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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-34/” type=”big” color=”red”] Return to Section 34 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”]Section 34 – Specialised Activities
Section 34 deals with the reporting requirements for entities applying FRS 102 in the specialist areas of agriculture, extractive activities, service concession arrangements, financial institutions, heritage assets, funding commitments and public benefit entities.
Agriculture – recognition and measurement
Extract from FRS102: Section 34.2-.34.3B
34.2 An entity using this FRS that is engaged in agricultural activity shall determine an accounting policy for each class of biological asset and its related agricultural produce.
Recognition
34.3 An entity shall recognise a biological asset or an item of agricultural produce when, and only when:
(a) the entity controls the asset as a result of past events;
(b) it is probable that future economic benefits associated with the asset will flow to the entity; and
(c) the fair value or cost of the asset can be measured reliably.
Measurement
34.3A For each class of biological asset and its related agricultural produce an entity shall choose as its accounting policy either:
(a) the fair value model set out in paragraphs 34.4 to 34.7A; or
(b) the cost model set out in paragraphs 34.8 to 34.10A.
34.3B If an entity has chosen the fair value model for a class of biological asset and its related agricultural produce, it shall not subsequently change its accounting policy to the cost model.
OmniPro comment
The meaning of biological assets and examples
Appendix I of FRS 102 defines agricultural activity as ‘the management by an entity of the biological assets for sale, into agricultural produce or into additional biological assets’. It covers a wide range of activities, such as raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture, and aquaculture (including fish farming).
A biological asset is ‘a living animal or plant’; and agricultural produce is ‘the harvested product of the entity’s biological assets’.
Example of biological assets, agricultural products and products that are the result of processing after harvest include (as extracted from IAS 41.4):
|
Biological assets |
Agricultural produce |
Products that are the result of processing after harvest |
|
Sheep |
Wool |
Carpet, Yarn |
|
Dairy cattle |
Milk |
Cheese |
|
Pigs |
Carcass |
Sausages etc |
|
Bushes plants |
Leaf |
Tea, Tobacco |
|
Trees in plantation of forest |
Felled Trees |
Logs, Timber |
|
Plants |
Cotton, Harvest Cane |
Thread, Clothing, Sugar |
|
Beef cattle |
Carcass |
Beef etc |
|
Vines |
Grapes |
Wine |
|
Fruit trees |
Picked Fruit |
Processed Fruit |
A different accounting policy can be determined for each biological class i.e. a cost method could be applied to sheep and a fair value model applied to cattle etc.
It is clear from Section 13.2 in FRS 102 that agricultural produce after point of harvest is not within the remit of Section 34, instead these come within the remit of Section 13 Inventories.
Section 34 only applies to agricultural produce (i.e. harvested crops) at the point of harvest and not prior to or subsequent to harvest. Unharvested produce is considered to form part of the biological asset e.g. wool which has not been extracted from a sheep cannot be valued separately.
In order to come within the definition of agricultural activity there must be a biological transformation which is managed. Biological transformation is where biological assets grow etc. For example, lambs are born and then reared to maturity as a sheep/ewe, which is then sold as lamb etc. Forestry grows throughout its life.
This process must be actively managed e.g. feeding cattle, sheep, arranging for those animal to reproduce.
Land and agricultural property do not come within this section as these are dealt with by Section 17.
The recognition criteria for biological assets is similar to any other asset, there must be:
- Ownership of the asset and have ability to control it
- Probable future economic activities will flow to the entity
- The fair value or cost can be reliably measured.
Accounting policy choices:
An entity must apply the policy chosen consistently and cannot change, where there is a change it is a change in accounting policy and would require retrospective adjustment.
The choices accounting policy available are:
- Value the assets at fair value or
- Value the assets at cost
Measurement – fair value model
Extract from FRS102: Section 34.4-.34.6A
34.4 An entity applying the fair value model shall measure a biological asset on initial recognition and at each reporting date at its fair value less costs to sell.
Changes in fair value less costs to sell shall be recognised in profit or loss.
34.5 Agricultural produce harvested from an entity’s biological assets shall be measured at the point of harvest at its fair value less costs to sell.
Such measurement is the cost at that date when applying Section 13 Inventories or another applicable section of this FRS.
34.6 In determining fair value, an entity shall consider the following:
(a) If an active market exists for a biological asset or agricultural produce in its present location and condition, the quoted price in that market is the appropriate basis for determining the fair value of that asset. If an entity has access to different active markets, the entity shall use the price existing in the market that it expects to use.
(b) If an active market does not exist, an entity uses one or more of the following, when available, in determining fair value:
(i) the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the end of the reporting period;
(ii) market prices for similar assets with adjustment to reflect differences; and
(iii) sector benchmarks such as the value of an orchard expressed per export tray, bushel, or hectare, and the value of cattle expressed per kilogram of meat.
(c) In some cases, the information sources listed in (b) may suggest different conclusions as to the fair value of a biological asset or an item of agricultural produce.
An entity considers the reasons for those differences, to arrive at the most reliable estimate of fair value within a relatively narrow range of reasonable estimates.
(d) In some circumstances, fair value may be readily determinable even though market determined prices or values are not available for a biological asset in its present condition. An entity shall consider whether the present value of expected net cash flows from the asset discounted at a current market determined rate results in a reliable measure of fair value.
34.6A If the fair value of a biological asset cannot be measured reliably, the entity shall apply the cost model to that biological asset in accordance with paragraphs 34.8 and 34.10A until such time that the fair value can be reliably measured.
OmniPro comment
The fair value model values biological assets at its fair value less costs to sell. To summarise where the fair value model is applied the following hierarchy should be applied:
- Price for the asset in an active market
- Recent transaction price if there is no active market
- Market prices for similar assets
- Sector benchmarks
- The present value of net cash flows from the asset.
Appendix I of FRS 102 defines an active market as existing when all of the following conditions exist:
- The items traded in the market are homogenous;
- Willing buyers and sellers can normally be found at any time; and
- Prices are available to the public.
Biological assets usually have an active market. For example, calves, cattle, sheep etc. have active markets. Therefore, these prices should be used. The fair value is measured at the end of each reporting period and changes are posted to the profit and loss.
Given that there may be more than one market for the biological asset Section 34.6 makes it clear that the price to be used is the market it which the entity will use to sell the assets etc.
Example 1: Fair value model
Company A owns calves/yearlings. These fall within the definition of biological assets. There are two active markets here, an entity could sell the cattle in a factory or in the mart both of which gives different answers. In determining the value to use the entity should determine whether they will dispose of the cattle in the mart or in the factory. This will require judgment.
It could also be that the price quoted in one part of the country is higher than in the location which the entity is located. In determining the price, the entity should assess whether they will use the local market or go to another market. For example, in one part of the country the price of cattle might be higher than the price of cattle in another part of the country. In determining the value to apply, the entity will need to assess what market it will use to get dispose of the biological asset.
Where an active market is not available then entities must move to Section 34.6(b) in line with the above hierarchy.
Where the cash flow model is used it should include all directly attributable cash inflows and outflows. The inflows will be the price in the market of the harvested crop over the asset’s life. The outflows will be those incurred in raising or growing the asset and getting it to the market. The market is where the asset will be sold. The cash flows should exclude the cost of financing the assets, taxation or re-establishing biological assets after harvest. For example, for corn it would be the price that would be received for ripe corn less costs of spraying, harvesting etc. If a value cannot be determined reliably it should be carried at cost.
Example 2: Application of the fair value model
Company A has sowed corn during the year. The company has applied the fair value model to biological assets. At the year-end a reliable measure cannot be determined due to very few sales occurring. In determining the cash flows the entities uses available information from as much external sources as possible to determine the future price obtainable when the corn is fully mature. These are then present valued at the appropriate market rate.
In assessing the outflows, it should include a notional amount for the cost of renting the land (although this may not be rented in reality – however it allows consistency with individuals who would have to rent the land) and discount all costs including this deemed rental cost to get the corn to its fully matured state. The net cash flow obtained here after discounting should be added to the deemed cost of the rental so as to determine the amount to recognise the field of corn in the financial statements.
Assume at the end of the year the net cash flows were CU10,000. This would be recognised in the financial statements.
|
|
CU |
CU |
|
Dr Agricultural/Biological Assets |
10,000 |
|
|
Cr Profit and Loss |
|
10,000 |
Assume at the end of the following year the actual fair value at the point of harvest was CU15,000. The difference of CU5,000 would be posted as a credit to the profit and loss account. All further costs and revenues between year-end and that date are recognised in the profit and loss account.
At the point of harvest the journal required would be to:
|
|
CU |
CU |
|
Dr Inventory on the Balance Sheet |
15,000 |
|
|
Cr Agricultural/Biological Assets |
|
15,000 |
From then on the corn would be dealt with under Section 13 of FRS 102.
If this was sold straight away there would be no gross profit shown as it is the same as the cost.
Where fair values cannot be reliably measured the cost model should be used. However, when a reliable measure becomes available at a point in the future, the fair value model should be recommenced.
Example 3: Application of the fair value model
Company A had the following transactions in the year.
On 1 November the entity purchased 10 cattle for beef production for CU10,000. If this entity were to sell the same cattle it would incur transportation costs of CU50 and auctioneering fees of CU50.
Therefore the amount to be recognised as a biological asset at that time is the fair value less cost to sell:
|
|
CU |
CU |
|
Dr Biological Assets (CU10,000 less CU100 costs to sell) |
9,900 |
|
|
Dr Loss on Initial Recognition |
100 |
|
|
Cr Bank |
|
10,000 |
At year end 31 December the market value of the cattle was CU11,000 less costs to transport and auctioneer fees of CU50= CU10,950. Therefore the gain should be recognised at year end. It incurred vet fees in the intervening period. The following journal should be posted:
|
|
CU |
CU |
|
Dr Biological Assets (fair value of CU10,950 less CU9,900 original cost) |
1,050 |
|
|
Cr Profit and Loss with Gain |
|
1,050 |
Note the vet fees are expensed as incurred.
On 31 March the company sold 5 of the cattle in the factory for CU7,000 and incurred CU300 in transportation fees. The journal required is:
|
|
CU |
CU |
|
Dr Bank |
6,700 |
|
|
Dr Transport Fees in P&L |
300 |
|
|
Cr Revenue |
|
7,000 |
The below journal is also required to transfer from biological assets at that date to inventory:
|
|
CU |
CU |
|
Dr Inventory |
6,700 |
|
|
Cr Biological Asset (CU10,950 / 10 cattle * 5) |
|
5,475 |
|
Cr Fair Value Gain on Cattle (CU6,700-CU5,475) |
|
1,225 |
The journal is then posted to derecognise the inventory and recognise the cost of sales.
At the end of the following year the fair value of the cattle was CU8,000 less cost of transport and auctioneer fees CU100 (CU7,900). The journal required to show the value at the end of that year is:
|
|
CU |
CU |
|
Dr Biological Assets |
CU2,425 |
|
|
Cr Gain on Fair Value in P&L (CU7,900-(CU10,950-CU5,475) |
|
CU2,425 |
Disclosures – fair value model
Extract from FRS102: Section 34.7-34.7B
34.7 An entity shall disclose the following for each class of biological asset measured using the fair value model:
(a) A description of each class of biological asset.
(b) The methods and significant assumptions applied in determining the fair value of each class of biological asset.
(c) A reconciliation of changes in the carrying amount of each class of biological asset between the beginning and the end of the current period. The reconciliation shall include:
(i) the gain or loss arising from changes in fair value less costs to sell;
(ii) increases resulting from purchases;
(iii) decreases attributable to sales;
(iv) decreases resulting from harvest;
(v) increases resulting from business combinations; and
(vi) other changes.
This reconciliation need not be presented for prior periods.
34.7A If an entity measures any individual biological assets at cost in accordance with paragraph 34.6A, it shall explain why fair value cannot be reliably measured. If the fair value of such a biological asset becomes reliably measurable during the current period an entity shall explain why fair value has become reliably measurable and the effect of the change.
34.7B An entity shall disclose the methods and significant assumptions applied in determining the fair value at the point of harvest of each class of agricultural produce.
OmniPro comment
Example 4: Biological Assets held at fair value
Extract from accounting policies note for forestry
Biological assets (fair value)
The acquisition of land for forest projects is originally recorded at cost in accordance with Section 17 of FRS 102. Biological assets are stated at fair value, less estimated point of sale costs at each period end. The fair value is determined using the present value of expected net cash flows from the asset, discounted at a current market rate other than for young seedling stands. The fair value of the young seedling stands is the actual reforestation cost of those stands.
The gain or loss in fair value of these biological assets is reported in net profit. The measurement of biological growth in the field is an important element of this valuation. Initially at the start of the plantation cycle the fair value is equal to the standard costs of preparing and maintaining a plantation, including the appropriate cost of capital, assuming efficient operations. Towards the end of the plantation cycle the fair value depends solely on the discounted value of the expected harvest, less estimated point of sale costs. The calculation takes into account the growth potential, environmental restrictions and other reservations of the forests. Felling revenues and maintenance costs are calculated on the basis of actual costs and prices, taking into account the company’s projection of future price development.
Periodic changes resulting from growth, felling, prices, discount rate, costs and other premise changes are included in operating profit in the profit and loss account.
Extract from critical judgements note
The company owns XX hectares of forest land. Biological assets (i.e. living trees) are measured at fair value at each balance sheet date. The fair value of biological assets is determined based among other estimates on growth potential, harvesting, price development and discount rate. Changes in any estimates could lead to recognition of significant fair value changes in the profit and loss account.
Extract from accounting policies note for livestock (Extracted from Appendix to IAS 41)
Livestock are measured at their fair value less costs to sell. The fair value of livestock is determined based on market prices of livestock of similar age, breed, and genetic merit. Milk is initially measured at its fair value less costs to sell at the time of milking. The fair value of milk is determined based on market prices in the local area. Changes in fair value are recognised within cost of sales in profit and loss.
Extract from accounting policies note for livestock
Livestock are measured at their fair value less costs to sell. The fair value of livestock is determined based on market prices of livestock of similar age, breed, and genetic merit. Changes in the fair value are recognised within cost of sales in the profit and loss.
Example 5: Extract from notes to the financial statements for biological assets held at fair value
|
Analysis of Biological Assets by Class |
2015 |
2015 |
2015 |
2015 |
2014 |
2014 |
2014 |
2014 |
|
|
CU |
CU |
CU |
CU |
CU |
CU |
CU |
CU |
|
|
Mature Cattle |
Immature Cattle |
Wheat |
Forests |
Mature Cattle |
Immature Cattle |
Wheat |
Forests |
|
Opening Balance |
100,000 |
50,000 |
40,000 |
30,000 |
100,000 |
50,000 |
40,000 |
40,000 |
|
Purchases |
20,000 |
2,000 |
10,000 |
10,000 |
20,000 |
2,000 |
10,000 |
10,000 |
|
Sales |
-40,000 |
-33,000 |
– |
– |
-40,000 |
-33,000 |
– |
– |
|
Harvest |
– |
– |
-30,000 |
-30,000 |
– |
– |
-30,000 |
-30,000 |
|
Acquired through Business Combinations |
30,000 |
– |
– |
– |
30,000 |
– |
– |
– |
|
Newborns |
– |
40,000 |
– |
– |
– |
60,000 |
– |
– |
|
Transfer from Immature to Mature |
19,000 |
-19,000 |
– |
– |
19,000 |
-19,000 |
– |
– |
|
Other Changes |
– |
– |
– |
– |
– |
– |
– |
– |
|
Gains/(loss) arising from Fair Value less Costs to Sell |
25,000 |
-10,000 |
10,000 |
10,000 |
25,000 |
-10,000 |
10,000 |
10,000 |
|
Closing Balance |
154,000 |
30,000 |
30,000 |
20,000 |
154,000 |
50,000 |
30,000 |
30,000 |
|
|
|
|
|
|
|
|
|
|
|
Biological Assets – Forestry: The pre-tax used in determining fair value in the year was X% (2014:X%). A 1% move in discount rate would affect the fair value by CUXXX. In addition to the discount rate, the growth of the forest stock, and timber prices are other essential assumptions used in valuation. |
||||||||
Measurement – cost model
Extract from FRS102: Section 34.8-34.9
34.8 An entity applying the cost model shall measure biological assets at cost less any accumulated depreciation and any accumulated impairment losses.
34.9 In applying the cost model, agricultural produce harvested from an entity’s biological assets shall be measured at the point of harvest at either:
(a) the lower of cost and estimated selling price less costs to complete and sell; or
(b) its fair value less costs to sell. Any gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell shall be included in profit or loss for the period in which it arises. Such measurement is the cost at that date when applying Section 13 or another applicable section of this FRS.
OmniPro comment
An entity that applies the cost model has a choice to carry biological assets:
- The lower of cost and estimated selling cost less cost to complete and sell; or
- Fair value less cost to sell.
Where an impairment is required, Section 27 should be reviewed.
From the above it is evident that it is possible under the cost model to still apply fair value. The opposite is not the case under the fair value model unless it can no longer be enclosed reliably.
Disclosures – cost model
Extract from FRS102: Section 34.10-34.9
34.10 An entity shall disclose the following for each class of biological asset measured using the cost model:
(a) a description of each class of biological asset;
(c) the depreciation method used;
(d) the useful lives or the depreciation rates used; and
(e) a reconciliation of changes in the carrying amount of each class of biological asset between the beginning and the end of the current period. The reconciliation shall include:
(i) increases resulting from purchases;
(ii) decreases attributable to sales;
(iii) decreases resulting from harvest;
(iv) increases resulting from business combinations;
(v) impairment losses recognised or reversed in profit or loss in accordance with Section 27 Impairment of Assets; and
(vi) other changes.
This reconciliation need not be presented for prior periods
34.10A An entity shall disclose, for any agricultural produce measured at fair value less costs to sell, the methods and significant assumptions applied in determining the fair value at the point of harvest of each class of agricultural produce.
OmniPro comment
See illustration of the above points below:
Example 6: Extract from accounting policies notes for livestock/biological assets carried at cost
Biological assets – Forestry (Cost)
The acquisition of land for forest projects is originally recorded at cost in accordance with Section 17 of FRS 102. Biological assets are measured at the lower of cost and estimated selling price less costs to complete and sell.
Depletion represents the costs of forests clearfelled during the year, calculated as the proportion that the area harvested bears to the total area of similar forests. The depletion amount is charged to the profit and loss account and is based on cost.
Extract from accounting policies notes for livestock
Biological assets – Livestock
Livestock are measured at the lower of cost and net realisable value. The purchase price of livestock bought in is measured at the purchase price plus directly attributable purchase costs. Own reared stock is measured at cost based on the selling price of the livestock less an appropriate margin based on industry norms to bring the value back to the estimated cost price.
Example 7: Extract from the notes to the financial statements disclosing biological assets held at cost:
|
Analysis of Biological Assets by Class |
2015 |
2015 |
2015 |
2015 |
2014 |
2014 |
2014 |
2014 |
|
|
CU |
CU |
CU |
CU |
CU |
CU |
CU |
CU |
|
|
Mature Cattle |
Immature Cattle |
Wheat |
Forests |
Mature Cattle |
Immature Cattle |
Wheat |
Forests |
|
Opening Balance |
100,000 |
50,000 |
40,000 |
30,000 |
100,000 |
50,000 |
40,000 |
40,000 |
|
Purchases |
20,000 |
2,000 |
10,000 |
10,000 |
20,000 |
2,000 |
10,000 |
10,000 |
|
Sales |
-40,000 |
-33,000 |
– |
– |
-40,000 |
-33,000 |
– |
– |
|
Harvest |
– |
– |
-30,000 |
– |
– |
– |
-30,000 |
– |
|
Depletion |
– |
– |
– |
-30,000 |
– |
– |
– |
-30,000 |
|
Acquired through Business Combinations |
30,000 |
– |
– |
– |
30,000 |
– |
– |
– |
|
Newborns |
– |
40,000 |
– |
– |
– |
60,000 |
– |
– |
|
Transfer from Immature to Mature |
19,000 |
-19,000 |
– |
– |
19,000 |
-19,000 |
– |
– |
|
Other Changes |
– |
– |
– |
– |
– |
– |
– |
– |
|
Gains/(loss) arising from Fair Value less Costs to Sell |
25,000 |
-10,000 |
10,000 |
10,000 |
25,000 |
-10,000 |
10,000 |
10,000 |
|
Closing Balance |
154,000 |
30,000 |
30,000 |
20,000 |
154,000 |
50,000 |
30,000 |
30,000 |
Transition exemptions
Section 35 provides no transition exemptions. This therefore this must be applied retrospectively.
Under previous GAAP, there was no specific guidance on accounting for biological assets, and therefore most entities followed the guidance on fixed assets (FRS15) and applied a cost model or the guidance on stock and long term contracts (SSAP9) and applied the lower of cost or net realisable value. Therefore if entities continue to use the cost model there should be no real transition differences.
However, if an entity changes from fair value to cost or from cost to fair value, the change should be applied retrospectively, and the adjustments would be recognised in reserves.
Depending on the type of biological asset a reclassification might be required to change it from current to non-current and vice versa and to reclassify it from inventory if it was previously included in inventory.
Principal transition adjustments
1) Change from cost model to fair value model
Under previous GAAP, there was no specific guidance on accounting for biological assets, and therefore most entities followed the guidance on fixed assets (FRS15) and applied a cost model or the guidance on stock and long term contracts (SSAP9) and applied the lower of cost or net realisable value. Therefore if entities continue to use the cost model or the model they previously adopted there should be no real transition differences.
However, if an entity changes from fair value to cost or from cost to fair value, the change should be applied retrospectively, and the adjustments would be recognised in reserves. Deferred tax will be required to be recognised for the fact that the increase will be taxable as part of the tax transition rules.
Example 8: Cost model to a fair value model
Company A holds cattle as biological assets. Under old GAAP, these were valued at cost under SSAP9. On transition to FRS 102, the entity decides to apply the fair value model. The total cost of biological assets stated in the balance sheet at 1 January 2014 being the date of transition was CU100,000 and at the 31 December 2014 and 2015 was CU130,000. The fair value of the cattle was CU125,000. Assume deferred tax rate of 10% and the transition adjustment will be taxable/tax deductible over a 5 year period. The fair value at 31 December 2014 and 2015 was CU150,000. The transition adjustments required are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Biological Assets |
125,000 |
|
|
Cr Inventory |
|
100,000 |
|
Cr Deferred Tax Liability (CU25,000*10%) |
|
2,500 |
|
Cr Profit and Loss Reserves Net of Deferred Tax |
|
22,500 |
Being journal to reflect the uplift to fair value and transfer to a separate line item including the deferred tax impact.
Journals required for the year ended 31 December 2014 assuming the above journals are posted to opening reserves
|
|
CU |
CU |
|
Dr Biological Assets (CU150,000-CU125,000) |
25,000 |
|
|
Dr Change in Fair Value of Biological Assets in P&L |
CU5,000* |
|
|
Cr Inventory (CU130,000 as stated at end of 2014 less CU100,000 journal posted in the journals on transition of CU100,000) |
|
CU30,000 |
Being journal to reflect uplift on value to fair value including the deferred tax impact and the related reclassification adjustment.
* (being movement that should have been posted to the P&L of CU25,000 credit (i.e. CU150,000 this year vs CU125,000 in prior year) less what has already been posted under old GAAP of CU30,000 credit (CU130,000 in current year vs CU100,000 in stock at date of transition) already posted to the P&L.
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU5,000*10%) |
500 |
|
|
Cr Deferred Tax in P&L |
|
500 |
Being journal to reflect deferred tax on movement in the year which will be taxable over the next 5 years.
Journals required for the year ended 31 December 2015 assuming the above journals are posted to opening reserves
As the fair value and carrying amount under the old GAAP at 31 December 2015 has remained the same as 2014, no reclassification is required. The only journal required will be to release 1/5th of deferred tax assets recognised up to 31 December 2014 to reflect the fact that 1/5th of the tax deduction will be obtained in the 2015 tax return based on the assumption included in this example. The remaining amount will be released over the following 4 years in line with when the deduction is allowed in the tax computation based on the assumption in this example. The journal required is:
|
|
CU |
CU |
|
Dr Deferred Tax Liability ((CU150,000 being the fair value at 31 December 2014 – CU130,000 being the carrying amount under old GAAP at that date) – (CU20,000/5 yearsx10%)) |
400 |
|
|
Cr Deferred Tax in P&L |
|
400 |
Being journal to reflect the release of the deferred tax liability for the year so as to match the 1/5th deduction allowed in the 2015 tax computation (as assumed in the question).
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