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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-29/” type=”big” color=”red”] Return to Section 29 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Example 31: Interest rate swap – non hedge accounting
Company A gets a loan for €100,000 on 1 January 2013 at a fixed rate of 5% which is repayable in 5 years.
At the same time Company A enters into an interest rate swap with a third party e.g. another bank for a 5 year period whereby Company A will pay the floating rate to the third party and the third party will pay the fixed rate to Company A. The notional amount hedged is €100,000 Assume the current average variable interest rate was 6%.
1) Under old GAAP (for non-FRS 26 adopters) this interest rate swap was not accounted for, instead it was disclosed in the financial statements. However under FRS 102 this should have been fair valued.
Assume at the end 31 December 2013 and 2014, there was a loss of €5,000 and profit of €6,000 respectively on the interest rate swap.
The transition adjustments required are:
1 January 2014
| Dr Profit and Loss Reserves | €5,000 |
| Cr Interest Rate Swap Liability | €5,000 |
Being journal to recognise the fair value of the interest rate swap.
| Dr profit and loss reserves with Deferred Tax | €500 |
| Cr Deferred Tax Liability | €500 |
Being journal to reflect the deferred tax on the above adjustment.
Journals required for year ended 31 December 2014 assuming the above journals are brought forward)
| Dr Interest Rate Swap Liability | €5,000 |
| Cr Interest Expense | €5,000 |
Being journal to reverse the fair value of the interest rate swap at the end of prior year.
| Dr Deferred Tax Liability | €500 |
| Cr Deferred Tax P&L | €500 |
Being journal to reflect the deferred tax on the above adjustment.
| Dr Interest Rate Swap Liability | €6,000 |
| Cr Interest Expense | €6,000 |
Being journal to recognise the fair value of the interest rate swap at 31 December 2014
| Dr Deferred Tax P&L | €600 |
| Cr Deferred Tax Liability | €600 |
Being journal to reflect the deferred tax on the above adjustment as it was not taxed in 2014 tax computation.
Journals required for year ended 31 December 2015 (assuming the above journals are brought forward)
| Dr Interest Expense | €6,000 |
| Cr Interest Rate Swap Liability | €6,000 |
Being journal to recognise the fair value of the interest rate swap at 31 December 2014.
Note that only 1/5th of the deferred tax is reversed in 31 December 2015 as under the tax transition rules the adjustment in 2014 will be taxable over 5 years from 2015.
Note that no deferred tax journals are required on the fair value of the interest rate swap adjustment in 31 December 2015 as this will be taxed/tax deductible in the 2015 year.
Under old GAAP (non-FRS 26 adopters) did not have the opportunity to apply hedge accounting. FRS 102 provides these entities with an opportunity provided the conditions in Section 12.18 are met. Note the documentation requirements of Section 12.18 (d) and (e) do not have to be met at the date of transition under Section 35.10(t) instead if these conditions are met by the date the first set of FRS 102 financial statements were authorised for issue then hedge accounting can be applied.
Cash flow hedge
On transition, the amount to be shown in the cash flow hedge reserve should reflect the extent the transaction has not yet affected the profit or loss. Under a cash flow hedge the fair value of the derivative (e.g. forward currency contract, interest rate swap – pay variable receive fixed and the hedged item) should be recognised in other comprehensive income. See example below:
Example 32: Cash flow hedge example
On 1 December 2013 Company A whose functional currency is euro secured a highly probable contract with a sterling customer worth £100,000. The sale is expected to happen on 31 March 2015 of the following year.
In contemplation of the sale Company A enters into a forward FX contract to sell £100,000 at a rate of €1:£0.80.
Assume the spot rate at 31 December 2013 was €1:£0.70 and the date of transition is 1 January 2014. Assume deferred tax of 10%.
The forward rate quoted for sterling contract at 31 December 2013 by the bank for a contract that matures on 31 March is €1:£0.75.
Under old GAAP this forward contract was not accounted for instead it was disclosed in the financial statements. However under FRS 102 this should have been fair valued. The contract also meets the hedge accounting requirement in 12.18 and the client wants to hedge account.
The transition adjustments as a result of entering into this forward contract and chosing to adopt hedge accounting is as follows:
1 January 2014
| Dr Other Comprehensive Income – Cash Flow Hedge Reserve | €8,333 |
| Cr Forward Contract Liability | €8,333* |
Being journal to reflect fair value of the forward contract at the year-end not accounted for under old GAAP and applying hedge accounting (i.e. posted to OCI as it meets the condition for hedging).
| Dr Deferred Tax in OCI/Cash Flow Hedge Reserve | €833 |
| Cr Deferred Tax Liability | €833 (€8,333*10%) |
Being journal to reflect deferred tax on the above adjustment
*Fair value of the forward contract:
Amount of euros that will be obtained on 31 March at contracted rate of €1:£0.80 is £100,000/£0.80= €125,000.
Note any sterling balances in the balance sheet at 31 December should be retranslated to the year-end spot rate.
Amount of euros that could theoretically be obtained on 31 March at contracted rate of €1:£0.75 is £100,000/£0.75 = €133,333.
Fair value loss at 31 December 2013/1 January 2014 is €133,333-€125,000 = €8,333.
Journals required for year ended 31 December 2014 assuming the above journals are brought forward)
| Dr Forward Contract Liability | €8,333 |
| Dr Other Comprehensive Income – Cash Flow Hedge Reserve | €8,333 |
Being journal to reverse the journals posted at 1 January as the contract has now matured and the FX gain on the contract has already been posted to the P&L under old GAAP (i.e. contract settled for €125,000 (£100,000/£0.80) less the £100,000 at the spot rate at 31 March of €1:£0.84p i.e. (€119,048)= €5,952.
| Dr Deferred Tax Liability | €833 (€8,333*10%) |
| Cr Deferred Tax in OCI/ Cash Flow Hedge Reserve | €833 |
Being journal to reflect reversal of deferred tax recognised on transition as the contract has now matured.
If another forward contract was entered into in 2014 and 2015, the same type of journals would be required
Example 33: Interest rate swap – cash flow hedge accounting
Company A gets a loan for €100,000 on 1 January 2012 at a variable rate which is repayable in 5 years.
At the same time Company A enters into an interest rate swap with a third party e.g. another bank for a 5 year period whereby Company A will pay the fixed rate of 6% to the third party and the third party will pay the floating rate to Company A. The notional amount hedged is €100,000 and the variable rate at inception such that the swap has a nil fair value is 6%. The expected average variable interest rate set in advance at the start of the year was 6%, 5% and 8% for 2012, 2013 and 2014 respectively. Interest is paid the following year.
Under old GAAP (for non-FRS 26 adopters) the fair value of the interest rate swap was not accounted for, instead it was disclosed in the financial statements. However under FRS 102 this should have been fair valued. The entity has also chosen to hedge account as it meets the hedge accounting requirements in Section 12.18.
Assume at the end 31 December 2013, the fair value of the interest rate swap was a loss of €5,000 up to that date. Under cash flow hedge rules assume €1,000 of this would have been recognised in the profit and loss account if the cash flows hedge previous years and the remaining €4,000
The transition adjustments required are:
1 January 2014
| Dr Cash Flow Hedge Reserve | €4,000 |
| Dr Profit and Loss Reserve | €1,000 |
| Cr Interest Rate Swap Asset | €5,000 |
Being journal to recognise the fair value of the interest rate swap.
| Dr Deferred Tax in OCI/ Cash Flow Hedge Reserve | €400 (4,000*10%) |
| Cr Deferred Tax Liability | €400 |
Being journal to reflect the deferred tax on the above adjustment.
The journals for 31 December 2014 would the same as the requirements under Section 12 shown in the example above.
Extract from the accounting policy note
a) Taxation
The company is managed and controlled in the Republic of Ireland and, consequently, is tax resident in Ireland. Tax is recognised in the profit and loss account, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case tax is also recognised in other comprehensive income or directly in equity respectively.
(i) Current tax
Current tax is calculated on the profits of the period. Current tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date.
(ii) Deferred tax
Deferred tax arises from timing differences that are differences between taxable profits and total comprehensive income as stated in the financial statements. These timing differences arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in financial statements.
Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Current or deferred taxation assets and liabilities are not discounted.
INCLUDE THE BELOW IF CONSOLIDATED FINANCIAL STATEMENTS ARE BEING PREPARED
If a temporary difference arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction does not affect accounting or taxable profit or loss, no deferred tax is recognised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Extract from notes to the financial statements – tax note
| .
|
2015
€ |
2014
€ |
| a) Analysis of tax expense in profit and loss: | ||
| Current tax: | ||
| Irish corporation tax on profit/(loss) on ordinary activities | XXX | – |
| Adjustment in respect of prior years | XXX | – |
| Foreign tax | XXX
|
–
|
| XXXX | – | |
| Deferred tax: | ||
| Origination and reversal of timing differences | ||
| Adjustment in respect of prior periods | ||
| Impact of change in tax rate | XXXX
|
–
|
| Tax on profit on ordinary activities (see note 9(c)) | 1,500,000
|
–
|
(i) During the year the Irish Government changed the capital gains tax rate from X% to X% which was substantively enacted on 2016. The year end deferred tax asset/liability has been measured at X% being the tax rate in force at the year end date. The impact of apply the updated rate of x% would result in the deferred tax asset/liability increasing by X%.
| b) Analysis of tax expense in other comprehensive income: | ||
| Deferred tax: | ||
| Actuarial loss on pension scheme | XXXX | – |
| Impact of change in tax rate | XXXX
|
XXXX
|
| Tax included in other comprehensive income | XXXX
|
|
c) Reconciliation of the expected tax charge at the statutory tax rate to the actual tax charge at the effective rate
The assessed tax charge for the year/period is different to the statutory rate of corporation tax in the Republic of Ireland of 12.5% (2014: 12.5%). The differences are explained below:
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Reconciliation of the expected tax charge at the statutory tax rate to the actual tax charge at the effective rate
| 2015 € | 2014 € | |
| a) Analysis of tax expense in profit and loss: | ||
| Current tax: | ||
| Irish corporation tax on profit/(loss) on ordinary activities | XXX | |
| Adjustment in respect of prior years | XXX | |
| Foreign tax | XXX | |
| XXXX | ||
| Deferred tax: | ||
| Origination and reversal of timing differences | ||
| Adjustment in respect of prior periods | ||
| Impact of change in tax rate | XXXX | |
| Tax on profit on ordinary activities (See note 9(c)) | 1,500,000 | |
d) Factors that may affect future tax charges The company has tax losses carried forward of €XXXX (2014: €XXX) that are available indefinitely for offset against future taxable profits. The directors have reviewed the potential deferred tax asset of €XXX at 31 December 2015 (2014: €XXX) and have concluded that it is inappropriate to recognise it in the company’s balance sheet at this time.
Extract from notes to the financial statements – deferred tax note (balance sheet) classified as Provision for liabilities in the balance sheet
Deferred tax
The deductible and taxable temporary differences at the year/period end dates in respect of which deferred tax has been recognised are analysed as follows:
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| 2015 € | 2014 € | |
| Deferred tax liabilities/(assets) (deductible temporary differences) | ||
| Capital allowances in excess of depreciation | – | – |
| Provisions | – | – |
| Post-employment benefits | – | – |
| Tax losses carried forward | – | – |
| Other deductible temporary differences | – | – |
| – | – |
Movement in deferred tax assets and liabilities, during the year, were as follows: [/et_pb_text][/et_pb_column][/et_pb_row][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]
| Capital allowances € | Provisions € | Tax losses carried forward € | Post- employment benefit € | Other € | Total € | |
| 2015 | ||||||
| At 1 January 2015 | – | – | – | – | – | – |
| Recognised in profit and loss | 177,328 | 307,132 | 307,132 | – | – | 484,460 |
| Acquisitions | – | – | – | – | – | – |
| Recognised in other comprehensive income | 177,328 | 307,132 | 307,132 | – | – | 484,460 |
| Disposals | – | – | – | – | – | – |
| Foreign exchange and other | – | – | – | – | – | – |
| At 31 December 2015 | 177,328 | 307,132 | 307,132 | – | – | 484,460 |
| Capital allowances € | Provisions € | Tax losses carried forward € | Post- employment benefit € | Other € | Total € | |
| 2014 | ||||||
| At 1 January 2014 | – | – | – | – | – | – |
| Recognised in profit and loss | 177,328 | 307,132 | 307,132 | – | – | 484,460 |
| Acquisitions | – | – | – | – | – | – |
| Recognised in other comprehensive income | 177,328 | 307,132 | 307,132 | – | – | 484,460 |
| Disposals | – | – | – | – | – | – |
| Foreign exchange and other | – | – | – | – | – | – |
| At 31 December 2014 | 177,328 | 307,132 | 307,132 | – | – | 484,460 |
- The net deferred tax liability/asset expected to reverse in the 2016 year is €XXXX. The reversal relates to the timing difference on tangible fixed assets and capital allowances through depreciation and amortisation. The above amount also incorporates the expected usage of loss carried forward.
- The unused tax losses at year end at detailed above. There are no unused tax credits. There is no expire date with regard to these losses.
- No deferred tax is recognised on unremitted profits of its associates as there is no liability to tax on these when remitted.
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