Section 35: Transition to FRS 102
Section 35 deals with the exemptions available to first time adopters on transition to FRS 102 so as to make the transition easier on companies.
What are the key points?
An entity must determine the transition date and provide comparative information in respect of the prior period for all amounts presented in the financial statements.
An opening balance sheet is not required to be presented however these opening balances must apply FRS 102.
A reconciliation is required between the profit and opening equity reported under old GAAP and FRS 102 for the opening balance sheet and the comparative period detailing the reasons for the transition adjustments.
The main exemptions which are provided are:
- A dormant entity as defined by the Companies Act can elect not to transition to FRS 102 until it moves from being a dormant entity as defined by the Act;
- Elect not to apply Section 19 – Business Combinations and Goodwill to combinations prior to the date of transition;
- Elect not to apply Section 26 – Share based payment transactions entered into prior to the date of transition where they were accounted for under FRS 20;
- Elect to measure property, plant and equipment, investment property or intangible assets which meet Section 16, 17 and 18 criteria at fair value or revaluation at the date of transition and deem the fair value or revaluation less depreciation as deemed cost. Where revaluation is used as deemed cost then the revaluation reserve is transferred to other equity;
- In the individual financial statements elect to treat the carrying value under previous GAAP of investments in subsidiaries, joint ventures and associates to be the deemed cost;
- Where a compound financial instrument was previously not accounted for as such under old GAAP and the liability component has been settled then an exemption can be made not to account for same as a compound instrument;
- Elect to treat the carrying amount of development expenditure under old GAAP as its deemed cost;
- Elect to treat the date of transition as the date in which a policy for capitalisation of borrowing costs is chosen;
- Elect to treat lease incentives received prior to the date of transition under old GAAP rules i.e. these incentives continue to be released up to the break clause;
- Elect to include the cost of decommissioning liabilities as the cost of an item of property, plant and equipment at the date of transition as opposed to the date in which it arose;
- Elect to apply hedge accounting from the date in which three of the five conditions are met if the two conditions relating to the documentation of the hedging relationship and the causes for ineffectiveness are documented prior to signing the financial statements. A similar election is possible for hedges in operation at the date of transition; and
- Specific exemption for extractive, service concession arrangements and arrangements containing a lease on first time adoption.
Section 35 contains mandatory exceptions whereby first time adopters cannot change the accounting that it followed previously for any of the following transactions:
- De-recognition of financial assets and liabilities;
- Hedge accounting;
- Accounting estimates;
- Discontinued operations; and
- Measuring non-controlling entities
Small entities meeting the criteria as set out by FRS 102 can avail of the following exemptions:
- Elect not to restate prior year comparative financial statement to comply with Section 11 and 12; financial instruments where they have not been fair valued under old GAAP. Instead Section 11 and Section 12 can be applied from the last day of the comparative period with an adjustment posted through equity and an explanation as to the policies applied in the comparative year.
In relation to financing transactions involving related parties treated under Section 11 i.e. intercompany loans at non market rates, a small entity can determine the present value at the first reporting date as opposed to the facts and circumstances at the time the liability or asset was first recognised.
These exemptions will not be available to Irish entities until the Companies Accounting Act 2016 is enacted.