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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-17/” type=”big” color=”red”] Return to Section 17 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
OmniPro comment
Section 35.10 provides an exemption on transition which allows an entity to use the fair value at the date of transition as deemed cost or a previous GAAP revaluation as deemed cost.
For example a company previously choose the revaluation option and revalued the buildings under old GAAP. The date of transition is 1 January 2014. A previous valuation was performed on 31 December 2012 and was stated at CU500,000 which was included in the Irish GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is CU464,285. Under the exemption at the date of transition, the company can elect to use the CU464,285 as its deemed cost going forward. Depreciation will be charged over the remaining life from the date of transition i.e. 15 years. Note however, deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition.
Where under old GAAP the revaluation option was chosen and the 2014 financial statements included a revaluation but on transition a cost model is chosen, a transition adjustment will be required to reverse the previous valuation under old GAAP in the 2014 financial statement together with the reversal of the additional depreciation on this revaluation.
Example 19: Fair value as deemed cost
A company previously chose the cost model under old GAAP. The date of transition is 1 January 2014 and the company intends to continue to use the cost model under FRS 102. The useful life of this asset was determined to be 20 years. The original cost was CU600,000. The remaining useful life at 1 January 2014 was 15 years and the NBV is CU450,000. The company has obtained a valuation representing fair value at 31 December 2013 of CU700,000. Under the exemption at the date of transition, the company can elect to use the CU700,000 as its deemed cost going forward and no further revaluation will be required as the entity has chosen to apply a cost model. Assume the deferred tax rate is 10% (non-CGT rate). Note however deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition. This transition exemption gives companies a one off opportunity to bolster the balance sheet of the company on the date of transition. It is also worth nothing where applicable the fair value should be split into each of its component parts. Note a valuation prepared after the date of transition cannot be used as the deemed cost, the valuation must be a valuation of the PPE on the date of transition. The journals required on transition using the above example are:
On 1 January 2014
|
|
CU |
CU |
|
Dr PPE (CU700,000-CU450,000) |
250,000 |
|
|
Cr Other Non-Distributable Reserve |
|
250,000 |
Being journal to reflect the uplift in value on the date of transition
|
|
CU |
CU |
|
Dr Non-Distributable Reserve |
25,000 |
|
|
Cr Deferred Tax Liability (CU250,000*10%) |
|
25,000 |
Being journal to recognise deferred tax on the uplift in value
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the depreciation and the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
|
|
CU |
CU |
|
Dr Depreciation in Profit and Loss |
16,667 |
|
|
Cr Accumulated Depreciation ((CU700,000-CU450,000)/15yrs) |
|
16,667 |
|
Dr Deferred Tax Liability (CU16,667*10%) |
1,667 |
|
|
Cr Deferred Tax in P&L |
|
1,667 |
Being journal to recognise the additional depreciation charge in the 2014 year and the release of the related deferred tax.
The 2015 journal will be the very same as the 2014 journal above assuming the above journals are brought forward to reserves.
Example 20: Previous GAAP revaluation as deemed cost
A company previously chose the revaluation option and revalued the buildings under Old GAAP. The date of transition is 1 January 2014. The original cost of the building was CU300,000. A previous valuation was performed on 31 December 2012 and was stated at CU500,000 which was included in the GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is CU464,285. The amount in the revaluation reserve at 31 December 2013 was CU260,000. Under the exemption at the date of transition, the company has elected to use the CU464,285 as its deemed cost going forward and not to adopt a policy of revaluation going forward. Note however deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition. Assume the rate of deferred tax is 10% (non-CGT rate). See below adjustments required on transition:
|
|
CU |
CU |
|
Dr Non-Distributable Reserve |
16,429 |
|
|
Cr Deferred Tax in Balance Sheet (CU464,285 – CU300,000) * 10%) |
|
16,429 |
Being journal to recognise deferred tax on the uplift at the date of transition to the non-distributable reserve
|
|
CU |
CU |
|
Dr Revaluation Reserve |
260,000 |
|
|
Cr Non Distributable Reserve |
|
260,000 |
Being journal to reclassify previous revaluations under old GAAP to a non-distributable reserve to set against the deferred tax recognised on transition.
From that date on, the increase in deferred tax should be recognised in the profit and loss account as the asset is depreciated. The asset is depreciated over its remaining life of 15 years so the depreciation charge will be the same as was posted under old GAAP.
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the depreciation and the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet ((CU464,285-CU300,000)/15yrs=10,952) * 10%) |
1,095 |
|
|
Cr Deferred Tax in Profit and Loss |
|
1,095 |
Being journal to reflect deferred tax movement to account for the decrease in the NBV of fixed assets due to depreciation for the year
|
|
CU |
CU |
|
Dr Non-Distributable Reserve |
9,857 |
|
|
Cr Profit and Loss Reserves (10,952-1,095) |
|
9,857 |
Being journal to transfer the depreciation on the revalued amount net of deferred tax from profit and loss reserves to the non-distributable reserve
The 2015 journal will be the very same as the 2014 journal above assuming the above journals are brought forward to reserves.
Example 21: Revaluation option chosen under old GAAP, reverting to the cost model on transition
A company previously chose the revaluation option and revalued the buildings under Old GAAP. On transition to FRS 102 the company decided to revert back to the cost model. The date of transition is 1 January 2014. The original cost of the property was CU300,000 purchased 5 years from the date of transition. A previous valuation was performed on 31 December 2012 and was stated at CU500,000 which was included in the Old GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is 464,285. Assume the CU300,000 was allowed for capital allowance purposes. The journals posted to reflect this are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Revaluation Reserve |
243,750** |
|
|
Cr PPE |
|
239,285* |
|
Cr Profit and Loss Reserves (CU243,750-CU239,285) |
|
4,465 |
Being journal to restate the balance to a cost basis and eliminate the revaluation reserve
* total of the adjustment is the difference between the carrying amount at 1 January 2015 and the amount this would have been stated at if no revaluation policy had of occurred.
Original cost = CU300,000/20yrs * 15yrs being the number of years remaining up to 1 January 2014 = CU225,000. Therefore the adjustment required is =CU464,285-CU225,000= CU239,285
**the value in the revaluation reserve at 1 January 2014 assuming depreciation each year was transferred to the revaluation reserve. Total revaluation posted at 31 December 2013 was CU300,000/20yrs * 16yrs being the years held at cost up to date of revaluation=NBV of CU240,000. The uplift at that time was CU500,000-CU240,000= CU260,000.
Therefore the additional depreciation on this revaluation during 2013 was CU16,250 (CU260,000/16yrs being number of years remaining at time of revaluation on 31/12/12 * 1 yr being the length of time from revaluation to date of transition = CU16,250. Total carrying amount in reserve at 1 January 2014 was CU243,750 (CU260,000-CU16,250).
Note deferred tax is not effected here as under old GAAP deferred tax would only have been recognised on the cost. The revaluation was a permanent difference.
Example 22: Change in useful economic life
At the date of transition, the NBV of plant and machinery was nil however the fair value was CU30,000 with a remaining life of 2 years. Assuming the write down to nil is not an error under prior GAAP but instead due to changes in conditions, then although usually this change to the economic life would be treated as change in estimate and adjusted prospectively, Section 35.9 prevents a change in estimate to be recognised in the first set of financial statements under FRS 102 instead it should be reflected in the first set of FRS 102 financial statements. However, it can elect to use fair value as deemed cost as allowed under Section 35.10 and apply the below transition adjustment:
|
|
CU |
CU |
|
Dr Fixed Assets |
30,000 |
|
|
Cr Profit and Loss Reseres |
|
30,000 |
From then on the depreciation will have to be recognised on this value over two years remaining useful life. Note deferred tax may need to posted here if the machinery still has a tax written down value.
Section 35 also provides an exemption where in the past an entity has not recognised the cost of dismantling, removing or restoring a site to its original condition. If this is the case, then instead of including the cost on transition at the date the liability arose the entity can elect to show this at the date of transition. In reality the requirement for a provision was also required under old GAAP therefore a provision should already have been made.
Principal transition adjustments
OmniPro comment
The main adjustments expected on transition are detailed below:
1) Deferred tax to be recognised on any uplift in value above tax cost
See example 19, 20 and 21 above for the transition adjustments required.
2) Spare parts
Section 17.5 which is the standard that deals with property, plant and equipment makes it clear that -spare parts are classified as property plant and equipment when they are expected to be used during more than one period or only used in connection with an item of property plant and equipment. Where this is the case the spare part is depreciated over its useful life which cannot be more than the useful life of the main asset for which the spare parts are utilised. Old GAAP provided less guidance therefore, some entities would have classified such spare parts as inventory instead of PPE. As a result on transition to FRS 102, such entities will need to recognise a transition adjustment to correct this.
Example 23: Reclassification of spare parts from inventory to PPE
Company A, has a significant value of spare parts for the production equipment. Under old GAAP these spare parts were treated as inventory. The total value of these spare parts at the date of transition was CU500,000. At the date of transition, the company determines the useful life of the spare parts to be 10 years from the date of transition and the residual value is nil. Assume the date of transition is 1 January 2014 and the tax rate is 10% (non-CGT rate). The transition adjustment required on 1 January 2014 is:
|
|
CU |
CU |
|
Dr PPE |
500,000 |
|
|
Cr Inventory |
|
500,000 |
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the depreciation and the deferred tax impact. Note from a tax perspective the depreciation will be allowed as a deduction, therefore after transition there will be no deferred tax effect. Assume deferred tax is recognised on transition for the tax deduction not allowed in the comparative year but will be allowed as part of transition adjustments in the tax computation going forward over 5 years. The journals required are:
|
|
CU |
CU |
|
Dr Profit and Loss – Depreciation (CU500,000 / 10yrs) |
50,000 |
|
|
Cr PPE – Spare Parts
|
|
50,000 |
|
Dr Balance Sheet – Deferred Tax (CU50,000 *10%) |
5,000 |
|
|
Credit Profit and Loss – Deferred Tax |
|
5,000 |
3) Transfer of software and website costs to intangibles
Where software and website development costs have previously been included within PPE, on transition an adjustment may be required to transfer these to intangibles where they are not an integral part of the hardware. If this is the case, it will merely be a balance sheet reclassification from PPE to intangibles as the useful life etc should remain the same.
Example 24: Transfer of software and website costs to intangibles
Under old GAAP, Company A classified website development costs and software costs which are not an integral part of the asset as property, plant and equipment. Under FRS 102, these should be classified as intangible assets. The NBV of these assets on transition was CU100,000. The journal required on transition is therefore:
On 1 January 2014
|
|
CU |
CU |
|
Dr Intangible Assets |
100,000 |
|
|
Cr PPE |
|
100,000 |
For the year ended 31 December 2014 and 2015 a similar adjustment will be required for the NBV at that date assuming the journal is not brought forward year on year.
4) Significant part of a fixed asset replaced since the date of transition
Where a significant part of a fixed asset was upgraded/replaced/renovated and under old GAAP in the comparative year, this cost was expensed as it was not separately depreciated, a transition adjustment may be required under FRS 102. Under FRS 102, such replacement parts should be capitalised where they provide incremental benefits and the previous amount included in PPE derecognised. Where the initial cost of the item replaced cannot be determined, then applying IAS 16 principals, the depreciated replacement cost can be used. In this particular case a transition adjustment may be required as detailed below
Example 25: Significant part of a fixed asset replaced since the date of transition
Company A renovated/replaced the ventilation system in its factory at a cost of CU200,000 on 1 January 2014. The transition date is 1 January 2014. This was a part that requires regular replacing. Under old GAAP, this was expensed as it had not previously been separately identified and depreciated nor did it enhance economic benefits above what it would have provided usually. Under FRS 102 it should have been capitalised and the NBV of the old ventilation system disposed of. Assume NBV of the factory is CU800,000 with 8 years useful life remaining on transition. The useful life in 10 years. Ignore deferred tax.
Under FRS102 the entity will need to calculate the depreciated replacement cost of the ventilation system. This is calculated as follows:
CU200,000/ useful life of 10 yrs * remaining useful life of 8 yrs = CU160,000
The transition adjustments to be posted in the 31 December 2014 year end (comparative year) are:
|
|
CU |
CU |
|
Dr Fixed Assets |
200,000 |
|
|
Cr Repairs in P&L |
|
200,000 |
Being journal to capitalise the cost previously expensed under old GAAP
|
|
CU |
CU |
|
Dr Loss on Disposal P&L |
160,000 |
|
|
Cr Fixed Assets |
|
160,000 |
Being journal to derecognise the old ventilation system
|
|
CU |
CU |
|
Dr Depreciation (CU200,000/8 yrs) |
25,000 |
|
|
Cr Fixed Assets |
|
25,000 |
Being journal to reflect additional depreciation on the new ventilation unit over its remaining UEL
The transition adjustment for 2015 will just be the depreciation journal of CU25,000 assuming the above journals are brought forward to reserves.
Example 26: purchasing on deferred credit terms
A company purchased a piece of equipment from a related party supplier on preferential terms for CU300,000 on 1 January 2013. The company does not have to pay for the eqipment until 2 years after delivery (i.e. 31 December 2014). Under normal trading conditions, the company would have to pay on delivery. Under old GAAP, the CU300,000 was charged to fixed assets and creditors respectively. The NBV at the date of transition (assume the date of transition is 1 January 2014) is CU270,000 with a remaining useful life of 9 years (CU30,000 depreciation charge per annum under old GAAP). Assume the entity will not adopt a policy of deemed cost or revaluation on transition. Assume the asset does not qualify for capital allowance purposes.
Under Section 17, the Company must present value the CU300,000 using the rate of interest that would be charged on this balance by a third party. Assume the interest that would be charged by a bank for 2 years on a loan of CU300,000 is 7%. The amount to be recognised as an asset is the present value for the future payment.
CU300,000 / (1+.07)^2 = CU262,031.
The difference of CU37,969 (CU300,000-CU262,031) is posted as an interest cost over the two year period assuming it does not meet the requirements for capitalising borrowing costs under Section 25 i.e. it is not a qualifying asset where the asset takes a period of time to complete. This CU37,969 is charged to the profit and loss account under the effective interest rate method as detailed in Section 11 of this manual. Therefore the interest charge for 2013 and 2014 should have been:
2013 interest charge = CU262,031*7%= CU18,342. Therefore the required carrying amount at the date of transition is CU280,373.
2014 interest charge = CU280,373 * 7%= CU19,627
The NBV required at 1 January 2014 under FRS 102 is= CU235,828 (CU262,031 cost net of finance charge/10 year life at date of acquisition* 9 years remaining at date of transition. The depreciation charge under FRS102 is CU26,203 (262,031/10 years).
The journals required on transition are:
1 January 2014
|
|
CU |
CU |
|
Dr Trade Creditors (CU300,000 of creditors-CU280,373) |
19,627 |
|
|
Dr Profit and Loss Reserves (CU34,172-CU19,627) |
14,545 |
|
|
Cr PPE (CU270,000 NBV-CU235,828 required NBV) |
|
34,172 |
Being journal to recognise the correct NBV of PPE and of trade creditors under FRS 102 at the date of transition and the related deferred tax impact
Journals required in year ended 31 December 2014 assuming the above journals are posted to profit and loss reserves etc.
|
|
CU |
CU |
|
Dr PPE (CU30,000-CU26,203) |
3,797 |
|
|
Cr Depreciation |
|
3,797 |
Being journal to reverse over depreciation charged under old GAAP
|
|
CU |
CU |
|
Dr Interest Charge |
19,627 |
|
|
Cr Trade Creditors |
|
19,627 |
Being journal to reflect deemed finance interest on the extended credit to bring the balance to CU300,000 prior to the date of payment
Journals required in year ended 31 December 2015 assuming the above journals are posted to profit and loss reserves etc.
|
|
CU |
CU |
|
Dr PPE (CU30,000-CU26,203) |
3,797 |
|
|
Cr Depreciation |
|
3,797 |
Being journal to reverse over depreciation charged under old GAAP.
If above asset qualified for capital allowance purposes deferred tax would need to be accounted for on the above journals as capital allowances are allowed on a gross basis.
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