1 Contents The Reporting Framework 2015 & 2016 FRS 102 - - PDF document

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Making your practice compliant, efficient and profitable

0845 450 5555 www.swat.co.uk

Welcome FRS 102 CIMA Webinar December 2014

Presented by: Adrian Gibbons

BSc ACA

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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

Contents

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FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill

Contents

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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

Contents

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Accounting Framework NOW

Small Co FRSSE Micro SSAPs & FRSs Med & Large Co

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Accounting Framework NOW

Small Co FRSSE Micro SSAPs & FRSs Med & Large Co

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Small Company Limits Turnover < £6.5M Gross Assets< £3.26M EEs < 50 Micro Entity Limits Turnover < £632K Gross Assets < £316K EEs < 10

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Accounting Framework 1/1/ 2015

Small Co

FRSSE 2015 Micro entity bits

Micro

FRS 102

FRSSE 2015

Medium & Large Co

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Accounting Framework 1/1/2016

Small Co

FRSME Based on FRS 102

Micro

FRS 102

Reduced disclosure

Medium & Large Co

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Accounting Framework 1/1/2016

Small Co

FRSME

Micro

FRS 102

Reduced disclosure

Medium & Large Co

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Small Company Limits Turnover < £10.2M Gross Assets < £5.1M EEs < 50

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A Basic Balance Sheet

Slide Only

Property Plant & Equipment Stock & WIP Trade Receivables Trade Payables Ordinary Loans

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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

Contents

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FRS 102

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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

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FRS 102 - Formats

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Topic – by sections Public benefit entities

Prefix PBE

Some sections have implementation guidance

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FRS 102 – Transition Rules

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UK GAAP FRS 102 FRS 102 Section 35

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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

Contents

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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

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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

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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

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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

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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

Contents

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Section 5: Example AB Limited Single Statement

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Section 5: Example AB Limited Single Statement

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Section 5: Example AB Limited Two statements

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Section 5: Example AB Limited Two Statements

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Section 5: Exceptional Items

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Exceptional not used No explicit requirement to disclose on the face of the statement of comprehensive income FRS 102 Requirement to disclose material items

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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

Contents

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Section 6: Changes in equity & statement

• f 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

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Section 6:Example

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Section 6:Example

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Section 6: Statement of income & retained earning

Page 17/18

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

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Section 6: Statement of income & retained earning Example

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Section 6: Statement of income & retained earning Example

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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

Contents

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FRS 102 FRS 1 Operating activities Net cash inflow from operating activities Taxation Investing activities Capital expenditure & financial investment Acquisitions and disposals Financing activities Financing

• 7. Statement of cash flows

Page 19/20

Equity dividends paid Equity dividends paid

• Ret. on investments & servicing of finance
• Ret. on investments & servicing of finance

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• 7. Statement of cash flows

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Cash and cash equivalents

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• 7. Statement of cash flows

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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

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FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill

Contents

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UK GAAP FRS 102 FRS 102 Sec 35

Transitional Arrangements

Page 22 39

First time adoption of FRS 102

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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

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First time adoption of FRS 102

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Transition date

Start of the previous period for the comparatives

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Example Entity X Limited

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UKGAAP to FRS 102 Y/E 31 December 2015 Transition date

1 January 2014

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Para 7 Section 35 FRS 102

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Opening statement of position Measures all assets & liabilities in accordance with FRS 102

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Para 7 Section 35 FRS 102

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Some assets and liabilities may have different values under FRS 102 when compared to the old accounting treatment

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Para 7 Section 35 FRS 102

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Example

Investments at cost may need to be valued at fair value Deferred tax will be needed for any asset that has been revalued

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Entity X Limited Deferred Tax Adjustment

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Property revalued under FRS 15 Has a revaluation reserve Deferred tax now needs to be recognised on the revaluation gain

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Entity X Limited Deferred Tax Adjustment

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Must account for the deferred tax at the transition date 1 January 2014

Dr Revaluation Reserve Cr Deferred Tax Provision

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Entity X Limited Fair Value Adjustment

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Forward Foreign Exchange contract 12 November 2013 Purchase 220K euros at 1.1 Dated 12 February 2014 Not recognised under UKGAAP

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Entity X Limited Fair Value Adjustment

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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?

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Change of Accounting Policy

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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

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Disclosures

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An entity must explain how the transition from current UKGAAP to FRS 102 has affected its reported financial position Three reconciliations are required

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Disclosures

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An equity reconciliation

At the transitional date and At the end of the last period to be prepared under the old UKGAAP

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Disclosures

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A profit & Loss account reconciliation for the last period completed under the

• ld UKGAAP

Examples of this disclosure are given later

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Disclosures – X Limited

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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

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Prohibition on Retrospective Restatement

Page 26

Section 35 has 5 areas where retrospective adjustment to previous transactions are not permitted on transition

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Prohibition on Retrospective Restatement

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Accounting Estimates

Any changes to accounting estimates should not trigger any PYA

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Accounting Estimates Example

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31 December 2013 – X Limited

Large debtor = £100K Provision made for £50K

Summer 2014 the debtor goes bust

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Accounting Estimates Example

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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

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Exemptions from – recognition or re- measurement of assets and liabilities

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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

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Exemptions from – recognition or re- measurement of assets and liabilities

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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

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Exemptions from – recognition or re- measurement of assets and liabilities

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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 D E C F

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Example X Limited

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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 B D E C F

New Business

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Example X Limited

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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

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Example X Limited

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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

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Example X Limited

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This exemption only applies to goodwill Other intangibles are dealt with under Sec 19 – no exemption here

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Exemptions from – recognition or re- measurement of assets and liabilities

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Fixed Assets – Deemed Cost

Property, plant & equipment Investment properties Some intangible assets – active market fair value

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Exemptions from – recognition or re- measurement of assets and liabilities

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Deemed cost

Fair value Old UKGAAP revaluation

Before or on the date of transition

Deferred tax will be needed as well

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X Limited - Example

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31 December 2000

Adopted a policy of revaluation of property At this stage they have one property Cost = £50K 2000 value = £1.2M

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X Limited - Example

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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

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X Limited - Example

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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

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X Limited - Example

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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

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Exemptions from – recognition or re- measurement of assets and liabilities

Page 34

Exemptions relating to Leases

Leases can be assessed according to the terms and conditions existing at the transitional date

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Leases Example

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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

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Leases Example

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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

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Exemptions from – recognition or re- measurement of assets and liabilities

Page 35

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

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DISCLOSURE OF TRANSITIONAL ISSUES AND ADJUSTMENTS

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Reconciliation disclosure under FRS 102

Page 35

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

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Notes

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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?

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Format 2

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Format 2

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FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill

Contents

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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

Other Contracts Excluded

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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

• ption could be traded for cash under the
• ptions market – is a financial instrument

Other Contracts Excluded

Slide Only

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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

Financial Instruments

Page 41 86

The entity must become a party to the contractual provisions of a financial instrument It then recognises a financial asset or a financial liability

Recognition & Measurement

Page 42/43 87

Recognised at Fair Value Fair Value = transaction price

Initial Recognition

Page 43

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Subsequent measurement

Page 43

Section 12 Financial Instruments

Fair Value – through profit or loss

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Subsequent measurement

Page 43

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

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What is Fair Value?

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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

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Example Forward Foreign Currency

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Example Forward Foreign Currency

Page 48

Accounting for the financial instrument at initial recognition and at the year end

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Example Forward Foreign Currency

Page 48

The order is placed for the asset so the liability to pay is recognised

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Example Forward Foreign Currency

Page 48

Settlement of the creditor and realisation of the forward foreign exchange contract

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Example Forward Foreign Currency

Page 48

Realisation of the forward foreign exchange contract gain on the transaction

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Example Forward Foreign Currency

Slide Only

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

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Example Forward Foreign Currency

Slide only

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

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Example Forward Foreign Currency

Slide only

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

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Directors personal guarantees

Page 49

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

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FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill

Contents

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FRS 102 Deferred Tax

Page 50

The changes to Deferred Tax will have a significant impact on most clients under FRS 102 FRS 102 – adopts the deferred tax plus approach

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Deferred Tax – Basic Principle

Page 51

The recognition of future tax consequences of transactions and events reported in the current years financial statements Timing differences

Tax equalisation account Matching concept

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FRS 102 Section 29: Income Tax

Page 51

Covers

Current tax charge Deferred tax charge VAT (was SSAP 5)

Adopts the same basic principle as FRS 19 regarding deferred tax

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FRS 19 Fixed Assets Exemption

Page 53

No deferred tax on a valuation unless

Binding agreement to sell & Recognised gains or losses are expected to arise on sale

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FRS 19 Fixed Assets Exemption

Page 53

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

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Investment Property Example

Page 54

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%

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Transitional Date Adjustment

Page 54

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

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Transitional Date Adjustment

Page 54

Deferred tax at transitional date would be = £4280 Adjustment 31 December 2014

£95K to £100K = £5K x 20% Deferred tax = £1K

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Year ended 31 December 2014

Page 54

Balance at 31/12/2014 = £5280 Profit & Loss Account to 31/12/2014

Gain on investment property = £5K Deferred tax on gain = (£1k)

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Year ended 31 December 2015

Page 54

Balance Deferred tax 31/12/15 = £7280 Profit & Loss Account

Gain on investment property = £10K Deferred tax on gain = (£2K)

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Permanent & Temporary Differences

Page 55

Deferred tax is not provided on permanent timing differences Temporary differences

Accelerated capital allowances Accrued pension liabilities Intra-group profits

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FRS 102 Section 35 Transition FRS 102 Section 12 Other Financial Instruments FRS 102 Section 29 Income Tax FRS 102 Section 19 Goodwill

Contents

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Section 19 Business Combinations & Goodwill

Page 60

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

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Accounting Treatment for Goodwill

Page 61

Goodwill Cost

Value of assets, liabilities and contingent liabilities as valued under this section

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Accounting Treatment for Goodwill

Page 61

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

Making your practice compliant, efficient and profitable

0845 450 5555 www.swat.co.uk

This course was:

FRS 102 CIMA Webinar December 2014

Presented by: Adrian Gibbons

BSc ACA