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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-28/” type=”big” color=”red”] Return to Section 28 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 of FRS 102 provides no exemptions on transition to FRS 102. Therefore, any differences between old GAAP and FRS 102 must be stated retrospectively. Detailed below are the principal transition adjustments expected.
Principal transition adjustments
There are a number of differences between FRS 102 and old GAAP all of which has been discussed in the differences table elsewhere in the website. The principal transition adjustments are as follows (in all examples assume the date of transition is 1 January 2014 and the deferred tax rate is 10%):
1) Deferred tax shown separately from the net defined benefit liability/asset
Under Section 28 and Section 29, deferred tax should not be netted against the defined benefit liability/asset instead it should be shown separately in the deferred tax balance in the balance sheet. Under old GAAP the deferred tax balance on the pension was netted against the carrying amount of the defined benefit pension. Therefore a reclassification adjustment will be required on transition to FRS 102.
Example 21: Reclassification of deferred tax from the carrying amount of the defined benefit balance
Company A operates a defined benefit pension scheme. Assume the date of transition is 1 January 2014 and the deferred tax rate is 10%. The defined benefit pension liability was CU10,000. A deferred tax asset of CU1,000 was netted against this balance in the 2013 TB. Assume the date of transition is 1 January 2014. The journal required on transition is:
1 January 2014
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
1,000 |
|
|
Cr Defined Benefit Liability (CU10,000*10%) |
|
1,000 |
Being journal to reclassify the deferred tax balance from the defined benefit liability.
Note a similar journal will be required for the 31 December 2014 year end. If there was a defined benefit asset in existence the journals would be the opposite way around.
2) Holiday accrual
Under old GAAP there was no specific requirement in the standard to accrue for holiday pay however in reality it probably should have been. FRS 102 specifically requires this to be accrued. Therefore on transition, the balance at 1 January 2014 will have to be restated to include the accrual and the deferred tax effect of this accrual. Deferred tax is included as although the deduction was not allowed previously it will be allowed in the future as part of the transition tax adjustments. There will also be an impact on the comparative figures. Note from 2015 on there will be no timing differences for posting for holiday accruals as for tax purposes it is an allowable deduction assuming it is taken within 9 months of year end and the transition adjustment will be allowed as a tax deduction over a 5 year period for the purpose of this example. Assume the holiday will be taken within 9 months of year end.
Example 22: Holiday accrual
Company A did not previously accrue for untaken holiday pay. The company pays employees who leave the value of the employees untaken leave. Assume the date of transition is 1 January 2014. At 1 January 2014 the company estimates the holiday accrual should be CU10,000 and the accrual at the 31 December 2014 and 31 December 2015 should be CU15,000 and CU17,000 respectively. Assume the deferred tax rate is 10% and the transition adjustment will be allowed as a tax deduction over a 5 year period for the purposes of this example. Assume the holidays will be taken within 9 months of year end. The adjustments required on transition are:
Journals required to be posted to the opening balance sheet at 1 January 2014 are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
10,000 |
|
|
Cr Holiday Accrual |
|
10,000 |
Being journal to reflect required accrual under FRS 102
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
1,000 |
|
|
Cr Profit and Loss Reserves (CU10,000*10%) |
|
1,000 |
Being journal to reflect the deferred tax on the holiday accrual which will be allowed for tax purposes in the future
Journals required to be posted to the 31 December 2014 old GAAP TB assuming the journals above are re-posted to be retained earnings etc.:
|
|
CU |
CU |
|
Dr Wages and Salaries in P&L (CU15,000 less prior year accrual of CU10,000) |
5,000 |
|
|
Cr Holiday Accrual |
|
5,000 |
Being journal to reflect additional accrual required for holiday pay at 31 December 2014
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
500 |
|
|
Cr Deferred Tax in P&L (CU5,000*10%) |
|
500 |
Being journal to reflect movement on deferred tax so as to show the deferred tax on CU15,000 at the year end.
Journals required to be posted to the 31 December 2015 old GAAP TB assuming the journals above are re-posted to retained earnings etc.:
|
|
CU |
CU |
|
Dr Wages and Salaries in P&L (CU17,000 less prior year accrual of CU15,000) |
2,000 |
|
|
Cr Holiday Accrual |
|
2,000 |
Being journal to reflect additional accrual required for holiday pay at 31 December 2015
Note there is no deferred tax in 2015 as under tax law this accrual is fully allowable as the tax return has not been submitted. As per our assumption under tax law it is likely the holiday accrual up to 31 December 2014 of CU15,000 will be allowed as a deduction over the period defined by the relevant tax authorities for an adjustment of this nature. In this instance a period of 5 years has been assumed. So therefore the deferred tax recognised up to the end of 2014 (that being CU1,500 i.e. CU15,000*10%) will be released as the deduction is given in the tax computation. The journal to reflect this in 2015 assuming a deduction of 1/5th of the CU1,500 (CU300) is allowed in the 2015 tax computation is:
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
CU300 |
|
|
Cr Deferred Tax in Balance Sheet |
|
CU300 |
Being journal to reflect reversal of deferred tax recognised on the holiday accrual at 31 December 2015.
For each year for the next 4 years this journal for CU300 will need to be posted based on the assumption in this example.
3) Group defined benefit pension scheme treated as defined contribution scheme under old GAAP now required to be brought on balance sheet
Under old GAAP, where a group company had a defined benefit pension scheme but the allocation of the assets and liabilities of the group could not be determined, then the entities within the group could account for the pension scheme as if it was a defined contribution scheme. FRS 102 does not provide this exemption. Instead it states that the assets and liabilities should be allocated between the group companies based on a contractual agreement or where this does not exist it should be accounted for by the entity in the group that is legally responsible for the plan.
Example 23: Group defined benefit pension scheme treated as defined contribution scheme under old GAAP now required to be brought on balance sheet
Company A is part of a group of companies. A group defined benefit scheme is in operation. Under old GAAP all group companies accounted for the scheme as a defined contribution scheme as a split of the asset and liabilities could not readily be determined. The total pension contributions during 2014 was CU100,000. Assume the date of transition is 1 January 2014. On transition to FRS 102, the group did a detailed analysis and identified the assets and liabilities of the scheme which were attributable to Company A. It determined the allocation of the scheme liabilities and assets were CU650,000 and CU500,000 respectively. Assume a deferred tax rate of 10%.The adjustments required on transition are:
Journals required to be posted to the opening balance sheet at 1 January 2014 are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU650,000 liabilities less CU500,000 assets) |
150,000 |
|
|
Cr Defined Benefit Pension Liability |
|
150,000 |
Being journal to recognise the defined benefit liability at the date of transition
|
|
CU |
CU |
|
Dr Deferred Tax Balance Sheet |
15,000 |
|
|
Cr Profit and Loss Reserves (CU150,000*10%) |
|
15,000 |
Being journal to recognise deferred tax on the defined benefit liabilities
Journals required to be posted to the 31 December 2014 old GAAP TB assuming the journals above are re-posted to retain earnings at:
|
|
CU |
CU |
|
Dr Defined Benefit Pension Liability |
100,000 |
|
|
Cr Pension Cost in P&L |
|
100,000 |
Being journal to reverse the actual contributions made from P&L to set it against the liability as the service cost will be posted to the P&L as provided by the actuary report.
Note based on the actuary valuation of the schemes assets and liabilities attributable to Company A at 31 December 2014, Company A will have to post this movement into the profit and loss account. The journals to be posted will be similar to the journals posted in example 10 above. These journals will also be required for 2015.
4) Past service costs not-vested recognised in full under FRS 102
Under old GAAP where a plan change was made and the effect of this change resulted in some conditions not vesting, the un-vested cost would be recognised on a straight line basis over which the conditions vest. FRS 102 requires such a change to be recognised immediately in the valuation of the defined benefit obligation.
Example 24: Past service costs not-vested recognised in full under FRS 102
During 31 December 2014, Company A agreed with the pension trustees to a change to the plan whereby the percentage of final salary per year of service as a pension would increase from 1% to 2% for everyone who has in excess of 5 years of service. An actuarial valuation indicates that this will result in additional liabilities for past service for members with over 5 years of service of CU100,000 and CU20,000 for members who have yet to reach the five year mark. Under old GAAP any unvested rights were charged on a straight line over the period in which the benefits vested. In this particular case they were charged at CU5,000 (CU20,000/5years). Under old GAAP all past service costs vested were expensed i.e. total expensed in 31 December 2014 period was CU105,000 (CU100,000+5,000). Assume the date of transition is 1 January 2014 and the deferred tax rate is 10%.
FRS 102 would require the full CU120,000 to be recognised in the profit and loss as vested and non-vested rights must be included. The transition adjustments required in the 2014 financial statements are:
|
|
CU |
CU |
|
Dr Service Costs in P&L (CU120,000 required less CU105,000 booked) |
15,000 |
|
|
Cr Defined Benefit Liability |
|
15,000 |
Being journal to expense all un-vested rights
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet (CU15,000*10%) |
1,500 |
|
|
Cr Deferred Tax in P&L |
|
1,500 |
Being journal to reflect deferred tax on the above journal
In the 2015 year an adjustment would be required to reverse the CU5,000 posted (i.e. credit service cost in P&L and debit profit and loss reserves) for the past service costs in the old GAAP TB as it would have been recognised in 31 December 2014 period under FRS 102 through the journal above. Deferred tax of CU500 would also have to be reversed on this CU500.
If in the above example, the change occurred in 2013, then the CU15,000 would be posted to profit and loss reserves and the 2014 journal would be similar to the 2015 journal above.
5) Determination of net interest on defined benefit scheme
Under old GAAP an entity recognised an expected return on plan assets in the profit and loss account. Under FRS 102 a net interest expense, based on the net defined liability, is recognised in the profit and loss account. There is no impact on the balance sheet the adjustment on transition is a transfer from interest expense/pension finance income/costs in the profit and loss to other comprehensive income in the comparative financial year. There will also be a reclassification from deferred tax in the profit and loss to deferred tax in other comprehensive income.
Example 25: Determination of net interest on defined benefit scheme
Company A operates a defined benefit scheme. At 31 December 2014, under old GAAP the expected return on plan assets posted as a credit to interest costs in the profit and loss account was CU20,000. The discount rate was 8% at 31/12/14 and 10% at 31/12/13. The fair value of plan liabilities at 31/12/13 and 31/12/14 was CU100,000 (split CU250,000 to liabilities and CU150,000 to assets) and CU150,000 (split CU300,000 to liabilities and CU150,000 to assets) respectively. Assume there were no contributions or payments out of the scheme during the year for simplicity and that the date of transition is 1 January 2014. Assume the deferred tax rate is 10%. FRS 102 requires an entity to show the net interest cost calculating the return on plan assets at the discount rate
The transition adjustment for 31 December 2014 is:
|
|
CU |
CU |
|
Dr Interest Cost in P&L |
15,000* |
|
|
Cr Actuarial Gain in Other Comprehensive Income |
|
15,000 |
Being journal to transfer the difference to OCI
*the net interest cost is obtained by multiplying the opening discount rate of 10% by the net opening pension liability of CU100,000 = CU10,000, therefore the return on the opening assets= CU150,000*10%= CU15,000. Hence this is the finance income to be shown in interest cost under FRS 102. The difference of CU15,000 between the CU20,000 posted under old GAAP is posted to OCI above.
|
|
CU |
CU |
|
Dr Deferred Tax in OCI |
1,500 |
|
|
Cr Deferred Tax in P&L (CU15,000*10%) |
|
1,500 |
Being journal to reclassify deferred tax from the P&L to OCI as a result of the above adjustment.
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