS 102 Section 5 Statement of Comprehensive Income FRS 102 Section 6 Changes to Equity FRS 102 Section 7 Cash Flows 4 Accounting Framework NOW Small Co FRSSE Med & Large Co SSAPs & FRSs Micro Page 3 5 Accounting Framework NOW Small Co FRSSE Small Company Limits Med Turnover & < Large 6.5M Co Gross Assets< 3.26M EEs < 50 SSAPs & FRSs Micro Page 3 Micro Entity Limits Turnover < 632K Gross Assets < 316K EEs < 10 6 2
Micro Accounting Framework 1/1/ 2015 Small Co Medium & Large Co FRSSE 2015 Micro entity bits FRSSE 2015 FRS 102 Page 4 7 Micro FRSME Based on FRS 102 Accounting Framework 1/1/2016 Small Co Medium & Large Co FRS 102 Reduced disclosure Page 4 8 Micro FRSME Accounting Framework 1/1/2016 Small Co Medium & Large Co Small Company Limits Turnover < 10.2M Gross Assets < 5.1M EEs < 50 FRS 102 Reduced disclosure Page 4 9 3
A Basic Balance Sheet Property Plant & Equipment Stock & WIP Trade Receivables Trade Payables Ordinary Loans Slide Only 10 Contents The Reporting Framework 2015 & 2016 FRS 102 Overview FRS 102 Section 3 Financial Statements FRS 102 Section 5 Statement of Comprehensive Income FRS 102 Section 6 Changes to Equity FRS 102 Section 7 Cash Flows 11 FRS 102 The Financial Reporting Standard Applicable in the UK & Republic of Ireland Issued March 2013 - Updated August 2014 (Further Update 2015?) AP beginning on or after 1 January 2015 Page 6 12 4
FRS 102 - Formats Topic by sections Public benefit entities Prefix PBE Some sections have implementation guidance Page 6 13 FRS 102 Transition Rules UK GAAP FRS 102 FRS 102 Section 35 Page 6 14 Contents The Reporting Framework 2015 & 2016 FRS 102 Overview FRS 102 Section 3 Financial Statements FRS 102 Section 5 Statement of Comprehensive Income FRS 102 Section 6 Changes to Equity FRS 102 Section 7 Cash Flows 15 5
Section 3: Financial statement presentation An entity may use titles for the financial statements other than those used in this FRS as long as they are not misleading CA 06 Headings Page 7 16 Section 3: Financial statement presentation Accounts must say that they comply with FRS 102 Explicit & Unreserved This would be Note 1 after the primary statements Page 7 17 Section 3: Complete set of Financial Accounts Either Single statement of comprehensive income Or Income statement & statement of other comprehensive income A statement of financial position at the reporting date Page 9 18 6
Section 3: Complete set of Financial Accounts Cash flow Notes Compliance with FRS 102 Significant accounting policies Other information Each statement must have equal prominence Page 10 19 Contents The Reporting Framework 2015 & 2016 FRS 102 Overview FRS 102 Section 3 Financial Statements FRS 102 Section 5 Statement of Comprehensive Income FRS 102 Section 6 Changes to Equity FRS 102 Section 7 Cash Flows 20 Section 5: Example AB Limited Single Statement Page 12 21 7
Section 5: Example AB Limited Single Statement Page 12 22 Section 5: Example AB Limited Two statements Page 13 23 Section 5: Example AB Limited Two Statements Page 13 24 8
Section 5: Exceptional Items Exceptional not used No explicit requirement to disclose on the face of the statement of comprehensive income FRS 102 Requirement to disclose material items Page 15 25 Contents The Reporting Framework 2015 & 2016 FRS 102 Overview FRS 102 Section 3 Financial Statements FRS 102 Section 5 Statement of Comprehensive Income FRS 102 Section 6 Changes to Equity FRS 102 Section 7 Cash Flows 26 Section 6: Changes in equity & statement of income & retained earnings Statement of changes in equity presents: Profit or loss for the period Other comprehensive income for the period Changes in accounting policies Material errors Investments by and dividends & other distributions to shareholders Page 16 27 9
Section 6:Example Page 17 28 Section 6:Example Page 17 29 Section 6: Statement of income & retained earning Simplified statement to replace full statement of changes in equity Used if the only changes are: Profit or loss for the period Payment of dividends PYA Combines the statement of income with the retained earnings statement Page 17/18 30 10
Section 6: Statement of income & retained earning Example Page 18 31 Section 6: Statement of income & retained earning Example Page 19 32 Contents The Reporting Framework 2015 & 2016 FRS 102 Overview FRS 102 Section 3 Financial Statements FRS 102 Section 5 Statement of Comprehensive Income FRS 102 Section 6 Changes to Equity FRS 102 Section 7 Cash Flows 33 11
7. Statement of cash flows FRS 102 FRS 1 Operating activities Net cash inflow from operating activities Taxation Equity dividends paid Investing activities Ret. on investments & servicing of finance Capital expenditure & financial investment Acquisitions and disposals Financing activities Financing Equity dividends paid Ret. on investments & servicing of finance Page 19/20 34 7. Statement of cash flows Cash and cash equivalents Page 20 35 7. Statement of cash flows Direct or indirect methods allowed Need to convert cash flow statement for prior year on conversion Other key points: Disclosure of cash unavailable for use with management commentary No reconciliation of movement in cash to movement in net debt Page 20/21 36 12
Contents FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill 37 Transitional Arrangements UK GAAP FRS 102 FRS 102 Sec 35 Page 22 38 First time adoption of FRS 102 Mandatory for Accounting Periods starting on or after 1 January 2015 Section 35 Applies to the first accounts on which the entity makes an explicit and unreserved statement of compliance with FRS 102 Page 22 39 13
First time adoption of FRS 102 Transition date Start of the previous period for the comparatives Page 23 40 Example Entity X Limited UKGAAP to FRS 102 Y/E 31 December 2015 Transition date 1 January 2014 Page 23 41 Para 7 Section 35 FRS 102 Opening statement of position Measures all assets & liabilities in accordance with FRS 102 Page 23 42 14
Para 7 Section 35 FRS 102 Some assets and liabilities may have different values under FRS 102 when compared to the old accounting treatment Page 23 43 Para 7 Section 35 FRS 102 Example Investments at cost may need to be valued at fair value Deferred tax will be needed for any asset that has been revalued Page 23 44 Entity X Limited Deferred Tax Adjustment Property revalued under FRS 15 Has a revaluation reserve Deferred tax now needs to be recognised on the revaluation gain Page 23 45 15
Entity X Limited Deferred Tax Adjustment Must account for the deferred tax at the transition date 1 January 2014 Dr Revaluation Reserve Cr Deferred Tax Provision Page 23/24 46 Entity X Limited Fair Value Adjustment Forward Foreign Exchange contract 12 November 2013 Purchase 220K euros at 1.1 Dated 12 February 2014 Not recognised under UKGAAP Page 24 47 Entity X Limited Fair Value Adjustment Under FRS 102 this needs to be valued at the transitional date at fair value Bank Fair Value 1 January 2014 = 20K Transitional TB will need to recognise the new asset at 1 January 2014 What is the tax impact of this? Page 24 48 16
Change of Accounting Policy Practical Issues Accounting software may not cope with the PYA The preparation of the accounts for the first FRS 102 period may take longer and cost more Directors need to plan in advance for the impact of FRS 102 Page 24 49 Disclosures An entity must explain how the transition from current UKGAAP to FRS 102 has affected its reported financial position Three reconciliations are required Page 25 50 Disclosures An equity reconciliation At the transitional date and At the end of the last period to be prepared under the old UKGAAP Page 25 51 17
Disclosures A profit & Loss account reconciliation for the last period completed under the old UKGAAP Examples of this disclosure are given later Page 25 52 Disclosures X Limited Y/E 31 December 2015 Equity reconciliation s as at I January 2014 & 31 December 2014 P&L account reconciliation Y/E 31 December 2014 Page 25 53 Prohibition on Retrospective Restatement Section 35 has 5 areas where retrospective adjustment to previous transactions are not permitted on transition Page 26 54 18
Prohibition on Retrospective Restatement Accounting Estimates Any changes to accounting estimates should not trigger any PYA Page 27 55 Accounting Estimates Example 31 December 2013 X Limited Large debtor = 100K Provision made for 50K Summer 2014 the debtor goes bust Page 27 56 Accounting Estimates Example At the transitional date of 1 January 2014 Should a full provision be made as the entity now knows that 50K is not adequate? No no retrospective adjustment to an estimate is permitted Page 27 57 19
Exemptions from recognition or remeasurement of assets and liabilities 17 exemptions Entities may choose not to re-measure some assets or liabilities At the transitional date Transactions after this date may need to be re-stated Page 28 58 Exemptions from recognition or remeasurement of assets and liabilities Dormant companies May elect to retain its accounting policies for reported assets, liabilities and equity at the date of transition Only adopt FRS 102 when those balances change or no longer dormant Page 28 59 Exemptions from recognition or remeasurement of assets and liabilities Associates, Joint Ventures, Business Combinations Can elect not to apply Section 19 to business combinations effected before the date of transition Particularly relevant to fair values and goodwill A B C D E F Page 29 60 20
Example X Limited X Limited made an acquisition during 2013 Y/E 31 December 2013 Fair value based on old UKGAAP Goodwill has a life of 10 years A New Business D B E C F Page 29 61 Example X Limited Y/E 31 December 2015 No need to restate fair values as at 1 January 2014 as section 19 does not need to be applied Must consider if 10 years is a reliable estimate for goodwill If not must use 5 years from the transitional date Page 29 62 Example X Limited If the acquisition had been made after 1 Jan 2014 Need to consider the fair values under FRS 102 Adjust both the 2014 and 2015 year end results Goodwill could be over 10 years if reliable estimate if not then 5 years But may become 10 years in 2015 Page 30 63 21
Example X Limited This exemption only applies to goodwill Other intangibles are dealt with under Sec 19 no exemption here Page 30/31 64 Exemptions from recognition or remeasurement of assets and liabilities Fixed Assets Deemed Cost Property, plant & equipment Investment properties Some intangible assets active market fair value Page 31 65 Exemptions from recognition or remeasurement of assets and liabilities Deemed cost Fair value Old UKGAAP revaluation Before or on the date of transition Deferred tax will be needed as well Page 31 66 22
X Limited - Example 31 December 2000 Adopted a policy of revaluation of property At this stage they have one property Cost = 50K 2000 value = 1.2M Page 32 67 X Limited - Example During 2008 the directors decided that the revaluation policy was onerous and not worth the cost But unable to change without going back to historical cost 31 December 2013 value = 1.65M Page 32 68 X Limited - Example FRS 102 gives directors the option to go back to cost 1.65M can be used as the deemed cost at 1 Jan 2014 Revaluation reserve stays and is used to reduce depreciation Deferred tax issue Page 32 69 23
X Limited - Example Expensive machines These can be revalued and this used as deemed cost under FRS 102 transitional rules Two options Revalue the machines and then use deemed cost Fair value at 1 January 2014 when adjusting to FRS 102 Page 32 70 Exemptions from recognition or remeasurement of assets and liabilities Exemptions relating to Leases Leases can be assessed according to the terms and conditions existing at the transitional date Page 34 71 Leases Example X Limited 20 year lease 1 January 2012 Periodic reviews every 5 years for rent Lease incentive is spread over 5 years Under FRS 102 the lease incentive is spread over 20 years Page 34 72 24
Leases Example The exemption allows X Limited to choose It can continue with the 5 year incentive policy or apply FRS 102 and move to 20 years Page 34 73 Exemptions from recognition or remeasurement of assets and liabilities Share-based payment transactions Some exemptions from section 26 if the equity instruments are granted before the transition date Not relevant to UKGAAP but would be useful for companies that are going from the FRSSE to FRS 102 May be highly relevant under FRS 102 Lite Page 35 74 DISCLOSURE OF TRANSITIONAL ISSUES AND ADJUSTMENTS 75 25
Reconciliation disclosure under FRS 102 No examples or guidance on layout in FRS 102 The notes give an example reconciliation for X Limited using the information presented on X Limited so far Transition date = 1 January 2014 Page 35 76 Page 36 77 Page 21 78 26
Notes The example solution also presents the notes to the reconciliations that explains the change in accounting policy Tax impact of this on the corporation tax computation? Page 37/38 79 Format 2 Page 38 80 Format 2 Page 39 81 27
Contents FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill 82 Other Contracts Excluded Sale of a non-financial items such as a commodity, inventory or property plant and equipment are excluded from Section 12 Thus a contract to buy a property at a date in the future (off plan sale) is not a treated as a financial instrument under this section Page 41 83 Other Contracts Excluded Example Farming Client Sells his wheat forward under a commodity contract not a financial instrument Grants an option to a purchaser to buy wheat at some date in the future the option could be traded for cash under the options market is a financial instrument Slide Only 84 28
Financial Instruments Section 11 & 12 should be considered together All clients should be reviewed and their financial instruments classified as either basic or other Some financial instruments are currently not recognised under UK GAAP so care is needed Page 41 85 Recognition & Measurement The entity must become a party to the contractual provisions of a financial instrument It then recognises a financial asset or a financial liability Page 42/43 86 Initial Recognition Recognised at Fair Value Fair Value = transaction price Page 43 87 29
Subsequent measurement Section 12 Financial Instruments Fair Value through profit or loss Page 43 88 Subsequent measurement Exceptions Equity instruments that are not publically traded and fair value cannot otherwise be reliably measured Cost less impairment Hedging instruments which are in a designated hedging relationship Page 43 89 What is Fair Value? A quoted price for an identical asset in an active market Price of a recent transaction for an identical asset provided no significant change to economic circumstances A valuation method Page 44 90 30
Example Forward Foreign Currency Page 47/48 91 Example Forward Foreign Currency Accounting for the financial instrument at initial recognition and at the year end Page 48 92 Example Forward Foreign Currency The order is placed for the asset so the liability to pay is recognised Page 48 93 31
Example Forward Foreign Currency Settlement of the creditor and realisation of the forward foreign exchange contract Page 48 94 Example Forward Foreign Currency Realisation of the forward foreign exchange contract gain on the transaction Page 48 95 Example Forward Foreign Currency Under old UK GAAP how would the transaction have been dealt with? The purchase of the asset would have been at the rate in the forward foreign exchange contract Slide Only 96 32
Example Forward Foreign Currency This transaction would have been at Euro 1.5 to 1 Thus the value of the asset would have been 333. Under FRS 102 this shows an uplift in the asset value of 17 Slide only 97 Example Forward Foreign Currency Under FRS 102 the same movement is recognised through the profit and loss account: Fair value gain to year end = 3 Fair value gain at payment = 34 Total value of FI = 37 Loss on payment for asset = ( 20) Net gain over the transaction = 17 Slide only 98 Directors personal guarantees Are these a financial instrument? No The company is not a party to this agreement The agreement is a related party transaction and should be disclosed Page 49 99 33
Contents FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill 100 FRS 102 Deferred Tax The changes to Deferred Tax will have a significant impact on most clients under FRS 102 FRS 102 adopts the deferred tax plus approach Page 50 101 Deferred Tax Basic Principle The recognition of future tax consequences of transactions and events reported in the current years financial statements Timing differences Tax equalisation account Matching concept Page 51 102 34
FRS 102 Section 29: Income Tax Covers Current tax charge Deferred tax charge VAT (was SSAP 5) Adopts the same basic principle as FRS 19 regarding deferred tax Page 51 103 FRS 19 Fixed Assets Exemption No deferred tax on a valuation unless Binding agreement to sell & Recognised gains or losses are expected to arise on sale Page 53 104 FRS 19 Fixed Assets Exemption No deferred tax on a valuation unless Binding agreement to sell & Recognised gains or losses are expected to arise on sale Para 29.15 Sec 29 Outlaws this exception Deferred tax calculated using tax rates & allowances that apply to the sale of the asset Page 53 105 35
Investment Property Example Year end 31 December 2015 Investment property valued at: December 2015 = 110K December 2014 = 100K 1 Jan 2014 = 95K The property was purchased December 2000 for 50K The companies tax rate is 20% Page 54 106 Transitional Date Adjustment Tax on the gain at the transitional date Cost = 50,000 Indexation = 23,600 (indexation allow.472) Adjusted base cost = 73,600 Gain = 21,400 Tax @ 20% = 4280 Page 54 107 Transitional Date Adjustment Deferred tax at transitional date would be = 4280 Adjustment 31 December 2014 95K to 100K = 5K x 20% Deferred tax = 1K Page 54 108 36
Year ended 31 December 2014 Balance at 31/12/2014 = 5280 Profit & Loss Account to 31/12/2014 Gain on investment property = 5K Deferred tax on gain = ( 1k) Page 54 109 Year ended 31 December 2015 Balance Deferred tax 31/12/15 = 7280 Profit & Loss Account Gain on investment property = 10K Deferred tax on gain = ( 2K) Page 54 110 Permanent & Temporary Differences Deferred tax is not provided on permanent timing differences Temporary differences Accelerated capital allowances Accrued pension liabilities Intra-group profits Page 55 111 37
Contents FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill 112 Section 19 Business Combinations & Goodwill Accounting treatment for all business combinations except: Joint Ventures Section 15 Acquisitions of a group of assets that are not a business Public Benefit Entities Section 34 Page 60 113 Accounting Treatment for Goodwill Goodwill Cost Value of assets, liabilities and contingent liabilities as valued under this section Page 61 114 38
Accounting Treatment for Goodwill Subsequent Accounting Treatment Goodwill has a finite useful life Amortised on a systematic basis If the entity cannot make a reliable estimate of the UEL then goodwill shall be written off over not more than 5 years Page 61 115 This course was: FRS 102 CIMA Webinar December 2014 Presented by: Adrian Gibbons BSc ACA 0845 450 5555 www.swat.co.uk Making your practice compliant, efficient and profitable 39