FRS 102 CASE STUDY HOW TO CONVERT YOUR FINANCIAL STATEMENTS

FRS 102 CASE STUDY HOW TO CONVERT YOUR FINANCIAL STATEMENTS market leaders for financial training

Case Study This document represents the case study that is used during the presentation of the seminar: FRS 102 Case Study - How to Convert your Financial Statements It is subject to copyright law and should not be reproduced by any unauthorised person for their own use, selling on to a third person or for presentation to other people. UK Training (Worldwide) Limited 17 Duke Street Formby L37 4AN e-mail:info@uktrainingworldwide.com Telephone: 01704 878988 Facsimile: 01704 832124 UK Training (Worldwide) Limited

UK Training (Worldwide) Limited

Preface The purpose of this document is to illustrate the transition process from preparing financial statements in accordance with UK GAAP to preparing them in accordance with FRS 102. Part 1 on page 1 explains the content of the relevant UK GAAP financial statements and recognises twelve aspects to be considered during the process of converting from UK GAAP to FRS 102. Part 2 on page 19 illustrates how to retrospectively restate a UK GAAP balance sheet at the date of transition. Part 3 on page 47 illustrates how to retrospectively restate a UK GAAP balance sheet at the implementation date and how to also restate the accompanying UK GAAP profit and loss statement for the financial year ending on the implementation date. Part 4 on page 75 illustrates the contents of the first set of FRS 102 financial statements with the additional disclosures that need to be made explaining the transition. UK Training (Worldwide) Limited

UK Training (Worldwide) Limited

PART 1 - INTRODUCTION The pages that follow contain UK GAAP financial statements for UK Printing Ltd: Balance sheet as at 1st January 2014 being its date of transition; Profit and loss statement for year ending 31st December 2014; and Balance sheet as at 31st December 2014 being the closing balance sheet preceding the implementation date. Then there are 12 considerations to enable these UK GAAP financial statements to be converted to FRS 102 financial statements. Please note that for ease of illustration we have assumed a tax rate of 20% where appropriate. UK Training (Worldwide) Limited Page 1

The following is the UK GAAP balance sheet at the date of transition being 1st January 2014 for UK Printing Ltd Intangible fixed assets Goodwill 370,000 Tangible fixed assets Freehold 250,000 Plant and machinery 1,190,000 Investment property 800,000 Investments Investment in subsidiary 50,000 Listed investments 450,000 Fixed assets 3,110,000 Current assets Stocks 230,000 Debtors 180,000 Financial asset - derivatives Bank and cash 50,000 460,000 Creditors due within one year Trade creditors (110,000) Financial liabilities derivatives Current tax (100,000) (210,000) Net current assets 250,000 Total assets less current liabilities 3,360,000 Creditors due after more than one year Loans (50,000) Provisions Deferred tax (10,000) (60,000) Net assets 3,300,000 Financed by Share capital 800,000 Revaluation reserve - freehold property 50,000 Revaluation reserve - investment property 150,000 Profit and loss account 2,300,000 3,300,000 UK Training (Worldwide) Limited Page 2

The following is UK Printing Ltd s UK GAAP profit and loss statement for the year ended 31st December 2014 Turnover 1,200,000 Cost of sales (400,000) Gross profit 800,000 Administration costs (115,000) Operating profit 685,000 Finance income Interest payable (20,000) Value adjustments on financial assets and current asset investments Profit before tax 665,000 Current tax (120,000) Deferred tax (15,000) Taxation (135,000) Profit after tax 530,000 Statement of total recognised gains and losses Profit for the year 530,000 Other recognised gains and losses 90,000 Total recognised gains and losses for the year 620,000 UK Training (Worldwide) Limited Page 3

The following is the UK GAAP balance sheet at the end of the year before the implementation date of 1st January 2015 for UK Printing Ltd Intangible fixed assets Goodwill 310,000 Tangible fixed assets Freehold 300,000 Plant and machinery 1,290,000 Investment property 840,000 Investments Investment in subsidiary 50,000 Listed investments 450,000 Fixed assets 3,240,000 Current assets Stocks 250,000 Debtors 200,000 Financial asset - derivatives Bank and cash 55,000 505,000 Creditors due within one year Trade creditors (130,000) Financial liabilities derivatives Current tax (120,000) (250,000) Net current assets 255,000 Total assets less current liabilities 3,495,000 Creditors due after more than one year Loans (50,000) Provisions Deferred tax (25,000) (75,000) Net assets 3,420,000 Financed by Share capital 800,000 Revaluation reserve - freehold property 100,000 Revaluation reserve - investment property 190,000 Profit and loss account 2,330,000 3,420,000 UK Training (Worldwide) Limited Page 4

Consideration 1 The background to the acquisition of Blueprint Blueprint was acquired as an unincorporated entity at the end of 2012. At the time of the acquisition goodwill was calculated in accordance with FRS 7 as the difference between the cost and identifiable net assets. The value of this goodwill was recorded as 250,000 and the directors made a reliable estimate of its expected useful life as five years. Based upon this the goodwill has been amortised at a rate of 50,000 per year with the net book value being 200,000 at 31st December 2013 and 150,000 at 31st December 2014. The directors have the option of restating the business combination under Section 19 of FRS 102 or continuing with the previous accounting treatment. The directors are happy with the initial assessment of the useful life of goodwill and, if they choose not to restate, no adjustments are required. The directors are considering the option of restating the value of goodwill at the time of acquisition on the basis that had FRS 102 been in operation the order book of Blueprint could have been treated as a separate intangible asset of 150,000. To do this as a retrospective adjustment there is a need to restate the value of goodwill at the time of acquisition as 100,000 being the original goodwill of 250,000 less the value of the order book of 150,000. The consequences are: the goodwill of 100,000 should now be amortised at a rate of 20,000 per year with the net book value being 80,000 at 31st December 2013 and 60,000 at 31st December 2014; and the value of the order book of 150,000 should be written down to nil at 31st December 2013. A further consideration is the impact upon the tax liability at 31st December 2013 and at 31st December 2014. FRS 102 does not permit the inclusion of internally generated intangible assets on the balance sheet such as brands, logos, publishing titles or customer lists. Actions At 1st January 2014 At 1st January 2014 At 1st January 2014 At 1st January 2015 Adjust the UK GAAP balance sheet to transfer the value of the order book of 150,000 out of goodwill to a separate intangible asset. Adjust the UK GAAP balance sheet to write off the value of the order book. Adjust the UK GAAP balance sheet to write back 30,000 of Blueprint s goodwill that had been amortised prior to January 2014. Adjust the UK GAAP balance sheet to write back a further 30,000 of Blueprint s goodwill that had been amortised during the year ending 31st December 2014 and make a corresponding adjustment to the profit and loss statement for that year. See page 20 See page 22 See page 24 See page 50 UK Training (Worldwide) Limited Page 5

Consideration 2 The background to value of land and buildings In accordance with FRS 15, UK Printing Ltd s accounting policy has been to revalue land and buildings every five years. Freehold property that cost 200,000 was revalued at 31st December 2009 as 250,000 and at 31st December 2014 as 300,000. The directors estimate that the fair value of the property at 31st December 2013 is 260,000 and at 31st December 2014 is 300,000. Realistically the company has two choices at the date of transition: 1. Adopt the revaluation model, using fair value which is the directors estimate of 260,000; 2. Adopt the cost model, using the transitional exemptions in section 35 they can use fair value at the date of transition or the previous SAAP valuation of 250,000 as the deemed cost. Given the past practice of regular valuations it is reasonable to assume that UK Printing Ltd will continue to revalue sufficiently regularly to comply with FRS 102. The directors choose the revaluation model and recognise that there is no need to change the balance sheet valuation under FRS 102 from that under FRS 15. Therefore the freehold property can remain as 250,000 at 31st December 2013 as it is not materially different to the valuation on 31st December 2009 of 250,000. They also conclude that the valuation of the freehold property at 31st December 2014 is their fair value of 300,000. Deferred tax will need to be provided on the revaluation surplus of 50,000 as at 31st December 2013 and the increase in the revaluation surplus of 50,000 during the year ending 31st December 2014. Actions At 1st January 2014 At 1st January 2015 Adjust the UK GAAP balance sheet to reduce the revaluation reserve in respect of the deferred tax due on the gain on freehold property prior to 1st January 2014. Adjust the UK GAAP balance sheet to reduce the revaluation reserve in respect of the deferred tax due on the gain on freehold property during the year ending 31st December 2014 and make a corresponding adjustment to the profit and loss statement for that year. See page 26 See page 54 UK Training (Worldwide) Limited Page 6

Consideration 3 The background to the value of investment property Under SSAP 19 investment property is carried at market value. The directors consider that the fair value under FRS 102 would be the same as the market value under SSAP 19. There is no accounting policy choice for investment property under Section 16, FRS 102 - it must be included at fair value unless fair value cannot be obtained without undue cost or delay. There is a transitional exemption choice available. Section 35.10 (c) and (d) allow an entity to use fair value or a previous revaluation as deemed cost on transition. This is only likely to be relevant where fair value cannot be obtained without undue cost or effort. However, it is reasonable to assume that as it has been possible to obtain market value in the past it will be possible to obtain fair value without undue cost or effort. There is no need to change the balance sheet valuation under FRS 102 from that under SSAP 19 so the investment property can remain as 800,000 at 31st December 2013 and 840,000 at 31st December 2014. There are two changes required: (a) The previous revaluation gains carried in revaluation reserve are required to be transferred to retained earnings, and (b) Deferred tax needs to be provided on the revaluation surplus of 150,000 as at 31st December 2013 and the increase in the revaluation surplus of 40,000 during the year ending 31st December 2014. A further consideration is that commentators are recommending that entities demonstrate that the unrealised gain is not distributable and that this is done by transferring the gain to a non-distributable reserve via the Statement of changes in equity or by way of note. Actions At 1st January 2014 At 1st January 2015 Adjust the UK GAAP balance sheet to transfer the value of the gains on investment property of 150,000 from the revaluation reserve to the profit and loss account and provide for the deferred tax due on the gains. Adjust the UK GAAP balance sheet to transfer the value of the additional gain on investment property of 40,000 during the year ending 31st December 2014 from the revaluation reserve to the profit and loss account and provide for the deferred tax due on the gain. Also, make a corresponding adjustment to the profit and loss statement for that year. See page 28 See page 56 UK Training (Worldwide) Limited Page 7

Consideration 4 - The background to stocks It is still expected that stocks and work in progress are included at the lower of cost and net realisable value. FRS 102 17.5 states that spare parts and servicing equipment are usually carried as inventory and recognised in profit or loss as consumed but major spare parts and stand-by equipment should be treated as property or plant and equipment when an entity expects to use them during more than one period. Similarly if the spare parts and servicing equipment can be used only in connection with an item of property or plant and equipment then they should be considered property or plant and equipment. Included in stocks at 1st January 2014 are spare parts for a large printing machine which can only be used in that machine. The value of the spare parts is 40,000. Actions At 1st January 2014 Adjust the UK GAAP balance sheet to transfer the value of spare parts and servicing equipment of 40,000 from stocks to plant and machinery. See page 30 UK Training (Worldwide) Limited Page 8

Consideration 5 The background to the value of trade investments. Investments are carried at cost and at 1st January 2014 they consist of an investment in a wholly owned subsidiary, Europe Printing Ltd, of 50,000 and trade investments of 450,000. The company is not required to prepare group accounts as it qualifies as a small group. The net assets of Europe Printing Ltd at 31st December 2013 are 620,000 and at 31st December 2014 are 710,000 respectively. The directors of UK Printing Ltd consider that the fair value of the investment in the subsidiary at 31st December 2013 is 750,000 and at 31st December 2014 is 900,000. However FRS 102 does give you the option to continue to report the investment in the subsidiary at cost or fair value. In this instance the directors of UK Printing Ltd have taken the option to report this investment at cost. However FRS 102 does not give you the same options in respect of trade investments which could comprise both listed investments and investments in private companies. If they can be measured reliably you are expected to include them at fair value with gains and losses recognised in the profit and loss account. Where fair value cannot be measured reliably such investments should be carried at cost less impairment. In this instance the fair value of the listed investments at 31 December 2013 is considered to be 490,000 and at 31 December 2014 is considered to be 520,000. Therefore at 31 December 2013 you need to take account of the gain on revaluation of 40,000 and at 31 December 2014 you need to take account of the further gain on revaluation of 30,000 in the year ending 31 December 2014 along with need to account for deferred tax on the gain. Actions At 1st January 2014 At 1st January 2015 Adjust the UK GAAP balance sheet to increase the value of the listed investments by 40,000. Adjust the UK GAAP balance sheet to further increase the value of the listed investments by 30,000 in respect of the gain during the year ending 31st December 2014 and make a corresponding adjustment to the profit and loss statement for that year. See page 32 See page 58 UK Training (Worldwide) Limited Page 9

Consideration 6 - The background to errors. Due to an administrative error the client did not include stock held at an outside warehouse on 31st December 2013 and on 31st December 2014. The omitted stock is valued at the lower of its cost or net realisable value of the stock being 80,000. The omission of this stock clearly meets the definition of an error under FRS 102 FRS 102 10.21 requires the retrospective correction of material prior period errors in the first financial statements authorised for issue after its discovery by: (a) Restating the comparative amounts for the prior period(s) presented in which the error occurred; or (b) If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. Tax law relating to the correction of errors requires the invalid basis, the year in which the error occurred, to be corrected in that year with subsequent periods restated. As pointed out by the HMRC guidance on transition however, whether tax can be collected or repayments claimed is dependent on the time limits for making or amending self-assessments. The directors consider that the error is identified within the time limits and tax should be adjusted in the restated 2013 figures. Therefore the closing stock at 31st December 2013 should be increased by 80,000 with the amount net of tax increasing the profit and loss account. Additionally, the directors initial assessment of slow moving and obsolete stock at 31st December 2013 was understated by 65,000 as the directors underestimated the effects of the launch of a competitor s new faster low-cost model. The key question for UK Printing Ltd is whether the failure to include adequate provision was based on either a failure to use, or misuse of the available information. If it was, then this is an error which should be accounted for as with the omitted stock. The information available at the time the financial statements were authorised for issue was considered appropriate. The fact that it turned out to be less than required does not introduce the need to correct an error. It needs to be considered as a revision of an accounting estimate. The treatment of the revision of accounting estimates is the same under FRS 102 as under FRS 3, that is an adjustment needs to be made in the year that the revision is identified. The directors consider that this is the revision of an accounting estimate and therefore consider that there is no need to make an adjustment at 31st December 2013. Actions At 1st January 2014 Adjust the UK GAAP balance sheet to correct the error of 80,000 in respect of the understatement of the value of the stocks. See page 34 UK Training (Worldwide) Limited Page 10

Consideration 7 The background to long term debtors. UK Printing Ltd s normal credit terms are 30 days from delivery and installation. On 1st January 2013, UK Printing Ltd was approached by a client who wished to negotiate extended credit terms. The company agreed to sell goods at a price of 140,000 for settlement on 31st December 2015. The 2013 invoice value of 140,000 was recorded in the normal way without any consideration being given to it being a long term debtor. In the case of revenue recognition we need to consider the timing of all the cash flows and points of receipt related to the sales contract. In discounted cash flow terms UK Printing Ltd will receive 140,000 at the end of 3 years, being equivalent to 99,650 at the time of raising the invoice based upon an effective interest rate of 12%. Therefore over the 3 year agreement the invoiced price of 140,000 should be recorded under two income headings: (a) Sales turnover of 99,650 when the criteria for recognition are met; with (b) the remaining 40,350 being recorded as finance income in each of the 3 years for which the credit has been extended. Given that UK Printing Ltd has effectively over-recorded sales in 2013 by the finance income of 40,350, adjustments are necessary at 31st December 2013 and 31st December 2014. Using the 12% discount rate the finance income recognised will be 11,958 in 2013, 13,392 in 2014 and 15,000 in 2015. An alternative approach would be to leave the debtor at settlement amount and record the unearned income as deferred income. Actions At 1st January 2014 At 1st January 2014 At 1st January 2015 Adjust the UK GAAP balance sheet to reduce the value of the debtors by 40,350 in respect of the sales that should now be treated as finance income. Adjust the UK GAAP balance sheet to include in the debtors the finance income of 11,958 for the year ending 31st December 2013. Adjust the UK GAAP balance sheet to include in the debtors the finance income of 13,392 for the year ending 31st December 2014 and make a corresponding adjustment to the profit and loss statement for that year. See page 36 See page 38 See page 60 UK Training (Worldwide) Limited Page 11

Consideration 8 The background to lease incentives. UK Printing Ltd has two operating leases one that commenced on 1st January 2012 and another that commenced on 1st January 2014. The first lease is for 20 years with a rent review at the end of 5 years. As part of the agreement the first 3 years are rent free with the first annual amount of rent of 20,000 falling due in 2015. There is a break clause in the lease but the directors expect to stay in the property at least until the end of the lease. The second lease is for 10 years and on signing the lease UK Printing Ltd received an incentive of 15,000 from the landlord with the annual rent falling due from 2014. The lease incentives have been accounted for in accordance with UITF 28. The rent charge is included within administrative expenses and the balance sheet adjustments required by UITF 28 are included in creditors due within one year. The table below summarises the timings of the payment of the rent and the receipt of the incentive along with the accounting treatments that have been applied under UITF 28 and should be applied under FRS 102. Lease 1 Lease 2 Payments Charges to P & L Payments/ (net receipt) Charges to P&L Year UITF 28 FRS 102 UITF 28 FRS 102 2012 0 8,000 17,000 2013 0 8,000 17,000 2014 0 8,000 17,000 (5,000) 2,500 8,500 2015 20,000 8,000 17,000 10,000 2,500 8,500 2016 20,000 8,000 17,000 10,000 10,000 8,500 2017 20,000 20,000 17,000 10,000 10,000 8,500 2018 20,000 20,000 17,000 10,000 10,000 8,500 2019 20,000 20,000 17,000 10,000 10,000 8,500 2020 20,000 20,000 17,000 10,000 10,000 8,500 2021 20,000 20,000 17,000 10,000 10,000 8,500 2022 20,000 20,000 17,000 10,000 10,000 8,500 2023 20,000 20,000 17,000 10,000 10,000 8,500 2024 20,000 20,000 17,000 2025 20,000 20,000 17,000 2026 20,000 20,000 17,000 2027 20,000 20,000 17,000 2028 20,000 20,000 17,000 2029 20,000 20,000 17,000 2030 20,000 20,000 17,000 2031 20,000 20,000 17,000 Total 340,000 340,000 340,000 85,000 85,000 85,000 UK Training (Worldwide) Limited Page 12

You will note that there is a significant change in the treatment of lease incentives. Under UITF 28, the benefit is spread over the shorter of the lease term and the period to the date of the rent review at which the rent is expected to be reset to market rate. Also, UITF 28 requires the spreading of the benefits over the shorter of the lease term and the period to the date of the rent review. FRS 102 requires the benefits to be spread over the lease term We are told that there is a break clause in lease 1 at the end of 10 years. FRS 102 20.15A requires the use of another systematic basis if it is representative of the time pattern of the lessee s benefit from the use of the leased asset. If the entity intends to exercise the break clause, or even if it will probably exercise the break clause it may be appropriate to spread the benefit over the period to the date the break clause can be exercised. In the accounts for 2012, 2013 and 2014 UK Printing Ltd will have accounted for the lease incentive under UITF 28 over the period to the date of the rent review. Therefore, the rent charges for 2012 and 2013 are 8,000 in respect of lease 1 and for 2014 10,500 being 8,000 for lease 1 and 2,500 for lease 2. The directors consider that UK Printing Ltd will not take advantage of any transitional exemption and will restate the rent charges as 17,000 for 2012 and 2013 in accordance with FRS 102. The amount included in creditors at 31st December 2013 is the rent of 16,000 as per the UITF 28 accounting treatment. Therefore a net adjustment is required which will increase the amount charged to the profit and loss account by 18,000 net of tax being the difference between the amount charged under UITF 28 of 16,000 and the amount of 34,000 that would have been charged had FRS 102 been applied. For 2014 the rent charge in respect of lease 1 should be increased by 9,000 net of tax being the difference between the amount charged under UITF 28 of 8,000 and the amount of 17,000 that would have been charged had FRS 102 been applied. Also, in 2014 having decided to restate lease 1, a further adjustment is required as there is no option but to restate lease 2. Therefore a net adjustment is required in respect of lease 2 which will increase the amount charged to the profit and loss account by 6,000 net of tax being the difference between the amount charged under UITF 28 of 2,500 and the amount of 8,500 that would have been charged had FRS 102 been applied. So in 2014, the total additional rent charged to the profit and loss account should be 15,000 net of tax. Actions At 1st January 2014 At 1st January 2015 Adjust the UK GAAP balance sheet to accrue the additional rent charges of 18,000 for the two years prior to 1st January 2014. Adjust the UK GAAP balance sheet to accrue the additional rent charges of 15,000 for the year ending 31st December 2014 and make a corresponding adjustment to the profit and loss statement for that year. See page 40 See page 68 UK Training (Worldwide) Limited Page 13

Consideration 9 The background to holiday pay accruals. The company has a holiday pay year which ends on 31st March. Employees are not allowed to carry forward holiday pay into future holiday years. There is, nonetheless, a material holiday pay accrual under FRS 102 which has never been accounted for under UK GAAP and therefore not included in the charges to the profit and loss account. The value of the accrual at 31st December 2013 is 80,000 and at 31st December 2014 is 100,000. The cost that is accrued should be fully allowable for tax and therefore adjustments net of tax should be made to the profit and loss account being 80,000 at 31st December 2013 and 20,000 at 31st December 2014. The adjustment at 31st December 2014 being the increase in the accrual from the previous year. The directors consider that the holiday pay would be included within cost of sales. Actions At 1st January 2014 At 1st January 2015 Adjust the UK GAAP balance sheet to accrue the holiday pay up to 31st December 2013 of 80,000. Adjust the UK GAAP balance sheet to accrue the additional holiday pay of 20,000 for the year ending 31st December 2014 and make a corresponding adjustment to the profit and loss statement for that year. See page 42 See page 70 UK Training (Worldwide) Limited Page 14

Consideration 10 The background to the treatment of a director s loan. The managing director of UK Printing Ltd lent 50,000 to the company on 31st December 2012. It was agreed that the loan is interest free and repayable on 31st December 2015. Most directors and inter-company loans will qualify as basic financial instruments and be required to be included at amortised cost using the effective interest method. Where the loan is interest free or below the market rate, FRS 102 11.13 requires initial measurement of such loans to be the present value of the future payments discounted at a market rate for a similar debt instrument. Although there is no actual interest payable, FRS 102 requires the present values to be calculated at a discounted rate. Clearly the present value of an interest free loan repayable on demand is the same as the face value of the loan. The directors have agreed that the loan should be renegotiated to being due on demand. This has the effect of removing the need to record the loan at the fair value of the cash flows. There is a need to reclassify the loan in the balance sheet and report it within current liabilities. Actions At 1st January 2014 Adjust the UK GAAP balance sheet to transfer the value of the director s loan of 50,000 from creditors due after more than one year to creditors due within one year. See page 44 UK Training (Worldwide) Limited Page 15

Consideration 11 The background to the treatment of goodwill on the acquisition of Printout. UK Printing Ltd acquired the trade and assets of an unincorporated business, known as Printout, on 1st January 2011 and recognised goodwill of 200,000. At the time of the acquisition the directors adopted a useful life of 20 years, aware that the useful life of goodwill under FRS 11 was presumed to be no more than 20 years, and that FRSSE prohibited a longer useful life. The directors now consider that they are unable to assess the useful life reliably. UK Printing Ltd has been amortising goodwill over 20 years but on transition the directors are unable to estimate the useful life. Under FRS 102 the company cannot continue to amortise intangible assets over 20 years if it is not a reliable estimate. Section 35 prohibits the recognition of revisions of accounting estimates as part of the transition adjustment. The entity has the following options under FRS 102: (a) Restate the combination under Section 19; (b) Not restate and - Treat the use of 20 years as an error and correct on transition; - Revise the useful life as a change in accounting estimate when the revision is identified; - Treat the book value at 31 December 2013 as deemed cost and amortise over its useful life of five years. UK Printing Ltd can restate the business combination on1st January 2011 as if FRS 102 had applied. This will allow it to consider whether other intangibles had been acquired and to revise the useful life of the goodwill at the date of acquisition to no more than five years as was done with Blueprint. UK Printing Ltd has decided not to restate the acquisition and therefore it is not permitted to adjust the carrying value of goodwill, and must continue to subsume any other intangible assets within goodwill (FRS 102 35.10(a). The directors consider that UK Printing Ltd will treat this as a revision of accounting estimate and recognise it in the year it is identified being the year to 31st December 2014. At 31st December 2014 the net book value of Printout s goodwill under UK GAAP is 160,000 being its original value of 200,000 less four years worth of amortisation of 40,000. Whereas by changing the useful life from 20 years to 5 years the net book value of Printout s goodwill would have been 40,000 being its original value of 200,000 less four years worth of amortisation of 160,000. Therefore an additional charge of 120,000 net of tax needs to be made to the profit and loss account as at 31st December 2014. Actions At 1st January 2015 Adjust the UK GAAP balance sheet to increase the amortisation of the goodwill by 120,000. See page 52 UK Training (Worldwide) Limited Page 16

Consideration 12 The background to the treatment of foreign currency contracts. Unless an entity has adopted FRS 26, it will not currently record derivative contracts until settlement. FRS 102 defines a derivative contract as one with all three of the following characteristics: (a) Its value changes in response to the change in a specified interest rate, financial instruments price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index (sometimes called the underlying ), provided in the case of a nonfinancial variable that variable is not specific to a party to the contract; (b) It requires no initial net investment or an initial net investment that is smaller than would be expected for other types of contracts that would be expected to have a similar response to changes in market factors; and (c) It is settled at a future date. FRS 102 requires derivative contracts to be valued at fair value while SSAP 20 allows sales covered by a forward contract to be recorded at the matched contracted rate. The SSAP 20 treatment means that there is no requirement to retranslate the value of the debtor at the balance sheet date or on settlement, and no translation difference arises. FRS 102 30.7 requires foreign currency transactions to be recorded at the spot rate at the date of the transaction, although an average rate may be used as an approximation provided that the rates do not fluctuate significantly. The balance is then restated at the end of each reporting period at the closing rate with the exchange gain or loss recognised in profit or loss, unless the gain or loss arises on a nonmonetary item on which gains and losses are recorded in other comprehensive income. On transition to FRS 102 there are no transitional exemptions which relate to the treatment of these items. Accordingly UK Printing Ltd needs to restate the financial statements as if SSAP 20 had not been applied but FRS 102 sections 12 and 30 had applied. On 1st November 2014 UK Printing Ltd raise an invoice for $100,000 for settlement in 3 months on 31st January 2015. On the same date the entity enters into a forward contract to sell $100,000 at a contracted rate of 1:$1.62. Details of the :$ exchange rate are as follows: Date Spot rate :$ Forward rate to 31 January 2015 :$ Value of Debtors at Spot rate Value of Debtors at Forward rate 1 November 2014 (date of contract) 1.60 1.62 62,500 61,728 31 December 2014 (year-end) 1.57 1.59 63,694 62,893 31 January 2015 (date of settlement) 1.55 64,516 UK Training (Worldwide) Limited Page 17

To comply with FRS 102, on 1st November 2014 the sales transaction should be valued at spot rate not the forward contract rate at that date. On 31st December 2014 the debtors should be restated at spot rate on that day. Also, on 31st December 2014 the derivative value of the forward contract needs to be recognised. Actions At 1st January 2015 At 1st January 2015 At 1st January 2015 Adjust the UK GAAP balance sheet to increase the value of the debtors by 772 in respect of the difference between the contract rate and the spot rate of the value of the sale on 1st November 2014 and make a corresponding adjustment to the profit and loss statement for the year ending 31st December 2014. Adjust the UK GAAP balance sheet to increase the value of the debtors by 1,194 in respect of the difference between the spot rate of the debtor at 1st November 2014 and its spot rate at 31st December 2014 and make a corresponding adjustment to the profit and loss statement for the year ending 31st December 2014 in respect of the gain on foreign currency exchange. Adjust the UK GAAP balance sheet to record the value of the financial liability on the derivative of 1,165 being the difference between the contract rate at 1st November 2014 and the forward rate of the value of the contract at 31st December 2014 and make a corresponding adjustment to the profit and loss statement for the year ending 31st December 2014. See page 62 See page 64 See page 66 UK Training (Worldwide) Limited Page 18

PART 2 CONVERTING THE UK GAAP BALANCE SHEET TO AN FRS 102 BALANCE SHEET AT THE DATE OF TRANSITION The pages that follow refer to the action points in Part 1 that relate to the conversion of the UK GAAP balance sheet to an FRS 102 balance sheet at the date of transition. UK Training (Worldwide) Limited Page 19

What are the effects of recognising the order book in Blueprint as a separate intangible asset? In consideration 1 we discussed the background to the acquisition of Blueprint by UK Printing Ltd and we recognised the need to adjust the UK GAAP balance sheet to transfer the value of the order book of 150,000 out of goodwill to a separate intangible asset. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to introduce a new intangible asset in respect of the order book and reduce the value of goodwill. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/01 Debit Order book 150,000 Credit Goodwill - Blueprint 150,000 Total 150,000 150,000 UK Training (Worldwide) Limited Page 20

UK GAAP 13/01 AFTER Freehold 250,000 250,000 Investment property 800,000 800,000 Plant and machinery 1,190,000 1,190,000 Trade investments 450,000 450,000 Investment in subsidiary 50,000 50,000 Order book - DR 150,000 150,000 Goodwill - Printout 170,000 170,000 Goodwill - Blueprint 200,000 CR 150,000 50,000 Stock 230,000 230,000 Debtors 180,000 180,000 Banks and cash 50,000 50,000 Provision for deferred tax (10,000) (10,000) Current tax (100,000) (100,000) Creditors due within one year (110,000) (110,000) Creditors due after more than one year (50,000) (50,000) 3,300,000 3,300,000 Share capital (800,000) (800,000) Revaluation reserve - freehold property (50,000) (50,000) Revaluation reserve - investment property (150,000) (150,000) Profit and loss account (2,300,000) (2,300,000) (3,300,000) (3,300,000) UK Training (Worldwide) Limited Page 21

What are the effects of writing off the order book? In consideration 1 we discussed the background to the acquisition of Blueprint by UK Printing Ltd and we recognised the need to adjust the UK GAAP balance sheet to write off the full value of the order book of 150,000. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to reduce the value of the order book and reduce the profit and loss account by the amount net of tax while reducing the current tax liability. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/02 Debit Profit and loss account 120,000 Debit Current tax 30,000 Credit Order book 150,000 Total 150,000 150,000 UK Training (Worldwide) Limited Page 22

BEFORE 13/02 AFTER Freehold 250,000 250,000 Investment property 800,000 800,000 Plant and machinery 1,190,000 1,190,000 Trade investments 450,000 450,000 Investment in subsidiary 50,000 50,000 Order book 150,000 CR 150,000 - Goodwill - Printout 170,000 170,000 Goodwill - Blueprint 50,000 50,000 Stock 230,000 230,000 Debtors 180,000 180,000 Banks and cash 50,000 50,000 Provision for deferred tax (10,000) (10,000) Current tax (100,000) DR 30,000 (70,000) Creditors due within one year (110,000) (110,000) Creditors due after more than one year (50,000) (50,000) 3,300,000 3,180,000 Share capital (800,000) (800,000) Revaluation reserve - freehold property (50,000) (50,000) Revaluation reserve - investment property (150,000) (150,000) Profit and loss account (2,300,000) DR 120,000 (2,180,000) (3,300,000) (3,180,000) UK Training (Worldwide) Limited Page 23

What are the effects of amortising the remaining goodwill of Blueprint over its useful life of five years? In consideration 1 we discussed the background to the acquisition of Blueprint by UK Printing Ltd and we recognised the need to adjust the UK GAAP balance sheet to write back 30,000 worth of the goodwill that had previously been amortised when the goodwill had included the value of the Blueprint s order book. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to increase the value of goodwill and increase the profit and loss account by the amount net of tax while increasing the current tax liability. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/03 Debit Goodwill - Blueprint 30,000 Credit Current tax 6,000 Credit Profit and loss account 24,000 Total 30,000 30,000 UK Training (Worldwide) Limited Page 24

BEFORE 13/03 AFTER Freehold 250,000 250,000 Investment property 800,000 800,000 Plant and machinery 1,190,000 1,190,000 Trade investments 450,000 450,000 Investment in subsidiary 50,000 50,000 Order book - - Goodwill - Printout 170,000 170,000 Goodwill - Blueprint 50,000 DR 30,000 80,000 Stock 230,000 230,000 Debtors 180,000 180,000 Banks and cash 50,000 50,000 Provision for deferred tax (10,000) (10,000) Current tax (70,000) CR 6,000 (76,000) Creditors due within one year (110,000) (110,000) Creditors due after more than one year (50,000) (50,000) 3,180,000 3,204,000 Share capital (800,000) (800,000) Revaluation reserve - freehold property (50,000) (50,000) Revaluation reserve - investment property (150,000) (150,000) Profit and loss account (2,180,000) CR 24,000 (2,204,000) (3,180,000) (3,204,000) UK Training (Worldwide) Limited Page 25

What are the effects of providing for deferred tax on the revaluation of freehold property? In consideration 2 we discussed the background to the value of the land and buildings owned by UK Printing Ltd and we recognised the need to adjust the UK GAAP balance sheet to provide for the tax liability related to previous gain on the revaluation of the land and buildings. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to reduce the value of the revaluation reserve by the deferred tax of 10,000 and to increase the provision for deferred tax. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/04 Debit Revaluation reserve - freehold property 10,000 Credit Provision for deferred tax 10,000 Total 10,000 10,000 UK Training (Worldwide) Limited Page 26

BEFORE 13/04 AFTER Freehold 250,000 250,000 Investment property 800,000 800,000 Plant and machinery 1,190,000 1,190,000 Trade investments 450,000 450,000 Investment in subsidiary 50,000 50,000 Order book - - Goodwill - Printout 170,000 170,000 Goodwill - Blueprint 80,000 80,000 Stock 230,000 230,000 Debtors 180,000 180,000 Banks and cash 50,000 50,000 Provision for deferred tax (10,000) CR 10,000 (20,000) Current tax (76,000) (76,000) Creditors due within one year (110,000) (110,000) Creditors due after more than one year (50,000) (50,000) 3,204,000 3,194,000 Share capital (800,000) (800,000) Revaluation reserve - freehold property (50,000) DR 10,000 (40,000) Revaluation reserve - investment property (150,000) (150,000) Profit and loss account (2,204,000) (2,204,000) (3,204,000) (3,194,000) UK Training (Worldwide) Limited Page 27

What are the effects of transferring the revaluation surplus on investment properties to the profit and loss account? In consideration 3 we discussed the background to the treatment of the revaluation surplus of investment properties owned by UK Printing Ltd and we recognised the need to adjust the UK GAAP balance sheet to transfer the value of the surplus of 150,000 out of the revaluation reserve to the profit and loss account. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to reduce the revaluation reserve and to increase the profit and loss account by the amount net of tax while increasing the provision for deferred tax. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/05 Debit Revaluation reserve - investment property 150,000 Credit Provision for deferred tax 30,000 Credit Profit and loss account 120,000 Total 150,000 150,000 UK Training (Worldwide) Limited Page 28

BEFORE 13/05 AFTER Freehold 250,000 250,000 Investment property 800,000 800,000 Plant and machinery 1,190,000 1,190,000 Trade investments 450,000 450,000 Investment in subsidiary 50,000 50,000 Order book - - Goodwill - Printout 170,000 170,000 Goodwill - Blueprint 80,000 80,000 Stock 230,000 230,000 Debtors 180,000 180,000 Banks and cash 50,000 50,000 Provision for deferred tax (20,000) CR 30,000 (50,000) Current tax (76,000) (76,000) Creditors due within one year (110,000) (110,000) Creditors due after more than one year (50,000) (50,000) 3,194,000 3,164,000 Share capital (800,000) (800,000) Revaluation reserve - freehold property (40,000) (40,000) Revaluation reserve - investment property (150,000) DR 150,000 - Profit and loss account (2,204,000) CR 120,000 (2,324,000) (3,194,000) (3,164,000) UK Training (Worldwide) Limited Page 29

What are the effects of transferring spare parts and servicing equipment to plant and machinery from stock? In consideration 4 we discussed the background to the treatment of spare parts and servicing equipment that we only usable with specific items of plant and machinery and we recognised the need to adjust the UK GAAP balance sheet to transfer the value of 40,000 worth of stock to plant and machinery. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to reduce the value of stock and increase the value of plant and machinery. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/06 Debit Plant and machinery 40,000 Credit Stock 40,000 Total 40,000 40,000 UK Training (Worldwide) Limited Page 30

BEFORE 13/06 AFTER Freehold 250,000 250,000 Investment property 800,000 800,000 Plant and machinery 1,190,000 DR 40,000 1,230,000 Trade investments 450,000 450,000 Investment in subsidiary 50,000 50,000 Order book - - Goodwill - Printout 170,000 170,000 Goodwill - Blueprint 80,000 80,000 Stock 230,000 CR 40,000 190,000 Debtors 180,000 180,000 Banks and cash 50,000 50,000 Provision for deferred tax (50,000) (50,000) Current tax (76,000) (76,000) Creditors due within one year (110,000) (110,000) Creditors due after more than one year (50,000) (50,000) 3,164,000 3,164,000 Share capital (800,000) (800,000) Revaluation reserve - freehold property (40,000) (40,000) Revaluation reserve - investment property - - Profit and loss account (2,324,000) (2,324,000) (3,164,000) (3,164,000) UK Training (Worldwide) Limited Page 31

What are the effects of valuing listed investments at fair value? In consideration 5 we discussed the background to the value of trade investments owned by UK Printing Ltd and we recognised the need to adjust the UK GAAP balance sheet to recognise the gain in the value of listed investments of 40,000 prior to 1st January 2014. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to increase the value of the trade investments by the gain and to increase the profit and loss account by the value of the gain net of tax while increasing the provision for deferred tax. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/07 Debit Trade investments 40,000 Credit Provision for deferred tax 8,000 Credit Profit and loss account 32,000 Total 40,000 40,000 UK Training (Worldwide) Limited Page 32

BEFORE 13/07 AFTER Freehold 250,000 250,000 Investment property 800,000 800,000 Plant and machinery 1,230,000 1,230,000 Trade investments 450,000 DR 40,000 490,000 Investment in subsidiary 50,000 50,000 Order book - - Goodwill - Printout 170,000 170,000 Goodwill - Blueprint 80,000 80,000 Stock 190,000 190,000 Debtors 180,000 180,000 Banks and cash 50,000 50,000 Provision for deferred tax (50,000) CR 8,000 (58,000) Current tax (76,000) (76,000) Creditors due within one year (110,000) (110,000) Creditors due after more than one year (50,000) (50,000) 3,164,000 3,196,000 Share capital (800,000) (800,000) Revaluation reserve - freehold property (40,000) (40,000) Revaluation reserve - investment property - - Profit and loss account (2,324,000) CR 32,000 (2,356,000) (3,164,000) (3,196,000) UK Training (Worldwide) Limited Page 33

What are the effects of correcting the stock error? In consideration 6 we discussed the background to the correction of errors and we recognised the need to adjust the UK GAAP balance sheet to correct the error of 80,000 in respect of the understatement of the value of the stocks at 31st December 2013. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to increase the value of the stock and to increase the profit and loss account while increasing the liability in respect of current tax. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/08 Debit Stock 80,000 Credit Current tax 16,000 Credit Profit and loss account 64,000 Total 80,000 80,000 UK Training (Worldwide) Limited Page 34

BEFORE 13/08 AFTER Freehold 250,000 250,000 Investment property 800,000 800,000 Plant and machinery 1,230,000 1,230,000 Trade investments 490,000 490,000 Investment in subsidiary 50,000 50,000 Order book - - Goodwill - Printout 170,000 170,000 Goodwill - Blueprint 80,000 80,000 Stock 190,000 DR 80,000 270,000 Debtors 180,000 180,000 Banks and cash 50,000 50,000 Provision for deferred tax (58,000) (58,000) Current tax (76,000) CR 16,000 (92,000) Creditors due within one year (110,000) (110,000) Creditors due after more than one year (50,000) (50,000) 3,196,000 3,260,000 Share capital 800,000) (800,000) Revaluation reserve - freehold property (40,000) (40,000) Revaluation reserve - investment property - - Profit and loss account (2,356,000) CR 64,000 (2,420,000) (3,196,000) (3,260,000) UK Training (Worldwide) Limited Page 35

What are the effects of accounting for part of a sale with extended credit terms as finance income? In consideration 7 we discussed the background to the treatment of sales with credit extended for a period of more than one year and we recognised the need to adjust the UK GAAP balance sheet to identify that part of the sales invoice that related to the sale and that part that should be treated as finance income. To convert the UK GAAP Balance Sheet at 31st December 2013 to become the opening FRS 102 Balance Sheet at 1st January 2014 it is necessary to reduce the value of the debtors by the finance income of 40,350 and to reduce the profit and loss account while reducing the liability in respect of current tax. These changes will not be made to the nominal ledger - they will just be adjustments to the reported UK GAAP values in the balance sheet at 1st January 2014. JNL Debit Credit 13/09 Debit Profit and loss account 32,280 Debit Current tax 8,070 Credit Debtors 40,350 Total 40,350 40,350 UK Training (Worldwide) Limited Page 36