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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=”http://frs102.com/members/premium-toolkit/section-11/” type=”big” color=”red”] Return to Section 11 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=” ” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Example 1: Investment in shares
Company A, hold an investment of 25% in the ordinary share capital of Company Y which gives Company A significant influence. In this particular case, this investment does not come within the remit of Section 11 for Company A as this is considered an associate which is accounted for in accordance with Section 14-Investments in Associates.
Example 2: Investment in shares – 15%
Company A hold an investment of 15% in the ordinary share capital of Company Y (which does not provide Company A with significant influence). This comes within the definition of a financial instrument and is accounted for in accordance with Section 11 as there is no puttable element attaching to the rights of the shares.
Example 3: variable and fixed interest payments
A loan contract was issued which stated that the interest rate on the principal is calculated at 12 months LIBOR minus 3%.
In this particular case, this loan consists of a positive variable return (that being 12 month LIBOR) and a negative fixed return (i.e. 3%). Therefore, this meets condition (a) above.
Example 4: a zero coupon
Where no interest is charged and the amount returned is the amount that was loaned, then as the fixed amount is returned it meets the condition in Section 11.9 (a) (i).
Example 5: fixed and variable interest payments
A loan contract was issued which stated that the interest rate on the principal is calculated at 12 months LIBOR plus 3%.
In this particular case, this loan consists of a variable return (that being 12 month LIBOR) plus a fixed return (i.e. 3%). Therefore, this meets condition (a) above.
Example 6: fixed rate loan for a set period and then a reversion to the banks variable rate
For such a loan, as it meets the condition in 11.9 (a) (ii) and given that the variable rate is an observable interest rate, it is a permissible link. Also as the interest rate is a positive rate this meets the definition of a basic instrument.
Example 7: fixed and variable interest payments where there a fixed positive return and a negative variable return
A loan contract was issued which stated that the interest rate on the principal is calculated at 10% less 12 months LIBOR.
For such a loan, the condition in 11.9(a)(i) is satisfied however, condition 11.9(a)(iv) is not as it is a negative variable rate.
Example 8: Loan/bond which is convertible into the borrower’s equity
For such a loan as there is an option to convert to equity it does not meet the definition of a basic instrument.
Example 9: loan issued which is linked to a general inflation index
Such a loan is a basic financial instrument. However, if it is linked to an inflation index which is not general and instead is specific to market, it does not meet the definition of a basic instrument.
Example 10: Variation in return
A loan stating that interest is payable at fixed rate of 2% for the first 2 years and 4% for the remaining 3 years.
Such a loan is a basic instrument as it meets the requirement in 11.9 (aB) i.e. the variation is not contingent on future events as it is explicitly stated from the start.
If in the above example the interest was fixed for the 5 years and then reverts to variable LIBOR rate, this is also determined to be basic financial instrument as it is in the contract, is determinable and not dependent on future contingencies.
Example 11: prepayment options
A loan is issued which states that if repayment is made early, then penalties will be payable to the issuer to compensate them for a fall in interest rates since inception.
Such a clause would meet the basic financial instrument definition as the clause was included to protect the issuer for early termination which is allowed as per Section 11.9(c).
Example 12: Loan extension option
A loan is issued for 10 years at a rate of 3% which provides an option to the borrower to extend the loan for a further 3 years and at that point pay interest at a rate of LIBOR plus 1% at that time.
Given that the variation in return is contingent on the borrower extending the loan and given that the market rate of the loan cannot be known at that time, this does not meet the condition in 11.9(aB). In order for this condition to be met the loan agreement would have to specify that the interest rate charged on the loan after 10 years would be determined at that time. As a result, the loan is classed as complex and within the remit of Section 12. In this case under Section 12, the fair value of the optional exemption would have to be determined based on the facts at each reporting period and the movement posted to the profit and loss account.
Example 13: loan at market rates with transaction costs
Company A obtains a loan from the bank for CU100,000 on 1 January 2015. Arrangement fees of CU10,000 was charged by the bank. The loan carries a market rate of interest of 5% per annum which is charged annually. It is repayable after 5 years. Entity A would calculate the amortised cost and effective interest rate in the following way:
Step 1: Assess whether the instrument meets the definition of a basic instrument and the category it falls into
As this loan meets the definition of a debt instrument where there is no unusual interest rates, then this meets the definition of a basic debt instrument.
Step 2: Determine the method in which the debt instrument should be measured (does section 11.14 (b) apply
As using the amortised cost basis does not create a measurement inconsistency and as this is not a group managed debt instrument where the performance of the group is evaluated on a fair value basis, then it is correct to use the amortised cost basis
Step 3: Assess if there is a financing transaction within the arrangement i.e. is the transaction at non market rates; is unusual extended credit terms provided?
Here the loan is at market rates, therefore there is no financing transaction.
Step 4: Determine amount to be recognised on initial recognition.
The amount to be recognised is the total value of the loan received of CU100,000 less the transaction costs of CU10,000 i.e. CU90,000
Step 5: Determine the effective interest rate and determine the carrying amount on subsequent measurement
The effective interest rate is the rate of interest that exactly discounts the estimated future cash flows through the expected life. In this case the rate is 7.469%. This 7.469% can be determined through trial and error or through the use of a mathematical formula in Microsoft Excel.
Step 6: Decide the journals to be posted at each period end
The journals to be posted in 2015 excluding the payment of the interest are as detailed below such that the amortised cost at 31/12/15 is CU91,708. This will be continued year on year:
|
|
CU |
CU |
|
Dr Loan Liability |
10,000 |
|
|
Cr Bank |
|
10,000 |
Being journal to recognise the arrangement fee charged
|
|
CU |
CU |
|
Dr Interest Expense |
CU6,722 |
|
|
Cr Loan Liability |
|
CU6,722 |
Being journal to recognise effective interest charge for 2015. The effective interest charge will be posted in each of the 5 years as detailed above. The CU5,000 will be set against the liability as it is paid.
Example 13a: change in estimate
If we take example 13 and assume that a repayment of CU10,000 was made at the end of year 2 (i.e. 31/12/16). Therefore the new principal to be repaid at 31/12/19 is CU90,000 and the new interest charge is CU4,500 (i.e. CU90,000*5%) for 2017 to 2019.
Calculate the net present value of estimated future cash flows as per below.
The actual carrying amount at 31/12/16 as per the amortised cost table above in example 14 was CU93,573. If we then take account of the additional payment of CU10,000 made on 31/12/16, the carrying amount in the financial statements is CU83,573. The difference of CU645 (CU83,573-CU84,218) is debited to the interest cost in the profit and loss account at 31/12/16.
The remaining difference of CU5,782 (CU90,000-CU84,218) is then charged to the profit and loss account over the remaining life as follows (assuming there is not a substantial modification as discussed further below):
Example 14: Intercompany loan from a parent company
Company A is a subsidiary of Parent B. Parent B provides a loan to Company A for 5 years for CU200,000 on 01/01/2015. No interest is charged on the amount loaned. The market rate of interest that would be charged on this loan by a third party i.e. a bank would be 5%. In the analysis below we have assumed the answers to steps one and two are as per example 13 above. (Step 1 Asses whether the instrument meets the definition of a basic instrument and the category it falls into. Step 2 Determine the method in which the debt instrument should be measured (does section 11.14 (b) apply). Assume the adjustments are not taxable or tax deductible under tax legislation rules and there are no transfer pricing adjustments required. Under Section 11, the following accounting transactions will be required in the books of the parent and the subsidiary:
Step 3: Assess if there is a financing transaction within the arrangement i.e. is the transaction at non market rates; is unusual extended credit terms provided?
Step 4: Determine amount to be recognised on initial recognition and subsequent measurement
Given that a financing arrangement exists, there is a need to determine the present value of the future payments using the inputted market rate. Therefore the amount to be recognised initially is:
CU200,000 / (1.05)^5 = CU156,705
Therefore the journals to post in Company A’s TB are:
|
|
CU |
CU |
|
Dr Bank |
200,000 |
|
|
Cr Interco Loan |
|
200,000 |
Being journal to recognise receipt of the loan
|
|
CU |
CU |
|
Dr Interco Loan (CU200,000- CU156,705) |
43,295 |
|
|
Cr Equity/Capital Contribution |
|
43,295 |
Being journal to reflect deemed gift from the parent for the fact that the loan was given interest free.
In the parent company financial statements the journals on initial recognition would be:
|
|
CU |
CU |
|
Dr Interco Loan |
200,000 |
|
|
Cr Bank |
|
200,000 |
Being journal to recognise provision of the loan
|
|
CU |
CU |
|
Dr Investment |
43,295 |
|
|
Cr Interco Loan (CU200,000-CU156,705) |
|
43,295 |
Being journal to recognise the deemed investment in Company as a result of providing a favourable loan
Step 5: Determine the effective interest rate
The effective interest rate is the rate of interest that exactly discounts the estimated future cash flows through the expected life. In this case the rate is 5% which is the same as the market interest rate as there was no transaction costs.
Step 6: Decide the journals to be posted at each period end.
In Company A financial statements the journals to be posted at 31/12/2015 are as detailed below such that the amortised cost at 31/12/15 is 164,540. This will be continued year on year:
|
|
CU |
CU |
|
Dr Interest Expense |
7,835 |
|
|
Cr Loan Liability |
|
7,835 |
Being journal to recognise effective interest charge for 2015. The effective interest charge will be posted in each of the 5 years as detailed above assuming no changes in the cash flow occur.
In the parent company financial statements the journals to be posted at 31/12/2015 are as detailed below such that the amortised cost at 31/12/15 is 164,540. This will be continued year on year:
|
|
CU |
CU |
|
Dr Loan Liability |
7,835 |
|
|
Cr Interest Income |
|
7,835 |
Being journal to recognise effective interest charge for 2015. The effective interest charge will be posted in each of the 5 years as detailed above.
Depending on the tax rule in the country in which the entity operates this interest expense booked in the subsidiary company and the interest income booked in the parent company may be taxable/tax deductible.
NOTE: if the terms of the loan agreement stated that the loan was repayable on demand, the carrying amount on initial recognition would be 200,000 as this is the deemed present value of future payments, therefore no deemed interest would need to be recognised.
Example 15: Loan provided to the company by a director
A shareholder/director provides a loan to Company A for 5 years for CU200,000 on 01/01/2015. Interest of 1% is charged on the amount loaned annually (i.e. CU2,000 per annum). The market rate of interest that would be charged on this loan by a third party i.e. a bank would be 5%. In the analysis below we have assumed the answers to steps one and two are as per above. (Step 1 Asses whether the instrument meets the definition of a basic instrument and the category it falls into. Step 2 Determine the method in which the debt instrument should be measured (does section 11.14 (b) apply). Assure that there are no timing differences for deferred tax purposes. Under Section 11, the following accounting transactions will be required in the books of the Company A:
Step 3: Assess if there is a financing transaction within the arrangement i.e. is the transaction at non market rates; is unusual extended credit terms provided?
Here the loan is at non-market rates as there is no interest charged, therefore there is a financing transaction. The interest rate charged on the loan is 4% (5%-1%) below market rates.
Step 4: Determine amount to be recognised on initial recognition
Given that a financing arrangement exists, there is a need to determine the present value of the future of the future payments using the inputted market rate. Therefore amount to be recognised initially is:
CU200,000 / (1.04)^5 = 164,385
Therefore, the journals to post in Company A’s TB are:
|
|
CU |
CU |
|||
|
Dr Bank |
200,000 |
|
|||
|
Directors Loan |
|
200,000 |
|||
Being journal to recognise receipt of the loan
|
|
CU |
CU |
|
Dr Directors Loan (200,000-164,385) |
35,615 |
|
|
Cr Interest Income |
|
35,615 |
Being journal to reflect the benefit received from the loan being received interest free.
NOTE: if the director was instead a shareholder/director, then there could be an argument to say that the credit should go to equity as opposed to the P&L as the shareholder has in effect given the company the benefit of an interest free loan which is akin to a capital contribution.
Step 5: Determine the effective interest rate
The effective interest rate is the rate of interest that exactly discounts the estimated future cash flows through the expected life. In this case the rate is 5.128%. This rate is determined through trial or error or through the use of a mathematical model in Excel.
Step 6: Decide the journals to be posted at each period end.
The journals to be posted at 31/12/2015 are as detailed below such that the amortised cost at 31/12/15 is CU170,815. This will be continued year on year:
|
|
CU |
CU |
|
Dr Interest Expense |
8,430 |
|
|
Cr Loan Liability |
|
8,430 |
Being journal to recognise effective interest charge for 2015. The effective interest charge will be posted in each of the 5 years as detailed above.
Example 16: Intercompany loan from a related party or a fellow subsidiary
If we take the same facts as example 15 but assume this time the loan was provided by a fellow subsidiary or another company which is owned by the same shareholders as Company A. Assume there are no timing differences for deferred tax purposes. The journals in this particular instance for each entity are:
Journals on initial recognition in Company A
|
|
CU |
CU |
|
Dr Bank |
200,000 |
|
|
Cr Related Party Loan Liability |
|
200,000 |
|
Dr Related Party Loan Liability (CU200,000-CU164,385) |
35,615 |
|
|
Cr Interest Income |
|
35,615 |
Being journal to recognise the receipt of the loan and the adjustments to show the loan at its present value of future payments
The journals for subsequent years will be the same as included in example 15 above
Journals on initial recognition in the fellow subsidiary/related party company
|
|
CU |
CU |
|
Dr Related Party Loan Asset |
200,000 |
|
|
Cr Bank |
|
200,000 |
|
Cr Related Party Loan Asset |
|
35,615 |
|
Dr Interest Expense |
35,615 |
|
Being journal to recognise the provision of the loan and the adjustments to show the loan at its present value of future receipts
On subsequent measurement the journals would be to credit interest income and debit related party loan asset so as to show the correct amortised cost amount as calculated above. It may also be possible to argue that the debit can be posted to other reserves and treated as a distribution.
In an instance where Company A provided a loan to the directors, the accounting treatment in Company A’s books would be the same as the journals for the related party entity above.
Example 16a: Sale with unusual credit terms
Company A sold goods worth CU50,000 with unusual credit terms on 01/12/13. The credit provided is for a period of up to 31/12/15. The normal cash price for these goods would be CU35,000. The difference of CU15,000 is determined to be a financing transaction. The effective interest rate is calculated at 18.62% as per below. The effective interest rate is determined so as to write the deemed interest into the P&L over the life of the transaction. The effective interest rate is determined through trial and error or through the use of Excel.
The adjustments required to accounted for this are as follows:
|
|
CU |
CU |
|
Dr Trade Debtors |
50,000 |
|
|
Cr Sales |
|
50,000 |
Being journal to recognise the sale
|
|
CU |
CU |
|
Dr Sales (CU50,000-CU35,000) |
15,000 |
|
|
Credit Trade Debtors |
|
15,000 |
Being journal to reflect the deemed financing element of the sale so as to show the correct amortised cost
|
|
CU |
CU |
|
Dr trade debtors |
536 |
|
|
Cr Finance Income in P&L (so that the carrying amount is now CU35,536) |
|
536 |
Being journal reflect the deemed interest income in the profit and loss for the year for one month. The same type of journal is posted for the other two years.
Example 16b: Purchase with unusual credit terms
If we take example 16A, and show the accounting for the purchaser in this case. For the purchasing company the journals to post are:
|
|
CU |
CU |
|
Dr Inventory |
50,000 |
|
|
Cr Trade Creditors |
|
50,000 |
Being journal to reflect purchase of stock
|
|
CU |
CU |
|
Dr Trade Creditors |
15,000 |
|
|
Cr Inventory |
|
15,000 |
Being journal to reflect the deemed financing element of the sale so as to show the correct amortised cost
|
|
CU |
CU |
|
Dr Finance Expense in P&L (so that the carrying amount is now CU35,536) |
536 |
|
|
Cr Trade Creditors |
|
536 |
Being journal reflect the deemed interest income in the profit and loss for the year for one month. The same type of journal is posted for the other two years.
Example 17: Employee loan
If this loan was to an employee the answer would be the same as example 16 as it is irrelevant who the loan is to. Instead of the amount being posted to interest expense it would be posted to employee compensation.
Example 17a: Loans repayable on demand
Company A received a loan of CU100,000 from Company B. Transaction fees of CU1,000 were incurred. No interest is charged on this loan. The loan is repayable on demand. In this case as this loan is repayable on demand, the CU1,000 transaction fees are expensed as incurred and the fair value of the loan is CU100,000 which is the amount to be recognised in the financial statements.
Example 18: non-convertible preference shares and non-puttable ordinary shares – traded price or can be reliably measured
A company purchased 200 shares which were publically quoted at a price of CU10 per share plus acquisition costs of CU100. At year end, the bid price of each share was CU15.
Therefore, as the shares are publically traded on initial recognition the amount to be recognised was CU2,000. The CU100 is ignored and is expensed. Therefore the movement between the date of acquisition and year end of CU1,000 should be posted as a credit to the P&L so that the year-end value reflects its fair value. Deferred tax will also need to be recognised on the movement which is posted to the tax line in the profit and loss account. The tax rate to be used is the sales tax (CGT) rate.
If the fair value can no longer be reliably measured then the value stated at that date is deemed to be its original cost.
Example 19: non-convertible preference shares and non-puttable ordinary shares – not traded or cannot be reliably measured
A company purchased 200 shares which were not publically quoted at a price of CU10 per share plus acquisition costs of CU100. The fair value of these shares cannot be reliably measured.
Therefore, on initial recognition the amount to be recognised is CU2,100. The subsequent carrying amount at each year end will be the cost of CU2,100 less any impairment.
If a reliable measurement can be obtained, it must be fair valued, there is no choice. For non-traded investments it is usually still possible to determine the fair value using valuation models which are utilised within the industry. However where the range of reasonable fair value estimates are significantly wide and the probabilities of the various estimates cannot be reasonably assessed, then the entity cannot use fair value. It is not permissible to measure the instrument at fair value by arbitrarily picking an estimate within a wide range.
Example 20: Impairment of debt instruments
Company A issued a loan to a related company for CU200,000 and incurred costs of CU10,000 at the start of year 1 for 5 years. Interest at a fixed rate of 5% was charged (i.e. CU10,000 per annum) which was deemed to be the market rate of the loan at that date. At the end of year 3 the related company’s financial performance deteriorated and shows signs that the full amount will not be recoverable. Company A estimates that it will only receive 75% of the interest (i.e. CU150,000*5%=CU7,500) and 75% of the capital (i.e. CU200,000*75%=CU150,000). Therefore, an impairment loss is required to be booked. The effective rate on taking out the loan was 3.88% which was calculated using a mathematical model in Excel.
NOTE: if in the above example the entity determined there to be doubt about the recoverability of the full asset an impairment of CU204,202 would be booked.
If the impairment review reverses in a prior period, then the impairment can be reversed to the P&L. Any reversal of a prior year impairment cannot reinstate the amortised cost above that what it would have been if no impairment was required.
Example 21: asset recognised due to settlement
Company A loans CU100,000 to another entity which attracted a market interest rate and was repayable in year 5.
The asset can be derecognised at the end of year 5 i.e. when the loan is fully repaid. If the loan is repaid earlier then it is derecognised on the date it is repaid.
In Section 11.33 (b), a financial asset can be derecognised when the entity transfers to another party substantially all of the risks and rewards of ownership of the financial asset.
Example 22: sale of debtors with recourse
Company A arranges invoice discounting with a bank. They sell their book of debtors which is stated at CU200,000 for CU180,000. However the company retains the credit risk. The company manages the debtors book and pays over any receipts to the bank. Given that substantially all the risk and rewards of ownership have not been transferred, as Company A will incur any bad debt risk, the debtor balance cannot be derecognised. As a result the way in which this CU180,000 is recognised is to:
|
|
CU |
CU |
|
Debit bank account |
180,000 |
|
|
Credit invoice discounting liability |
|
180,000 |
NOTE: the interest charged by the bank is charged to the P&L as incurred and any transaction costs are released over the life of the arrangement such that the liability is held at amortised cost.
Example 23: sale of debtors with recourse
Company A arranges invoice discounting with a bank. They sell their book of debtors which is stated at CU200,000 for CU180,000. The bank also takes on the credit risk. The company manages the debtors book and pays over any receipts to the bank. Given that substantially all the risk and rewards of ownership have been transferred, the company can derecognise the trade debtor balance. The journal to derecognise this is to:
|
|
CU |
CU |
|
Dr Bank Account |
180,000 |
|
|
Dr Profit and Loss – Bank Charges |
20,000 |
|
|
Cr Trade Debtors |
|
200,000 |
Example 24: Transfer of assets at fair value subject to a call option
Company A owned publically quoted shares with a fair value of CU50,000. The company decided to sell these shares for CU45,000 to a bank with an option to purchase these in 6 months for CU55,000.
It is noted that the risk and rewards of ownership have not been substantially transferred as Company A has an option to purchase the shares back if the value of the shares is above CU55,000. However, given that the bank can sell the shares themselves in an active market and then repurchase them at a later date if the option is called in, it therefore means that the bank has control as it meets the definition in Section 11.33 (c). On this basis as control has passed, the asset can be derecognised. The journals to be posted are as follows:
|
|
CU |
CU |
|
Dr Bank Account |
45,000 |
|
|
Cr Investments |
|
50,000 |
|
Cr fair value of Call option (to be accounted for under Section 12) |
|
5,000 |
Note there has to be an ability for the other party to dispose of the asset to another party. This would not be the case for a debtor’s book balance where credit risk was maintained by Company A.
As detailed in 11.35, where non cash collateral is provided (e.g. in the form of shares or debt) it needs to be separated and disclosed in the financial statements, however it is not derecognised until the entity defaults on any loan.
Example 25: Substantial modification of a loan
Company A took out a loan for CU1,000,000 on 01/01/15 with a bank which was due to be repaid on 31/12/18. Interest was charged at a rate of 7% (CU70,000 per annum) and arrangement fees of CU5,000. Due to poor trading conditions at 31/12/16, the company renegotiated the facility with the bank. The revised terms are as follows:
- loan is now repayable on 31/12/22
- Interest – 6.25% (6.25%*CU800,000= CU50,000)
- Maturity – 31/12/23
- Final principal due on maturity of CU800,000
- Cost of renegotiation of CU4,000
Should the above be treated as a modification of an existing loan or an extinguishment of an existing loan and its replacement by a new loan?
Step 1: Amortise old facility up to date of the modification. The effective interest rate has been determined through the use of Excel.
Step 2: Calculate present value of future estimated cash flows under revised terms discounted at original EIR of 7.148%
Determine if a substantial modification has occurred i.e. is the modification 10% or more
Extent of modification = A – B = (CU997,325-CU765,482) = 23.2% A CU997,325
Where A = The present value of remaining cash flows under original terms using original EIR = CU997,325
Where B = The present value of revised cash flows using original EIR of CU765,482
As the difference of CU231,843 (CU997,325-CU765,482) is greater than 10%, this is treated as an extinguishment. Therefore, the journal required to derecognise are:
|
|
CU |
CU |
|
Debit Financial Liability |
997,325 |
|
|
Dr Interest Expense |
2,675 |
|
|
Cr Cash |
|
1,000,000 |
In effect what gets written off to the P&L is the unamortised element of the initial arrangement fee of CU5,000.
The fair value of the new financial liability would then be recognised, the fair value could be obtained by discounting the cash flows of the modified loan at the interest rate at which the company could have obtained this new loan at in the market. If we assume the fair value of the new loan is CU999,000, the accounting journals would be:
|
|
CU |
CU |
|
Dr Cash |
1,000,000 |
|
|
Cr Financial Liability |
|
999,000 |
|
Cr Interest Expense |
|
1,000 |
If the above was not above 10% and therefore was not deemed to be a substantial modification, there is a choice as to how to account for the unamortised expenses. The unamortised expenses can be amortised over the remaining life of the negotiated instrument net of any associated fees (can be on a straight line basis or a revised EIR basis so as to allow the unamortised element to come to the capital value at the end of its life e.g. in the example above the CU993,325 (CU997,325-CU4,000 fees) would be amortised such that the capital amount comes to CU800,000 by the end of 2023) or as would be done for a change in estimated cash flows, the current carrying amount is adjusted to reflect the revised present value of estimated cash flows and the remaining amount amortised over the original effective rate of interest (See example 13a for example of same).
Example 26: Loans at non-market rates on transition
Company A is a subsidiary of Parent B. Parent B provides a loan to Company A for 5 years for CU200,000 on 01/01/2012. No interest is charged on the amount loaned. The market rate of interest that would have been charged on this loan by a third party on 01/01/13 i.e. a bank would be 5%. The date of transition is deemed to be 01/01/14. The carrying amount of the loan in the subsidiary and parent financial statements under old GAAP at 01/01/14 was CU200,000 as there was no requirement to account for the loan based on its present value of future cash flows. Assume the adjustments are not taxable/tax deductible under tax legislation rules and there are no transfer pricing adjustments required.
Given that a financing arrangement exists, there is a need to determine the present value of the future payments using the inputted market rate. Therefore amount to be recognised initially is:
CU200,000 / (1.05)^5 = CU156,705
The difference between CU200,000 and CU156,705 is in effect a deemed gift from the parent for the fact that the loan was given interest free.
The transition adjustments to the opening balance sheet at 01/01/14 are as follows:
In the subsidiary financial statements
|
|
CU |
CU |
|
Dr Intercompany Loan (CU200,000 – CU172,768 being the required carrying amount at date of transition) |
27,232 |
|
|
Dr Profit and Loss Reserves (i.e. 2012 and 2013 interest charge) |
16,063 |
|
|
Cr Capital Contribution (CU200,000-CU156,705 being the PV on future payments on inception of the loan) |
|
43,295 |
Being journal to show the correct amortised cost at the date of transition and the initial capital contribution received
In the parent financial statements
|
|
CU |
CU |
|
Dr Investment in Company A (CU200,000-CU156,705 being the PV on future receipts on inception of the loan) |
43,295 |
|
|
Cr Intercompany Loan Receivable |
|
27,232 |
|
Cr Profit and Loss Reserves (i.e. 2012 and 2013 interest income) |
|
16,063 |
Being journal to show the correct amortised cost at the date of transition
The adjustments required to adjust the comparative year (year ended 31/12/14) assuming the opening transition journals above are carried forward and P&L journals above posted to reserves:
In the subsidiary financial statements
|
|
CU |
CU |
|
Dr Interest Expense |
8,638 |
|
|
Cr Intercompany Loan |
|
8,638 |
Being journal to reflect the deemed interest charge for the 31/12/14 period as per the calculation above
In the parent financial statements
|
|
CU |
CU |
|
Dr Intercompany Loan |
8,638 |
|
|
Cr Interest Income |
|
8,638 |
Being journal to reflect the deemed interest income for the 2014 year as per the calculation above
The adjustments required to adjust the current year (year ended 31/12/15) assuming the opening transition journals above and the 2014 journals are carried forward and P&L journals above posted to reserves:
In the subsidiary financial statements
|
|
CU |
CU |
|
Dr Interest Expense |
9,070 |
|
|
Cr Intercompany Loan |
|
9,070 |
Being journal to reflect the deemed interest charge for the 31/12/15 period as per the calculation above
In the parent financial statements
|
|
CU |
CU |
|
Dr Intercompany Loan |
9,070 |
|
|
Cr Interest Income |
|
9,070 |
Example 26a: Directors loan at non-market rates on transition
If we take example 26 above and this time assume the loan was provided to Company A by its director/shareholder. Assume the adjustments are taxable/ tax deductible under UK tax law and therefore deferred tax is required to be recognised on transition. Assume a deferred tax rate of 10% and the tax transition adjustments will be taxable/tax deductible over a 10 year period from 2015 on.
The transition adjustments to the opening balance sheet at 01/01/14 would be as follows:
In the Company A financial statements
|
|
CU |
CU |
|
Dr directors loan (200,000 – 172,768) |
27,232 |
|
|
Cr profit and loss reserves |
|
27,232 |
|
|
CU |
CU |
|
Dr Profit and Loss reserves with deferred tax (CU27,232*10%) |
2,723 |
|
|
Cr Deferred Tax Liability |
|
2,723 |
Being journal required to reflect the correct amortised cost on transition and the related deferred tax impact. This goes to profit and loss reserves as initially the difference between the present value and the carrying amount would be posted to interest income
The journals mentioned above for the subsidiary are relevant here for the 2014 and 2015 year but deffered tax would need to be considered in the example for end of year.
Additional deferred tax journals to be posted in 2014 are:
|
|
CU |
CU |
|
Dr Deferred Tax Liability (CU8,638*10%) |
864 |
|
|
Cr Deferred Tax in P&L |
|
864 |
Being journal to reflect the release of deferred tax for the additional not and interest charged in 2014.
Additional deferred tax journals to be posted in 2015 are:
|
|
CU |
CU |
|
Dr deferred tax liability (1859/10 years) |
186* |
|
|
Cr deferred tax in P&L |
|
186 |
Being journal to release 1/10th of the deferred tax liability of CU1859.
*Total carrying amount of deferred tax liability at 31/12/14 of CU1,859 (CU2,732 – CU864) divided by 10 years being the assumed period in which this transition adjustment will be included in the tax computation for taxation purposes (i.e. CU18,594 (CU27,232 – CU8638) divided by 10 years = CU1,859 which will be taxed at 10% in the 2015 year assuming a tax rate of 10%. For 9 years after 2015 the same deferred tax journal of CU186 will be required so as to match the amount taxed in the tax computation on the transition adjustment.
Example 26b: Related party company loan at non-market rates on transition
If we take example 26 above and this time assume the loan was provided to Company A by a related company, Company B.
The transition adjustments to the opening balance sheet at 01/01/14 would be as follows:
In the Company A financial statements
|
|
CU |
CU |
|
Debit intercompany loan (CU200,000 – CU172,768) |
27,232 |
|
|
Credit profit and loss reserves |
|
27,232 |
Being journal required to reflect the correct amortised cost on transition. This goes to profit and loss reserves as initially the difference between the present value and the carrying amount would be posted to interest income
The journals mentioned in example 26 above for the subsidiary are relevant here for the 2014 and 2015 year. There is no deferred tax impact as it is from a corrected company therefore the adjustments are not taxable/tax deductible.
Example 26c: Directors loan at non-market rates on transition
If we take example 26 above and this time assume that Company A provided a loan to its directors for the same amount.
The transition adjustments to the opening balance sheet at 01/01/14 would be as follows:
In the Company A financial statements
|
|
CU |
CU |
|
Debit profit and loss reserves |
27,232 |
|
|
Credit directors loan (CU200,000 – CU172,768) |
|
27,232 |
Being journal required to reflect the correct amortised cost on transition. This goes to profit and loss reserves as initially the difference between the present value and the carrying amount would be posted to interest expense. Note if the loan was provided to a shareholder, then there could be an argument for this to be posted to other reserves in equity.
The journals mentioned above for the subsidiary are relevant here for the 2014 and 2015 year.
Deferred tax will need to be recognised on the above adjustment similar to example 26a.
Example 27: Non-puttable ordinary shares at market value
Company A had an investment in ordinary shares which were list on the stock exchange. If we assume the date of transition is 01/01/14 and the market value of these shares at that date was CU10,000. Under old GAAP the carrying amount of these shares was CU6,000 being their original cost. Assume the deferred tax rate is 20% (CGT rate). The fair value at 31/12/14 was CU11,000 and CU9,000 at 31/12/15.
The transition adjustments required to adjust the opening balance sheet at 01/01/14 are:
|
|
CU |
CU |
|
Dr Investments at Fair Value |
4,000 |
|
|
Cr Profit and Loss Reserves (CU10,000 – CU6,000 cost) |
|
4,000 |
|
Dr Profit and Loss Reserves for Deferred Tax (CU4,000*20%) |
800 |
|
|
Cr Deferred Tax Liability |
|
800 |
Being journal to reflect the fair value at the date of transition and the related deferred tax on the uplift.
The adjustments required to adjust the comparative year (year ended 31/12/14) assuming the opening transition journals above are carried forward and P&L journals above posted to reserves
|
|
CU |
CU |
|
Dr Investments at Fair Value |
1,000 |
|
|
Cr Profit and Loss – Finance Income (CU11,000 – CU10,000 prior carrying amount) |
|
1,000 |
|
Dr Deferred Tax in P&L (CU1,000*20%) |
200 |
|
|
Cr Deferred Tax Liability |
|
200 |
Being journal to reflect the movement in fair value during the year and the related movement on deferred tax
The adjustments required to adjust the current year (year ended 31/12/15) assuming the opening transition journals above and the 2014 journals are carried forward and P&L journals above posted to reserves:
|
|
CU |
CU |
|
Dr Profit and loss – Finance Expense (CU11,000 prior carrying amount – CU9,000) |
2,000 |
|
|
Cr Investments at Fair Value |
|
2,000 |
|
Dr Deferred Tax Liability |
400 |
|
|
Cr Deferred Tax in P&L (CU2,000*20%) |
|
400 |
Being journal to reflect the movement in fair value during the year and the related movement on deferred tax
Example 28: Sale with unusual credit terms
Company A sold goods worth CU50,000 with unusual credit terms on 01/12/13 (date of transition is 01/01/14 as in the example above). The credit provided is for a period of up to 31/12/15. The normal cash price for these goods would be CU35,000. Under old GAAP CU50,000 was recognised in 2013 and the carrying amount in debtors at 01/01/14 was CU50,000. The difference of CU15,000 is determined to be a financing transaction. Assume the deferred tax rate is 10%. The effective interest rate is calculated at 18.62% as per below. The effective interest rate is determined so as to write the deemed interest into the P&L over the life of the transaction. The effective interest rate is determined through trial and error or through the use of excel.
The transition adjustments required to adjust the opening balance sheet at 01/01/14 are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU15,000-CU536 which relates to pre transition) |
14,464 |
|
|
Cr Trade Debtors |
|
14,464 |
|
Dr Deferred Tax on BS (CU14,464*10%) |
1,446 |
|
|
Cr Profit and Loss Reserves for Deferred Tax |
|
1,446 |
Being journal to reflect correct carrying amount of CU35,536 in the opening balance sheet and the effect of deferred tax on this adjustment (deferred tax as this was taxed under old GAAP but it has not hit the profit and loss account under FRS 102 at this time, so assumed the assumed deferred tax will be released as this is released to the profit and loss as this amount will be deducted in the tax computation going forward)
The adjustments required to adjust the comparative year (year ended 31/12/14) assuming the opening transition journals above are carried forward and P&L journals above posted to reserves.
|
|
CU |
CU |
|
Dr Trade Debtors |
6,617 |
|
|
Cr Finance Income in P&L (so that the carrying amount is now CU42,152) |
|
6,617 |
|
DR Deferred Tax P&L |
661 |
|
|
Cr Deferred Tax on BS (CU6,617*10%) |
|
661 |
Being journal reflect the deemed interest income in the profit and loss for the year and the related deferred tax effect
The adjustments required to adjust the current year (year ended 31/12/15) assuming the opening transition and 2014 journals above are carried forward to reserves.
|
|
CU |
CU |
|
DR Trade Debtors |
7,848 |
|
|
Cr Finance Income in P&L (so that the carrying amount is now CU50,000) |
|
7,848 |
|
Debit Deferred Tax P&L |
785 |
|
|
Cr Deferred Tax on BS (CU7,848*10%) |
|
785 |
Being journal reflect the deemed interest income in the profit and loss for the year and the reversal of the related deferred tax for the fact that this will be taxable in the tax computation in the current year.
Example 28a: Purchase with unusual credit terms
If we took example 28 above and assume that Company B was the purchaser. The journals required would be as follows:
The transition adjustments required to adjust the opening balance sheet at 01/01/14 are:
|
|
CU |
CU |
|
Dr Trade Creditors |
14,464 |
|
|
Cr Profit and Loss Reserves (CU15,000-CU536 which relates to pre transition) |
|
14,464 |
|
Dr Profit and Loss Reserves for Deferred Tax |
1,446 |
|
|
Cr Deferred Tax on BS (CU14,464*10%) |
|
1,446 |
Being journal to reflect correct carrying amount of CU35,536 in the opening balance sheet and the effect of deferred tax on this adjustment (deferred tax as a tax deduction was claimed under old GAAP but it has not hit the profit and loss account under FRS 102 at this time, so the deferred tax will be released as this is released to the profit and loss as this amount will be added back in the tax computation going forward)
The adjustments required to adjust the comparative year (year ended 31/12/14) assuming the opening transition journals above are carried forward and P&L journals above posted to reserves.
|
|
CU |
CU |
|
Dr Finance Expense in P&L (so that the carrying amount is now CU42,152) |
6,617 |
|
|
Cr Trade Creditors |
|
6,617 |
|
Dr Deferred Tax on BS (CU6,617*10%) |
661 |
|
|
Cr Deferred Tax P&L |
|
661 |
Being journal reflect the deemed interest income in the profit and loss for the year and the related deferred tax effect
The adjustments required to adjust the current year (year ended 31/12/15) assuming the opening transition and 2014 journals above are carried forward to reserves.
|
|
CU |
CU |
|
Dr Finance Expense in P&L (so that the carrying amount is now CU50,000) |
CU7,848 |
|
|
Cr Trade Creditors |
|
CU7,848 |
|
Dr Deferred Tax on BS (CU7,848*10%) |
CU785 |
|
|
Cr Deferred Tax P&L |
|
CU785 |
Being journal reflect the deemed interest income in the profit and loss for the year and the related deferred tax effect
Example 29: Sample disclosure requirements
Extract from accounting policy notes
Financial instruments
The company has adopted Section 11 and Section 12 of FRS 102 when accounting for financial instruments.
a) Trade and other receivables.
Trade and other receivables including amounts owed to group companies are recognised initially at transaction price (including transaction costs) unless a financing arrangement exists in which case they are measured at the present value of future receipts discounted at a market rate. Subsequently these are measured at amortised cost less any provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the company will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. All movements in the level of the provision required are recognised in the profit and loss.
b) Cash and cash equivalents.
Cash and cash equivalents include cash on hand, demand deposits and other short- term highly liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position.
c) Other financial assets.
Other financial assets include investment which are not investments in subsidiaries, associates or joint ventures. Investments are initially measured at fair value which usually equates to the transaction price and subsequently at fair value where investments are listed on an active market or where non listed investments can be reliably measured. Movements in fair value is measured in the profit and loss.
Where fair value cannot be measured reliably or can no longer be measured reliably, investments are measured at cost less impairment.
d) Trade and other payables.
Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade payables, other payable and amounts due to group companies are recognised initially at the transaction price net of transaction costs and subsequently measured at amortised cost using the effective interest method.
e) Borrowings.
Borrowings are recognised initially at the transaction price (present value of cash payable to the bank, including transaction costs). Borrowings are subsequently stated at amortised cost. Interest expense is recognised on the basis of the effective interest method and is included in finance costs.
Preference shares, which are mandatorily redeemable on a specific date, are classified as borrowings. The dividends on these preference shares are recognised in the profit and loss as a finance cost.
Borrowings are classified as current liabilities unless the Company has a right to defer settlement of the liability for at least 12 months after the reporting date.
f) Derivatives.
Derivatives are initially measured recognised at fair value on the date the contract is entered into and subsequently re-measured at their fair value. Changes in the fair value are recognised in the profit and loss within finance costs or finance income as appropriate, unless they are included in a hedging arrangement.
Derivative financial instruments are not basic.
Hedge accounting is not applied.
OR WHERE HEDGE ACCOUNTING IS APPLIED
Derivative financial instruments are used to manage the Group’s exposure to foreign currency risk and interest rate risk through the use of forward currency contracts and interest rate swaps. These derivatives are generally designated as cash flow hedges in accordance with Section 12. The Group does not enter into speculative derivative transactions.
g) Derecognition.
Financial liabilities are derecognised when the liability is extinguished, that being when the contractual obligation is discharged.
h) Offsetting financial instruments.
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
i) Compound financial instruments.
Compound financial instruments issued by the company comprise of convertible preference shares which can be converted to a set amount of ordinary shares at a future date. The liability component of the compound instrument is initially recognised at the fair value of a similar liability where the conversion to equity option is not available. Subsequently this is measured at amortised cost using the effective interest rate method. The equity component is measured the difference between the fair value of the liability component and the fair value of the instrument as a whole. The equity component is not re-measured. Transaction costs are apportioned to the equity and liability component as a proportion that each type instrument is to the total fair value of the compound instrument.
j) Hedge accounting
Cash flow hedges
Subject to the satisfaction of certain criteria, relating to the documentation of the risk, objectives and strategy for the hedging transaction and the on-going measurement of its effectiveness, cash flow hedges are accounted for under hedge accounting rules. In such cases, any unrealised gain or loss arising on the effective portion of the derivative instrument is recognised in the cash flow hedging reserve, a separate component of equity and posted to other comprehensive income. Unrealised gains or losses on any ineffective portion of the derivative are recognised in the income statement. When the hedged transaction occurs the related gains or losses in the hedging reserve are transferred to the Income Statement.
The company engages in hedge accounting for forward contracts in order to manage foreign currency fluctuations as well as interest rate swaps.
Changes in fair values of derivatives designated as cash flow hedges which meet the conditions for hedge accounting are recognised in directly in equity through other comprehensive income to the extent that they are effective. Any ineffectiveness is charged to the profit and loss. Any gain or loss recognised in OCI is transferred from equity to the profit and loss when the hedge relationship ends.
Cash flow hedges are those of highly probable forecasted future income or expenses. In order to qualify for hedge accounting, the Group is required to document the relationship between the item being hedged and the hedging instrument and demonstrate, at inception, that the hedge relationship will be highly effective on an on-going basis. The hedge relationship must be tested for effectiveness on subsequent reporting dates.
There is no significant difference between the timing of the cash flows and income statement effect of cash flow hedges.
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit and loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the profit and loss.
Extract of notes to the financial statements – Financial instruments note disclosures
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Financial assets at fair value through profit or loss |
|
|
|
Listed investments |
2000 |
3000 |
|
Financial assets that are equity instruments measured at cost less impairment |
|
|
|
Investments (see note 3) |
10,000 |
10,000 |
|
Loan commitment carried at cost less impairment |
1,000 |
500 |
|
Financial assets that are debt instruments measured at amortised cost |
|
|
|
Intercompany loans |
100000 |
90000 |
|
Loan notes |
80000 |
75000 |
|
Other debtors including deposits receivable |
40000 |
41000 |
|
Trade debtors |
30000 |
15000 |
|
Cash and short term deposits |
30000 |
15000 |
|
Financial liabilities at fair value through profit and loss |
|
|
|
Derivative financial instruments – Forward foreign contracts (see note 1) |
3000 |
2000 |
|
Derivative financial instruments – Interest rate swap (see note 2) |
XXX |
XXX |
|
Financial liabilities measured at amortised cost |
|
|
|
Trade creditors |
20000 |
10000 |
|
Intercompany loans |
20000 |
10000 |
|
Accounts payable |
20000 |
10000 |
|
Finance leases |
20000 |
10000 |
|
Bank loans and loan notes |
20000 |
10000 |
|
Accruals for goods and services |
20000 |
10000 |
|
Bank overdraft |
20000 |
10000 |
Note 1: The company takes out foreign currency contracts to hedge against the risk of foreign exchange movements. At 31 December 2015, the company had forward contracts to purchase FC100,000 at a rate of CU1=FC.80. These contracts expire within 6 months of the year end. The fair value of these instruments at 31 December 2015 was CU10,000 (2014: CU2,000). This has been recognised in the profit and loss.
The forward contracts are measured at fair value by utilising observable market date, more specifically quoted prices.
Note 2: The fair value of interest rate swaps is calculated as the present value of the expected future cash flows based on observable yield curves.
The notional principal amounts of the outstanding interest rate swap contracts at 31 December 2015 were CUxxxxx (2014: CUxxxxxx).
At 31 December 2015, the average fixed interest rate on the swap portfolio was X% (2014: X%). The main floating rates are EURIBOR and LIBOR.
OR WHERE HEDGING IS APPLIED
Derivatives – forward foreign exchange contracts
Forward foreign exchange contracts are marked to market using quoted forward exchange rates at the reporting date.
The absolute principal amount of the outstanding forward foreign exchange contracts at 31 December 2015 was CUXXXX (2014: CUXXXXXXX).
The hedged highly probable forecast transactions denominated in foreign currency are expected to occur at various dates during the next 12 months. Gains and losses recognised in the hedging reserve in equity (note XX) on forward foreign exchange contracts as of 31 December 2015 are recognised in the profit and loss in the period or periods during which the hedged transaction affects the income statement. This is generally within 12 months of the end of the reporting period.
Derivatives – Interest Rate Swaps
The fair value of interest rate swaps is calculated as the present value of the expected future cash flows based on observable yield curves.
The notional principal amounts of the outstanding interest rate swap contracts at 31 December 2015 were CUxxxxx (2014: CUxxxxxx).
At 31 December 2015, the average fixed interest rate on the swap portfolio was X% (2014: X%). The main floating rates are EURIBOR and LIBOR. Gains and losses recognised in the hedging reserve in equity (note XX) on interest rate swap contracts as of December 2015 will be continually released to the income statement within finance cost until the maturity of the relevant interest rate swap.
Note 3: At the year end the fair value of certain equity investments could not be determined. As a result the carrying value prior to this date has now been deemed to be the cost of the investments.
Extract of notes to the financial statements – interest disclosures
|
Note: Interest receivable and similar income |
2015 |
2014 |
|
Bank interest receivable |
10000 |
5000 |
|
Interest on intra-group loans |
2000 |
0 |
|
Economic benefits provided on inter-group loan (see (i) below) |
200000 |
0 |
|
Interest income on other financial assets |
1000 |
1000 |
|
Total interest income on financial assets not measured at fair value through profit and loss i.e. on an amortised cost basis |
213000 |
6000 |
|
Gain on derivative financial instruments |
1000 |
2000 |
|
Total interest receivable and similar income |
214000 |
4000 |
|
i) On XX March 2015, the Company provided a 1,000,000 interest free loan to a fellow subsidiary company. Section 11 requires that all Financial Assets and Liabilities are initially recognised at their fair value. The Company estimates the fair value of interest free loans issued by calculating the present value of all future cash receipts discounted using the prevailing rates of interest for a similar instrument. Upon initial recognition the Company recognised the loan for CU800,000. The difference between the nominal amount of the loan and the initial fair value is CU200,000. As this is not a financial asset, nor do the Company view this as a cost of an investment in a subsidiary this amount is recognised as an expense upon initial recognition. |
||
|
Note: Interest payable and similar expences |
2015 |
2014 |
|
Interest payable on bank loans and overdrafts |
10000 |
5000 |
|
Preference share dividend |
2000 |
0 |
|
Finance lease interest |
1000 |
1000 |
|
Interest on inter-group loan (see (ii) below) |
10000 |
0 |
|
Economic benefits transferred on inter-group loan (see (i) below) |
200000 |
0 |
|
Total interest payable on financial assets not measured at fair value through profit and loss i.e. on an amortised cost basis |
223000 |
6000 |
|
Loss on derivative financial instruments |
1000 |
2000 |
|
Total interest payable and similar charges |
224000 |
4000 |
|
i) On XX March 2015, the Company obtained a 1,000,000 interest free loan from a fellow sister company. Section 11 requires that all Financial Assets and Liabilities are initially recognised at their value. The Company estimates the fair value of interest free loan issued by calculating the present value of all future cash recepits discounted using the prevailing rates of interest for a similar instrument. Upon initial recognition, the Company recognised the loan for CU700,000. The difference between the nominal amount of the loan and the initial fair value is CU300,000. As this is not a financial liability, nor do the Company view this as a capital contribution from a sister company, this amount is recognised as income upon initial recognition. |
||
|
ii) In accordance with Section 11 as the Company received loans as detailed above at non market rates, the Company recognised these loans at their estimated fair value at the issuance date as detailed in note X. At the year end the estimated fair value of the load for CU1,000,000. The additional interest arising in the current year upon the application of a market interest rate is CU100,000. |
||
Extract of notes to the financial statements – debtors disclosures incorporating financial instrument requirements
|
TRADE AND OTHER RECEIVABLES |
|
|
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Trade debtors |
1,022,788 |
1,083,813 |
|
Other debtors |
279,008 |
57,864 |
|
Amounts owed by group companies (see (i) below) |
790,000 |
0 |
|
Prepayments |
20,795 |
12,710 |
|
Directors’ Loans |
112,633 |
104,332 |
|
VAT |
30,090 |
13,614 |
|
|
2,225,224 |
1,272,333 |
The fair values of trade and other receivables approximate to their carrying amounts. Trade debtors are stated after provisions for impairments of CU105,000 (2014: CU113,000).
Amounts owed by directors are unsecured, interest free, have no fixed date of repayment and are repayable on demand.
i) On XX March 2015, the Company obtained a CU1,000,000 interest free loan from a fellow sister company. Section 11 requires that all Financial Assets and Liabilities are initially recognised at their fair value. The Company estimates the fair value of interest free loan issued by calculating the present value of all future cash receipts discounted using the prevailing rates of interest for a similar instrument. Upon initial recognition, the Company recognised the loan for CU700,000. The difference between the nominal amount of the load and the initial fair value is CU300,000. As this is not a financial liability, nor do the Company view this as a capital contribution from a sister company, this amount is recognesd as income upon initial recognition.
|
Extract of notes to the financial statements – creditors disclosures incorporating financial instrument requirements TRADE AND OTHER PAYABLES |
|
|
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Trade creditors |
669,675 |
475,652 |
|
Other creditors and accruals |
186,051 |
178,139 |
|
Bank Loans and overdrafts |
1,066,950 |
2,064,128 |
|
Amount due to group company (see (i) below) |
688,000 |
0 |
|
Finance Lease |
31,198 |
39,933 |
|
Derivative financial instruments |
3,000 |
2,000 |
|
Corporation tax due |
280,351 |
64,812 |
|
Other Taxation and Social Security |
25,665 |
26,245 |
|
Deferred Tax |
2,856 |
– |
|
|
2,953,746 |
2,850,909 |
- The company received loans totalling CU1,000,000 million at non market rates from a fellow sister company. Section 11 requires that all Financial Assets and Liabilities are initially recognised at their fair value. The Company estimates the fair value of interest free loan issued by calculating the present value of all future cash receipts discounted using the prevailing rates of interest for a similar instrument. Upon initial recognition, the Company recognised the loan for CU700,000. The difference between the nominal amount of the loan and the initial fair value is CU300,000. As this is not a financial liability, nor do the Company view this as a capital contribution from a sister company, this amount is recognised as income upon initial recognition.
BORROWINGS
|
|
Within 1 year |
Between 1 & 2 years |
Between 2 & 5 years |
After 5 years |
|
Total |
|
|
CU |
CU |
CU |
CU |
|
CU |
|
Repayable other than by instalments |
|
|
|
|
|
|
|
Bank Overdrafts |
0 |
0 |
0 |
0 |
|
0 |
|
Repayable by instalments |
|
|
|
|
|
|
|
Term loan |
13,740 |
0 |
1,053,210 |
– |
|
1,066,950 |
The bank facilities are secured by a debenture incorporating fixed and floating charges over the assets of the company and personal guarantees from the Directors.
The facilities expiring within one year are annual facilities subject to review at various dates during 2015/2016. The rate of interest applied on these loans is 4%.
The loan outstanding within 2 to 5 years is repayable on 30 November 2015 and an interest rate of 5% is applied on this loan.
FINANCIAL ASSETS
|
|
At fair value |
At cost less impairment |
Total |
|
|
CU |
CU |
CU |
|
Costs |
|
|
|
|
At beginning of year |
200,000 |
100,000 |
300,000 |
|
Additions in year |
|
30,000 |
30,000 |
|
Fair value adjustments |
(20,000) |
– |
(20,000) |
|
Disposals in year |
– |
(20,000) |
(20,000) |
|
At end of year |
180,000 |
110,000 |
290,000 |
|
Amounts provided |
|
|
|
|
At beginning of year |
– |
– |
– |
|
Movement |
– |
(10,000) |
(10,000) |
|
At end of year |
– |
(10,000) |
(10,000) |
|
Carrying amount |
|
|
|
|
At 31 December 2015 |
180,000 |
100,000 |
280,000 |
The fair value of the listed investments at 31 December 2015 is CU180,000 (2014: CU200,000).
Other investments are not listed and are held at cost less impairment as fair value cannot be reliably measured.
Consolidated Statement of Comprehensive Income
|
Profit for the financial year |
1,000,000 |
500,000 |
|
Exchange differences on retranslation of foreign operations |
XXX |
XXX |
|
Cash flow hedges |
|
|
|
– effective portion of changes in fair value to cash flow hedges |
9 XXX |
XXX |
|
– fair value of cash flow hedges transferred to income statement |
10 XXX |
XXX |
|
Actuarial loss in respect of the defined pension scheme |
11 (XXX) |
(XXX) |
|
Gain/(loss) on revaluation of intangible assets |
12 XXX |
(XXX) |
|
Gain/(loss) on revaluation of property, plant and equipment |
13 XXX |
(XXX) |
|
Gain/(loss) on revaluation of subsidiaries, associates, etc. |
14 XXX |
(XXX) |
|
Deferred tax on components of other comprehensive income |
15 XXX |
XXX |
|
|
|
|
|
Total other comprehensive income for the year net of tax |
200,000 |
(100,000) |
|
|
|
|
|
Total comprehensive income for the year |
1,200,000 |
400,000 |
Extract from the Changes in Equity showing the movement on the cash flow hedge reserve in line with Section 12 disclosure requirements
|
|
Equity Share Capital |
Non-controlling Interest |
Revaluation Reserve |
Other Reserve |
Retained Earnings |
Cash flow hedge Reserve |
Total Equity |
|
|
|||||||
|
|
CU |
CU |
CU |
CU |
CU |
CU |
CU |
|
Balance at 1 January 2014 |
100,000 |
100,000 |
225,000 |
115,375 |
115,375 |
1,000 |
441,375 |
|
|
|
|
|
|
|
|
|
|
Changes in ownership interests in subsidiaries which do not result in a loss of control |
|
(100,000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit for the year |
|
|
10,000 |
|
83,818 |
|
93,818 |
|
Balance at 31 December 2014 |
100,000 |
0 |
225,000 |
0 |
209,193 |
1,000 |
535,193 |
|
|
|
|
|
|
|
|
|
|
Balance at 1 January 2015 |
100,000 |
0 |
225,000 |
0 |
209,193 |
1,000 |
535,193 |
|
|
|
|
|
|
|
|
|
|
Equity Shares issued net of issue costs |
20,000 |
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
Profit for the year |
|
|
|
|
1,005,772 |
|
1,005,772 |
|
|
|
|
|
|
|
|
|
|
Equity dividends paid (see note XX) |
|
|
|
|
(10,000) |
|
(10,000) |
|
|
|
|
|
|
|
|
|
|
Capitalisation of shares |
|
|
|
1,000 |
(1,000) |
– |
– |
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
|
|
|
(15,000) |
|
(15,000) |
(15,000) |
|
Balance at 31 December 2015 |
109,000 |
10,000 |
225,000 |
(14,000) |
1,214,965 |
(15,000) |
1,554,965 |
Cash flow hedge reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred since XXXXX.
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