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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-16/” type=”big” color=”red”] Return to Section 16 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”]Transition exemptions
Section 35.10 provides an exemption to allow a prior valuation as deemed cost. This exemption is not likely to be beneficial as all investment property under old GAAP had to be carried at open market value which should equate to fair value so there would be no transition adjustments in any event.
Principal transition adjustments
1) Recognition of fair value adjustments through the profit and loss and the related deferred tax to include transfer from revaluation reserve to a non-distributable reserve
Example 3: Fair value and tax adjustments
Assume the date of transition is 1 January 2014. Under old GAAP the company purchased a property for CU100,000. The valuation at 31 December 2013 was CU200,000 which equated to the open market value which also equates to the fair value at that date. Under old GAAP the open market value at 31 December 2014 and 2015 was CU250,000, the movement of which was posted to the STRGL in the year ended 31 December 2014. The revaluation reserve under old GAAP was CU100,000 and CU150,000 for year ended 31 December 2013 & 2014 respectively. Assume the deferred tax rate is 20% (the sales (CGT) rate). Assume indexation is not applicable for tax purposes.The transition adjustments required on adoption of FRS 102 are:
Transition journals to be posted on 1 January 2014
|
|
CU |
CU |
|
Dr Revaluation Reserve |
100,000 |
|
|
Cr Non-Distributable Reserve |
|
100,000 |
Being journal to transfer the old revaluation reserve to a non-distributable reserve.
|
|
CU |
CU |
|
Dr Non-Distributable Reserve for Deferred Tax ((CU200,000-CU100,000)*20%) |
20,000 |
|
|
Cr Deferred Tax Liability Balance Sheet |
|
20,000 |
Being journal to reflect the deferred tax liability on the uplift in value at the future expected sales tax rate
Transition journals to be posted on 31 December 2014 assuming the journals above are posted to reserves etc
|
|
CU |
CU |
|
Dr STRGL |
50,000 |
|
|
Cr Fair Value Movement on Investment Property in P&L (CU250,000-CU200,000) |
|
50,000 |
Being journal to transfer the fair value uplift to the profit and loss account from the STRGL.
|
|
CU |
CU |
|
Dr Deferred Tax in P&L (CU50,000*20%) |
10,000 |
|
|
Cr Deferred Tax Liability Balance Sheet |
|
10,000 |
Being journal to reflect the deferred tax on the uplift in value at the future expected sales tax rate
|
|
CU |
CU |
|
Dr Revaluation Reserve |
50,000 |
|
|
Cr Non-Distributable Reserve |
|
50,000 |
Being journal to transfer the old revaluation reserve to a non-distributable reserve.
No journals are required at the 31 December 2015 assuming the above journals are posted and the fair value remains at CU250,000. If the fair value moves then journals similar to the 31 December 2014, above should be posted.
2) Recognition of investment property for property rented to group companies
Where an entity leases property to another member of the group on transition this may require the property to be reclassified from property, plant and equipment to investment property and the property then to be shown at fair value. Under old GAAP, where a property was leased to another group company this was classified as property, plant and equipment and depreciated (it could not be classified as investment property). This example assumes that the property meets the definition of investment property.
Example 4: Property leased to other group companies classified as investment property
Assume the date of transition to FRS 102 is 1 January 2014 and the deferred tax rate is 20% which is the sales tax (CGT) rate. Company A is a member of a group. Company A leases a property to a sister Company; Company B for 10 years and receives an annual rent of CU50,000. The property was purchased for CU150,000 and the net book value at 1 January 2014, 31 December 2014 and 2015 in the old GAAP books is CU100,000, CU90,000 and CU80,000 respectively. The directors have determined the fair value of the property at 1 January 2014 was CU200,000. Assume the property did not qualify for capital allowance purposes and the property remained at its fair value of CU200,000 at 31 December 2014 and 2015 as this still equated to fair value. Assume the property met the conditions for investment property from 1 January 2014. The adjustments required on transition are:
Transition journals to be posted on 1 January 2014
|
|
CU |
CU |
|
Dr Investment Property |
CU200,000 |
|
|
Cr Non-Distributable Reserve (200,000-150,000) – fair value uplift |
|
CU50,000 |
|
Cr Profit and Loss Reserves (150,000-100,000) – prior depreciation |
|
CU50,000 |
|
Cr Property, Plant and Equipment |
|
CU100,000 |
Being journal to transfer the property from PPE to investment property, derecognise prior years depreciation and recognise the fair value uplift.
|
|
CU |
CU |
|
Dr Profit and Loss Reserves for Deferred Tax ((200,000-150,000 cost)*20%) |
CU10,000 |
|
|
Cr Deferred Tax liability in Balance Sheet |
|
CU10,000 |
Being journal to reflect the deferred tax on the uplift in value at the future expected sales tax rate
Transition journals to be posted on 31 December 2014 assuming the journals above are posted to reserves etc
|
|
CU |
CU |
|
Dr Property, Plant and Equipment |
10,000 |
|
|
Cr Depreciation in P&L (being movement in book value yr on yr) |
|
10,000 |
Being journal to reverse depreciation posted in 2014 on the property under old GAAP.
The same journal as above is posted in 2015 to reverse the depreciation charged in the 2015 trial balance.
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