ACCOUNTS AND AUDIT UPDATE AUTUMN 2016 FOR Guy Loveday 1 WHAT IS - - PDF document

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ACCOUNTS AND AUDIT UPDATE AUTUMN 2016 FOR

Guy Loveday

WHAT IS COMING UP?

• RENEGOTIATION OF LOANS – FRS

102 AND FRS 105

• DIRECTORS’ LOANS – FRS 102 AND

FRS 105

• REVALUATIONS AND FRS 102
• HMRC COMMENT ON FRS 102
• AUDITING AND FRS 102

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RENEGOTIATION OF LOANS

• On 1 January 20X1, an entity takes
• ut a bank loan for £5m, incurring an

arrangement fee of £100,000. Interest

• f £400,000 (8%) is payable annually,

in arrears, over the next four years. The loan is repayable on 31 December 20X4. The effective interest rate can be calculated as 8.6121%.

EXAMPLE - FRS 102

• Year

b/f 8.61% cash c/f

• 20X1

4,900 422 (400) 4,922

• 20X2

4,922 424 (400) 4,946

• 20X3

4,946 426 (400) 4,972

• 20X4

4,972 428 (400) 5,000

• 1,700

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RENEGOTIATION OF LOANS

• On 31 December 20X1, the bank

agreed to modify the terms of the loan so that it will not be repayable until the end of 20X6. Interest payments will, however, increase to £550,000 per

• annum. The lender was paid a fee of

£50,000 relating to the modification.

SUBSTANTIAL MODIFICATION

Year b/f charge cash c/f 20X1 4,900 422* (400) 4,922 RENOG 4,922 78** ( 50) 4,950 20X2 4,950 558*** (550) 4,958 20X3 4,958 559*** (550) 4,967 20X4 4,967 560*** (550) 4,977 20X5 4,977 561*** (550) 4,988 20X6 4,988 562*** (550) 5,000 3,300 * = 8.61% ** = unamortised fee *** = 11.27%

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NO SUBSTANTIAL MODIFICATION

Year b/f 8.61% cash c/f 20X1 4,900 422 (400) 4,922 RENOG 4,922 597* ( 50) 5,469 20X2 5,469 471 (550) 5,390 20X3 5,390 464 (550) 5,304 20X4 5,304 457 (550) 5,211 20X5 5,211 449 (550) 5,110 20X6 5,110 440 (550) 5,000 3,300 * £5.519m - £4.922m

RENEGOTIATION OF LOANS

• On 1 January 20X1, an entity takes
• ut a bank loan for £500,000 incurring

an arrangement fee of £10,000. Interest of £40,000 (8%) is payable annually, in arrears, over the next four

• years. The loan is repayable on 31

December 20X4.

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EXAMPLE – FRS 105

• Year

b/f charge cash c/f

• 20X1

490.0 42.5 (40.0) 492.5

• 20X2

492.5 42.5 (40.0) 495.0

• 20X3

495.0 42.5 (40.0) 497.5

• 20X4

497.5 42.5 (40.0) 500.0

• 170.0

RENEGOTIATION OF LOANS

• On 31 December 20X1, the bank

agreed to modify the terms of the loan so that it will not be repayable until the end of 20X6. Interest payments will, however, increase to £55,000 per

• annum. The lender was paid a fee of

£5,000 relating to the modification.

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SUBSEQUENT ACCOUNTING

Year b/f charge cash c/f 20X1 490.0 42.5 (40.0) 492.5 RENOG 492.5 7.5 ( 5.0) 495.0 20X2 495.0 56.0 (55.0) 496.0 20X3 496.0 56.0 (55.0) 497.0 20X4 497.0 56.0 (55.0) 498.0 20X5 498.0 56.0 (55.0) 499.0 20X6 499.0 56.0 (55.0) 500.0 330.0

DIRECTORS LOANS AND FRS 102

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DIRECTORS LOANS AND FRS 102

• JULY 2016
• ICAEW FINANCIAL

REPORTING FACULTY ISSUE:

• GUIDANCE ON

DIRECTORS LOANS AND FRS 102 …

DIRECTORS LOANS AND FRS 102

• JULY 2016
• … INCLUDING THE

IMPACT OF ICAEW TECH 05/16 ON REALISED AND DISTRIBUTABLE PROFITS

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DISCLOSURE REMINDER

• LOANS TO DIRECTORS –

DISCLOSABLE

• LOANS FROM DIRECTORS

(RELATED PARTY TRANSACTIONS) MAY NOT BE DISCLOSABLE …

DISCLOSURE REMINDER

• Companies following FRS 102 Section

1A are specifically required only to provide particulars of material transactions with directors that are not concluded under normal market conditions

• However further disclosures may be

considered necessary, to give a true and fair view

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EXAMPLE 1

• On 1 January 20X1, a director lends a

company £1m at a zero rate of

• interest. The loan is repayable three

years later. The market rate of interest for a similar loan is 5%

EXAMPLE 1

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EXAMPLE 1

• Assuming that the loan is made by the

director in his or her capacity as the

• wner of the business, the “difference”
• f £136,162 should be recognised

directly in equity as a capital contribution

EXAMPLE 1

• THE CAPITAL CONTRIBUTION OF

£136,162 IS NOT A REALISED PROFIT

• THE INTEREST EXPENSE EACH

YEAR IS NOT A REALISED LOSS

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EXAMPLE 2

• The situation is as above, except that

the company is lending the money to the director

• Assuming that the loan is made to the

director in his or her capacity as the

• wner of the business, the difference

should be recognised directly in equity as a distribution

EXAMPLE 2

• THE DISTRIBUTION IS PAID OUT OF

REALISED PROFITS

• THE INTEREST INCOME IS A REALISED

PROFIT …

• … IF THERE IS A REASONABLE

CERTAINTY THAT THE BALANCE CAN BE REPAID AT MATURITY AND AN EXPECTATION THAT IT WILL BE SETTLED WITHOUT A REPLACEMENT LOAN BEING ADVANCED

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EXAMPLE 3

• On 1 January 20X1, a company provides

a director with a £1,200 interest free season ticket loan. The loan – which is repayable at £100 per month over the course of the next year – is on terms available to other members of staff

• The market rate of interest for a similar

loan is 6% per annum or 0.5% per month

EXAMPLE 3

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EXAMPLE 3

• As the loan is not made to the director

in his or her capacity as the owner of the business, the difference of £38.11 should be expensed over the life of the loan

EXAMPLE 3

• THE INITIAL PREPAYMENT OF

£38.11 IS NOT A REALISED LOSS

• AS THE PREPAYMENT IS

EXPENSED EACH MONTH IT IS A REALISED LOSS

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EXAMPLE 3

• THE GUIDANCE SUGGESTS:
• Although the aggregate effect of all

such loans should be considered, the amount of the discount on this and similar season ticket loans may be considered immaterial

• If this is the case, the loans could

simply be carried at cost

GLENN COLLINS - ACCA

“ There seems to be some concern and confusion

• ver revaluation

reserves and when and if they should apply”

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REVALUATION RESERVES

• REVALUATIONS AND

FAIR VALUATIONS

• REVALUATIONS

UNDER FRS 15 AND FRS 102

• DEFERRED TAX!
• USE OF

APPROPRIATION ACCOUNTING

REVALUATIONS AND FAIR VALUATIONS

• ONLY PPE AND

INTANGIBLES CAN BE REVALUED USING A REVALUATION RESERVE

• A NUMBER OF

ASSETS CAN OR MUST BE FAIR VALUED THROUGH THE P&L ACCOUNT

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REVALUATIONS UNDER FRS 15 AND FRS 102

• FRS 15 REQUIRES CURRENT

VALUE (LOWER OF NRC AND NPV) ON AN EXISTING USE BASIS FOR NON-SPECIALISED PROPERTIES

• FRS 102 REQUIRES MARKET

VALUE (NRV)

• NOT ALWAYS THE SAME!

DEFERRED TAX!

• FRS 102 REQUIRES DEFERRED

TAX PROVISIONS ON REVALUATIONS AND FAIR VALUE ADJUSTMENTS

• FRS 15 DID NOT USUALLY

REQUIRE DEFERRED TAX PROVISIONS ON REVALUATIONS

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FRS 102 APPENDIX 4 …

“ Entities measuring financial instruments, investment properties, and living animals and plants at fair value should note that they may transfer such amounts to a separate non- distributable reserve, instead of a transfer to retained earnings, but are not required to do so Presenting fair value movements, that are not distributable profits, in the separate reserve may assist with the identification of profits available for that purpose”

LONG LIVE THE REVALUATION RESERVE!

• Following FRS 102, a company takes the

increase in the fair value of its investment property of £50,000 to the current year’s profit and loss account and provides for deferred tax of £10,000

• An amount equivalent to the net credit to the

profit and loss account of £40,000 may be transferred to a separate reserve as an appropriation of profits. That reserve might be called the investment property revaluation reserve!

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HMRC COMMENT ON FRS 102

• JUNE 2016
• THE COMMISSIONERS’

ADVISORY ACCOUNTANT’S TEAM GIVE A SHORT PRESENTATION FOR THE CIOT ENTITLED “WHAT HMRC HAVE LEARNED FROM EARLY ADOPTERS OF NEW UK GAAP”

HMRC ORGANISATION CHART

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ALISON RING & GEOFF LEGOUAIS

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ISSUES COVERED …

• WHY DO THE FINANCIAL

STATEMENTS MATTER?

• REVIEW OF EARLY ADOPTERS

FINANCIAL STATEMENTS

• WHAT PRACTICAL STEPS CAN BE

TAKEN TO AVOID FURTHER QUESTIONS FROM HMRC?

WHY DO THE FINANCIAL STATEMENTS MATTER?

“ It is important for the information provided to HMRC to be clear on how these transitional adjustments impact

• r do not impact on

the taxable profits”

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OH DEAR …….. “ It is quite a small population but we have found quite a few issues” FOUR CATEGORIES ….

1. Obvious errors and inconsistencies in disclosures; 2. Inadequate disclosure; 3. Apparent errors in transition accounting; and 4. The link between the transitional adjustments reconciliation note and the tax computation being difficult to follow

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OBVIOUS ERRORS

• Financial statements refer to no

transitional adjustments but then detail material transitional adjustments;

• No updates to the accounting policy notes

where it is clear that the accounting policy has changed; and

• Disclosure of an accounting policy in

respect of fair value hedging where there is none

OBVIOUS ERRORS

“ … when there are

• bvious errors in

the disclosures this reduces the comfort on the accuracy of the figures in the accounts”

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INADEQUATE DISCLOSURE

• Disclosing a prior period error separately but

then failing to describe how that prior period error arose;

• The largest transitional adjustment in the

reconciliation having no narrative with it;

• The transition note not stating that there had

been a re-classification from tangible assets to intangible assets – so the adjustment was effectively hidden; and

• Absence of a prior period income statement

in the FRS 102 transition statements.

INADEQUATE DISCLOSURE

“ It is likely that this will lead us to having to ask more questions of those companies which have adopted minimal disclosure”

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TRANSITION ERRORS

• The previous accounting policy was incorrect, but

the change was treated as a transition adjustment rather than as the correction of an error – this is critical for tax purposes as these are treated differently;

• Substantial prior period error not included in

transition accounts;

• Changes in estimates bundled in as transitional

adjustments – which again impacts on the tax treatment; and

• Disclosing a transitional adjustment where one

would not be expected as there is no difference between old and new UK GAAP.

MISSING LINKS!

• Tracing the transitional adjustments

through to the tax computations;

• Application of tax law to the transitional

adjustments can be complex - there are sometimes errors in the application of the tax rules such as the disregard regulations; and

• The tax computations themselves are

incorrect in some cases as companies were not applying the change of accounting policy relief accurately.

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MISSING LINKS! “ Some of these are as basic as getting the debits and credits the wrong way around!” PRACTICAL STEPS …

• To make sure, in the financial

statements, that the transitional adjustments and reconciling items comply with the requirements of the accounting standard

• To make it clear how you get from the

transitional adjustments to the tax computation figures

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PRACTICAL STEPS …

“ Overall, the message is to be very clear with disclosure – particularly when and how a transitional adjustment has a tax impact”

AUDITING UNDER FRS 102

• WHAT NEEDS TO

BE DONE AT THE FIRM LEVEL?

• WHAT NEEDS TO

BE DONE AT THE ENGAGEMENT LEVEL?

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WHAT NEEDS TO BE DONE AT THE FIRM LEVEL?

• UNDERSTANDING FRS 102
• AWARENESS OF TRANSITIONAL

PROVISIONS

• UPDATING OF TEMPLATES
• POSITION ON “UNDUE COST AND

EFFORT”

WHAT NEEDS TO BE DONE AT THE FIRM LEVEL?

• THREATS TO INDEPENDENCE –

MANAGEMENT THREAT AND SELF REVIEW THREAT

• ESTABLISHMENT OF FAIR

VALUATIONS – PROBLEM IF MATERIAL AND SUBJECTIVE

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WHAT NEEDS TO BE DONE AT THE ENGAGEMENT LEVEL?

• AUDITING OF POLICY CHOICES
• AUDITING OF BALANCES AT DATE

OF TRANSITION

• AUDITING OF NEW COMPARATIVES
• DISTINGUISHING BETWEEN

ERRORS AND TRANSITIONAL ADJUSTMENTS

WHAT NEEDS TO BE DONE AT THE ENGAGEMENT LEVEL?

• IMPACT ON BUSINESS
• IMPACT ON DISTRIBUTABLE

PROFITS

• CONSIDERATION OF INCREASED

RISK OF FRAUD AND ERROR

• AUDITING OF FAIR VALUES

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