ACCOUNTS AND AUDIT UPDATE AUTUMN 2016 FOR Guy Loveday 1 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 1
RENEGOTIATION OF LOANS • On 1 January 20X1, an entity takes out a bank loan for £5m, incurring an arrangement fee of £100,000. Interest of £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 2
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% 3
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 out 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. 4
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. 5
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 6
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 7
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 8
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 9
EXAMPLE 1 • Assuming that the loan is made by the director in his or her capacity as the owner of the business, the “difference” of £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 10
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 owner 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 11
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 12
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 13
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 over revaluation reserves and when and if they should apply” 14
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 15
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 16
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! 17
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 18
ALISON RING & GEOFF LEGOUAIS 19
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 or do not impact on the taxable profits” 20
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 21
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 obvious errors in the disclosures this reduces the comfort on the accuracy of the figures in the accounts” 22
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