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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-18/” type=”big” color=”red”] Return to Section 18 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 exemptioAn 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. However, in order for the revaluation to be applied it must be able to be measured reliably. In reality this exemption is not likely to be beneficial for most companies as most companies’ intangibles will not have an active market nor will they have previously been recognised separately as they are consumed within goodwill. Therefore, it is likely the entity will take the exemption mentioned below.
Section 35 also provides an exemption whereby intangibles subsumed within goodwill prior to transition date does not have to be separately recognised and the carrying value of goodwill does not have to be adjusted assuming Section 19 is not applied retrospectively. Where Section 19 is applied retrospectively, goodwill recognised previously will have to be assessed to see if intangibles can be recognised separately.
Principal transition adjustments
The main adjustments expected on transition are detailed below:
1) Intangible asset with an indefinite useful life under old GAAP
Under old GAAP it was possible for intangible assets to have an indefinite useful economic life and as a result no amortisation was charged instead an annual impairment review was performed. On transition to FRS 102 these assets will now have to be assigned a useful economic life and where this cannot be determined then it will have to be assigned a life not exceeding 10 years (5 years currently Ireland but it will change to 10 years on adoption of the EU Directive 2013/34). This will result in an additional amortisation charge and will also require an adjustment on transition to FRS 102. In the example 7 below we have assumed a useful life could be determined of 20 years however where an entity cannot determine a useful life then the default useful life of 5/10 years should be utilised. It we assume for instance in example 7, that the default life of 10 years had to be used, then the carrying amount to be shown in the opening balance sheet on transition assuming this is a UK company would be €250,000 (500,000/10 years*5 years of life remaining) or it would be nil if we assume it is a Republic of Ireland Company (500,000/5 year default life * 0 years remaining at the date of transition).
Example 8: Intangible asset with an indefinite useful life under old GAAP
An intangible asset of 500,000 was recognised under old GAAP (acquired 5 years prior to the date of transition) which was determined to have a finite useful life. Assume on transition, under FRS 102, a useful life of 15 years was determined. Therefore, a transition adjustment is required whereby, if the useful life on the date of transition is 15 years, then the original useful life should have been 20 years when acquired. Therefore, amortisation of 125,000 (i.e. 500,000/20 years * 5 years) will need to be posted to retained earnings on transition so as to show the carrying amount at 375,000 in the opening balance sheet. The journals required are:
| Debit profit and loss reserves | 125,000 |
| Credit intangible asset | 125,000 |
Being journal to recognise amortisation charge for the period from acquisition to the date of transition i.e. 1 January 2014 for a company with a December year end. Then in future years an amortisation charge of 25,000 should be posted. Here we have assumed that this intangible has not been allowable for capital allowance purposes so therefore there is no deferred tax effect nor was there a revaluation.
The journals required for 31 December 2014 assuming the above journals are posted to reserves:
| Debit amortisation in the P&L | 25,000 | (500,000/20yrs) |
| Credit accumulated amortisation | 25.000 |
Being journal tor reflect amortisation for the 2014 year as intangible was not previously amortised.
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
If we assume capital allowances was allowable on these intangibles and assume the deferred rate is 12.5%, the journals required are:
On 1 January 2014
| Debit deferred tax liability | 15,625 | (125,000*12.5%) |
| Credit profit and loss reserves | 15,625 |
Being journal to reflect deferred tax on the amortisation charged to profit and loss reserves
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
| Debit deferred tax liability | 3,125 | (25,000*12.5%) |
| Credit deferred tax in P&L | 3,125 |
Being journal to reflect deferred tax on the amortisation charged in the year
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
2) Deferred tax on revaluation whether a previous revaluation is used or the fair value is used as deemed cost (not required under old GAAP)
Example 9: Deferred tax on revaluation whether a previous revaluation is used as deemed cost
Company A decided previously had a policy of revaluation on intangibles. The original cost was €600,000. Assume the date of transition is 1 January 2014. The intangibles were revalued 31 December 2012 to 700,000 and at 31 December 2013, the carrying amount was €630,000 (useful life of 10 years at that time – amortisation charge of €70,000). The amount in the revaluation reserve at 31 December 2013 was €30,000. On transition to FRS 102, the company has decided to discontinue adopting the revaluation option and instead use the previous revaluation as the deemed cost. On the date of transition, assuming the intangible can be sold separately a deferred tax liability should be recognised for the uplift in value above its tax cost which was not required under old GAAP. Assume deferred tax is 12.5%. The deferred tax to be recognised is as follows:
Deferred tax = 630,000 less 600,000 = 30,000 * 12.5%= 3,750.
Journal required be posted on transition i.e. 1 January 2014 is:
| Credit deferred tax | 3,750 |
| Debit non distributable reserve | 3,750 |
Being journal to recognise deferred tax on the uplift at the date of transition to the non-distributable reserve
| Debit revaluation reserve | 30,000 |
| Credit non distributable reserve | 30,000 |
Being journal to reclassify previous revaluations under old GAAP to a non-distributable reserve.
In the 31/12/14 (comparative year) and 31/12/15, deferred tax will also be required to be posted for the deferred tax on the movement on the carrying amount in relation to additional amortisation posted on the revalued amount each year. From 1 January 2014 the €630,000 is depreciated over its useful economic life at that date, that being 9 years (€630,000/9 years=€70,000). The additional amortisation on the revalued amount is therefore € ((€630,000-€600,000)/9 yrs)*12.5%) The journal required to be posted in relation to deferred tax for each year is:
| Debit deferred tax liability | 417 | (30,000/9yrs *12.5%) |
| Credit profit and loss–deferred tax | 417 |
Being journal to reflect release of deferred tax for depreciation charged in the year
No adjustment is required for depreciation as the depreciation charge in 2014 and 2015 is equal to what should have been charged.
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/asset. 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 10: 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
| Dr intangible assets | CU100,000 |
| Cr PPE | CU100,000 |
For the year ended 31 December 2014 and 2015 a similar adjustment will be required for the NBV at that date assuming the above journal is not brought forward year on year.
4) Default 20 years used to amortise intangibles under old GAAP where a reliable estimate could not be determined.
All intangible assets are considered to have a finite life under FRS 102. The standard specifies that where a useful life cannot be determined then a useful life should not exceed 10 years (currently 5 years in Ireland until the EU Directive 2013/34 is enacted). Under old GAAP where a useful life could not be reliably determined a default rate of 20 years was mandated. Where intangible assets acquired prior to the transition to FRS 102 has been determined and presumably there was a basis for this as required by old GAAP, it is unlikely that this will have any impact as it will continue to be amortised over the period determined under old GAAP.
Where under old GAAP the default rate of 20 years was used as the useful life could not be determined and the carrying amount cannot be supported, then a transition adjustment will be required such that the default life of 10 years (5 years for Ireland) should be used.
Example 11: Intangible asset that used a default useful life of 20 years under old GAAP
An intangible asset of 500,000 was recognised under old GAAP (acquired 5 years prior to the date of transition). Under old GAAP the default life of 20 years was chosen so the carrying amount in old GAAP books was 375,000. Assume the date of transition is 1 January 2014 and the useful life cannot be determined under FRS 102 either, hence the default rate of 10 years for UK companies and 5 years for Republic of Ireland companies should be used. Therefore, a transition adjustment is required. As the default rate is 10 years under FRS 102, at the date of transition using this default rate a remaining useful life of 5 years exists. Therefore, the carrying amount required on transition for UK companies is 250,000 (500,000/10 years*5 years remaining at the date of transition) and for Republic of Ireland companies is nil (500,000/10 years*0 years remaining at the date of transition)
The journals required on 1 January 2014 are:
| UK companies | ||
| Debit profit and loss reserves | 125,000 |
(375,000 carrying amount under old GAAP-250,000 required under FRS 102) |
| Credit intangible asset | 125,000 | |
| Republic of Ireland companies | ||
| Debit profit and loss reserves | 375,000 |
(375,000 carrying amount under old GAAP-Nil required under FRS 102) |
| Credit intangible asset | 375,000 |
Being journal to recognise additional amortisation charge under FRS 102 for the period from acquisition to the date of transition i.e. 1 January 2014 for a company with a December year end. Then in future years an amortisation charge of 25,000 should be posted. Here we have assumed that this intangible has not been allowable for capital allowance purposes so therefore there is no deferred tax effect nor was there a revaluation.
The journals required for 31 December 2014 assuming the above journals are posted to reserves:
| UK companies | ||
| Debit amortisation in the P&L | 25,000 | ((500,000/10 yrs under FRS 102) – (500,000/20yrs under old GAAP)) |
| Credit accumulated amortisation | 25,000 |
Being journal tor reflect additional amortisation for the 2014 year for the fact that this is being written off over 10 years as opposed to 20 years under old GAAP.
| Republic of Ireland companies | ||
| Credit amortisation in the P&L | 25,000 | (500,000/20yrs) |
| Debit accumulated amortisation | 25,000 |
Being journal required to reverse previous depreciation posted under old GAAP as under FRS 102 this has a nil NBV on transition
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
If we assume capital allowances was allowable on these intangibles and assume the deferred rate is 12.5%, the journals required are:
On 1 January 2014
| UK companies | ||
| Debit deferred tax asset | 15,625 | (125,000*12.5%) |
| Credit profit and loss reserves | 15,625 |
Being journal to reflect deferred tax on the amortisation charged to profit and loss reserves
Republic of Ireland companies
| Debit deferred tax asset | 46,875 | (35,000*12.5%) |
| Credit profit and loss reserves | 46,875 |
Being journal to reflect deferred tax on the amortisation charged to profit and loss reserves
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
| Debit deferred tax asset | 3,125 | (25,000*12.5%) |
| Credit deferred tax in P&L | 3,125 |
Being journal to reflect deferred tax on the amortisation charged in the year
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
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