SLIDE 1
What we will be covering
An overview of the new Framework
Who needs to adopt and when
Key differences from current UK GAAP
The implications for you and your business
Managing the transition
FRS 102 Tessa Park and Tim Gonzaga 4 June 2015 What we will be - - PowerPoint PPT Presentation
FRS 102 Tessa Park and Tim Gonzaga 4 June 2015 What we will be - - PowerPoint PPT Presentation
The changing face of accounting: FRS 102 Tessa Park and Tim Gonzaga 4 June 2015 What we will be covering An overview of the new Framework Who needs to adopt and when Key differences from current UK GAAP The implications for
SLIDE 2
SLIDE 3
Overview of the new framework
All existing FRS, UITF, SSAP going
Replaced by a small suite of standards: – FRS 100 (an overview standard) – FRS 101 (reduced disclosures for some entities
- therwise adopting IFRS)
– FRS 103 /104 (don’t worry about these!)
FRS 102 – all the accounting and disclosure requirements
FRS 105 (draft) same, only for ‘micro entities’
SLIDE 4
How will this affect me?
SLIDE 5
Do I need to adopt?
Applies to all entities preparing accounts under UK GAAP except FRSSE companies
However, FRSSE to be withdrawn with effect from 2016
So unless you elect to use IFRS/ FRS 101 – yes!
SLIDE 6
When do I need to adopt?
Applies for accounting periods beginning on or after 1/1/2015
Small companies: from 1/1/ 2016
Key dates – first accounting period under FRS 102: and
Date of transition (point at which everything gets retrospectively restated)
Some useful one off exemptions on transition (see later)
Can early adopt – but adds time pressure
SLIDE 7
What do I need to do?
Default position is full retrospective restatement
This means:
– Take account of all differences at date of transition – however far back they go – Restate all balance sheet items where this is necessary – May involve recognition and measurement changes – Changes that affect brought forward P&L – adjust retained earnings at date of transition
SLIDE 8
What do I need to do? (2)
First year of preparing financial statements under FRS 102 – prepare reconciliations:
– Balance sheet at date of transition – Balance sheet at date of last financial statements published under
- ld UK GAAP
– Profit and loss account ditto
Disclose the reconciliations in the notes to the accounts
SLIDE 9
What will my accounts look like?
Some new requirements – statement of changes in equity
Statement of comprehensive income – one part
- r two?
Cash flow statement – totally different format
Statement of compliance with FRS 102
Disclosure of significant judgements and sources of estimation uncertainty
PYA for all material errors in prior year, not just those that are fundamental
SLIDE 10
What else will I need to think about?
The numbers are likely to change – profits may well go down (or possibly up)
This may have an effect on
– Bonus policy – Dividend policy – Banking covenants – Tax payable
Best to think about this now rather than later
SLIDE 11
Key changes
SLIDE 12
Key changes
Intercompany/ other long term loan balances
Media write backs
Property
Deferred tax
Holiday pay accruals
Financial instruments & foreign exchange
Goodwill and intangible assets
Business combinations and other group issues
Health warning - these are not the only differences!
SLIDE 13
Long term loan balances
Issues arise where loan balances are at zero or a below market rate of interest and are long term (i.e. more than
- ne year)
This is common with intercompany loans or loans from / to related parties
FRS 102 requires them to be treated as ‘financing transactions’
Logic – company getting a benefit from not paying a market rate
SLIDE 14
Long term loans (2)
On initial recognition – show at present value of eventual amount of repayment
Discount over term of loan using a market rate of interest on a similar debt instrument (need to impute/ estimate/ guess)?
Then unwind discount over the term
Potentially significant differences between repayment amount and amount initially recognised – how to account for difference?
SLIDE 15
Issues to consider
What is a comparable market rate? What rate could the loan have been obtained from a bank?
What is the expected time frame (realistically) for repayment? Is there an agreed term?
Should terms of loan be formalised (or changed?)
Should a market rate be charged? (possible tax consequences?)
SLIDE 16
Issues to consider (2)
If on demand – no issue
However, reclassification as current could have serious effect on liquidity of balance sheet
May need to renegotiate covenants with external lenders?
If no explicit terms, this would usually be default position
SLIDE 17
Media write backs
Big issue for media where accrual recognised but invoice never received – though could apply to any uninvoiced accrual
FRS 102 (unlike old UK GAAP) contains explicit guidance
- n derecognition of liabilities
Liabilities can only be derecognised when settled, released by the creditor, or expires
SLIDE 18
Media write backs (2)
In the case of media write backs – unlikely to either be settled or released by creditor
Can be said to have expired when statute of limitations has passed
6 years from date the liability was initially incurred
Not permissible to write back any earlier under FRS 102 – so may require accounting policy change/ adjustment at DoT
SLIDE 19
Property, plant and equipment
Major difference is treatment of revaluations – cost model is basically the same
Gains on revaluation go through
- ther comprehensive income –
again basically same as now
Losses go to profit or loss – unless previously recognised gain on same me asset – can no longer offset
SLIDE 20
Investment property
Valued at fair value – unless FV cannot be
- btained without ‘undue cost or effort’
Term is not defined – but if were able to
- btain sensible valuations in the past,
exemption unlikely to be available
All gains and losses on investment property are shown in profit t or loss ss
Not realis lised ed so so not dist strib ibuta utable ble – need d to keep track ck!
SLIDE 21
Leases
Overall 2 main points of difference
No ’90% test’ for determining whether lease is finance or operating
Lease incentives spread over lease term rather than period to first rent review
Lease term is the non-cancellable period plus any further periods which are highly probable to be entered into at the inception of the lease
SLIDE 22
Deferred tax
Nobody’s favourite area of accounting!
Generally – more ‘timing differences’ under FRS 102 than current UK GAAP
Therefore – more deferred tax balances recognised – with consequential effects
- n profits
In addition – discounting of deferred tax balances prohibited
SLIDE 23
Deferred tax (2)
Recognised on all revaluation luation gains ns even if no binding agreement to sell
BIG differen erence e – main n impact act where e proper erty ty held– consider ider effects ts on b/s ratios/ tios/ covenants? nants?
Other big difference - recognised on fair value adjustments on a business combination (with balancing adjustment to goodwill on acquisitions)
SLIDE 24
Holiday pay accruals
Explicit requirement to accrue for ‘accumulating compensated absences’
Holiday pay and any similar entitlements where there is an ability to carry forward
Not an issue where policy is ‘use it or lose it’ (and enforced)
SLIDE 25
Holiday pay accruals (2)
If entitlement to c/f holiday – recognise accrual at o/s holiday x average daily rate of pay
Particular problem where holiday year not the same as accounting year, or where holiday entitlement depends on when an individual joined
May be constructive obligation if in practice allow c/f even though policy doesn’t technically permit
Full retrospective restatement required – so best to do DoT calculation ASAP
SLIDE 26
Financial instruments
Key principle – financial instruments are split between ‘basic’ and ‘other’
Most (though not all) basic are at cost or amortised cost
This includes bank loans with straightforward terms
‘Other’ are at fair value
SLIDE 27
Financial instruments (2)
Derivatives (forward currency contracts, interest rate swaps taken out separately from loan) – bring on balance sheet at fair value and re-measure at each reporting date
Investments in other entities – show at fair value, unless unquoted equity instruments and fair value cannot be reliably measured
SLIDE 28
Financial instruments (3)
Main implications:
– Terms of loans will need to be reviewed carefully to determine if basic or not – Cannot just assume bank loan will be basic – Consider renegotiation? (Bank may not agree!) – How do you fair value anyway? (talk to the bank) – Listed, and many unlisted, investments will have to be fair valued (easy if listed, less so if not)
SLIDE 29
Foreign exchange
Need to disclose functional currency – may not always be Sterling
Currency of primary economic environment in which company operates
Can choose a different presentation currency
Use of a contracted rate or closing rate to translate transactions is not permitted – need to use spot rate. FX contracts may be accounted for as hedges
Cannot use closing rate to translate P&L of foreign
- peration
SLIDE 30
Goodwill and intangible assets
Under current UK GAAP – 20 years for goodwill, though can have longer/ indefinite life
Under FRS 102 – use UEL of max 10 years, if a reliable estimate of UEL cannot be made
Indefinite life UEL/ intangibles not permitted
SLIDE 31
Goodwill (2)
On transition – need to consider carefully whether a reliable estimate of UEL can genuinely be made
(and if so, is it same as it was before?)
If yes – don’t need to do anything (except disclose)
If no – put through additional amortisation (increased hits to consolidated profits)
Ditto company profits if goodwill from purchase of unincorporated business
How to account will depend on why it’s changed
SLIDE 32
Business combinations
Need to determine whether any intangibles should be recognised separately from goodwill
This could include brand names, databases or customer relationships
Deferred tax provisions on FV adjustments
Need to factor in contingent liabilities, if FV can be reliably measured
So potentially significantly different goodwill balances
Negative goodwill same treatment as currently
SLIDE 33
Business combinations (2)
Piecemeal acquisitions – goodwill only calculated at the point control obtained (none recognised subsequently if changes in MI)
Merger accounting banned (except group reconstructions/ some charity combinations)
Fair value adjustments – one year from date of the combination (not the subsequent year end date)
Contingent consideration – substance of earn out arrangements?
JVs – equity accounting not gross equity
SLIDE 34
Business combinations (3)
Main implications:
– Goodwill balances may be significantly different – Part acquisitions and part disposals will be accounted for differently – More intangibles – how to value? Could be quite difficult to do – Accounting for JVs – arguably simpler?
SLIDE 35
Managing the transition
SLIDE 36
Transitional exemptions
A number of areas where there are optional exemptions from full retrospective restatement on transition
Also some instances where full retrospective restatement is actually prohibited
Some exemptions are more useful than others
SLIDE 37
Optional exemptions
Business iness combinations binations – exemption from restating combinations before date of transition
However – will still need to restate deferred tax on fair value adjustments
Since cannot adjust goodwill if taking exemption – adjust brought forward consolidated reserves instead
Really useful exemption as removes need to unpick old acquisitions
SLIDE 38
Optional exemptions (2)
Fair r value e or revaluation luation as deemed med cost
Most useful for own use property
Can fix valuation under current UK GAAP as deemed cost at date of transition – then apply (less depreciation) going forward
So no need for future valuations
Can also do as a one-off if item not previously held at valuation
SLIDE 39
Optional exemptions (3)
Lease se incentiv ntives es for leases commencing prior to DoT – can use old treatment for spreading (quite useful)
Dormant companies – basically exempt from any restatements unless balances change i.e. ceases to be dormant (useful given intercompany balance issue)
A few other exemptions which are less useful – see section 35 of FRS 102
SLIDE 40
Prohibitions from retrospective restatement
Can’t ‘lose’ prior year errors as transition differences
Accounting estimates not to be retrospectively adjusted
For instance – legal case – provision for £50k in the 31/12/13 accounts. By the time the 31/12/15 accounts are prepared under FRS 102, case has settled for £75k.
In FRS 102 numbers at DoT the provision is shown at £50k – prevents the creative use of hindsight when preparing the transitional numbers
Only exception is where accounting policies change due to adoption or if material error
SLIDE 41
Tax aspects of FRS 102
Michael Haig
SLIDE 42
Corporation tax
Three areas to cover:
– General trading income – Intangible assets – Financial instruments
Two situations
– Transition – Operating under FRS102
SLIDE 43
Corporation tax General position
Change from one valid basis to another
Compare years up to 31/12/2014 (old); with 31/12/2015 (new)
Need to ensure
– Receipts taxed once – Expenses allowed once
Adjustment on first day of new basis
Applies to trading and property business
SLIDE 44
General trading Transition
Most transitional adjustments will be tax effective
– Property impairments/revaluations – Disallowable/capital costs eg entertaining
Trading/property will follow FRS102 accounts
Accounts do not determine tax status eg revenue/capital, wholly/exclusively
SLIDE 45
General trading Media writebacks
Period over which media writebacks may be made extended
May result PY adjustment in accounts
“Receipts…brought into account before the change…[that]… would not have been…if the profits had been calculated on the new basis.”
Deduction on first day of first period
SLIDE 46
Intangible assets Transition
Only for “new” intangibles (1 April 2002)
Compare accounting value:
– End of last “old” period; and – Start of first “new” period
Difference arises on 1st day of new basis
Not applicable if 4% election made
SLIDE 47
Intangible assets Look out for
Research & development
– If enhanced deduction – no amortisation of intangible
Software
– Treated as Plant & Machinery – not affected – Future expenditure – election for P&M treatment
SLIDE 48
Financial instruments General
FRS102 has some profound effects
– “proper” Amortised Cost accounting – Fair value accounting – Recognition of derivatives
In addition, Loan Relationship Rules are changing!
– FRS102 from 1 January 2015 – Loan Relationships from 1 January 2016
SLIDE 49
Financial instruments Transition
A number of interacting parts
– Legislation – Change of Accounting Practice Regs – Disregard Regs
A very complex area
SLIDE 50
Financial instruments Transition
Basic rule
– Difference between closing and opening value – Irrelevant how treated in accounts – Includes derivatives
Change of Accounting Practice Regs
– Transition adjustments spread over 10 years – Unless realised in first AP under new basis
SLIDE 51
Financial instruments Living with FRS102
Loan Relationship rules tax all movements (for now…)
Some FIs “Fair Valued” but;
– connected parties always ys taxed under Amortised Cost
Amortised Cost or Fair Value accounting will result in gains and losses
Initial recognition may give day 1 credit or debit
– Gaining clarity on where “spare” debit/credit goes; but – Little guidance from HMRC
SLIDE 52
Financial instruments Hedging
Derivatives recognised under FRS102
FV movements will be tax effective (for now…)
So hedges would not be effective for tax purposes
Disregard Regulations
– Attempts to restore pre-FRS26 UK GAAP – Applies to certain hedging instruments – FV movements disregarded until realisation
Will need to elect ct in to Regs
SLIDE 53
Financial instruments New Loan Relationships
New loan relationship rules from 1 January 2016
Main changes
– Only tax P&L entries – “Perpetual debt” – not a Loan Relationship – Consultation on amendment to connected party rules – Some changes to Disregard Regulations
Draft legislation in December?
SLIDE 54
Income Tax
Income Tax?
Companies must use FRS102
And so must LLPs
– Trading/property income similar to Corporation Tax – P&L movements for intangibles not taxable/allowable – Interest/discounts taxed on receipt/realisation
Taxable and accounts could be very different
SLIDE 55
Capital Gains Tax
Capital Gains Tax?!
HMRC Statement of Practice D12
Revaluation of, say, investment property;
Change in capital sharing ratios;
Chargeable disposal!
SLIDE 56
Conclusion
Tax issues separate but associated with accounting issues
Don’t assume accounting adjustments will be same as tax
Watch this space on FIs
SLIDE 57