[et_pb_section admin_label=”Header – All Pages” global_module=”1221″ transparent_background=”off” background_color=”#1e73be” 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″ custom_padding=”||0px|”][et_pb_row global_parent=”1221″ admin_label=”row”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ admin_label=”Post Title” title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”on” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” title_all_caps=”off” use_border_color=”off” border_color=”#ffffff” border_style=”solid” title_font=”|on|||” title_font_size=”35″ custom_padding=”10px|||”] [/et_pb_post_title][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” global_module=”1228″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”0px||0px|” padding_mobile=”on” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row global_parent=”1228″ admin_label=”Row” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” gutter_width=”3″ custom_padding=”0px||0px|” padding_mobile=”off” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ admin_label=”Text” background_layout=”light” text_orientation=”left” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”]
[/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-9/” type=”big” color=”red”] Return to Section 9 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 9 is very similar to the rules under old GAAP however it does provide additional choices for entities in their individual financial statements.
Section 35.9(e) mandates that the non-controlling interest is not adjusted on transition to FRS 102. All adjustments are carried out prospectively. The below transactions are required to be adjusted prospectively:
- allocation of profit and loss between non-controlling interest and owners of the parent
- accounting for changes in the parent’s ownership not resulting in a loss of control
- accounting for loss of control of a subsidiary.
Under the last point it is unlikely to cause any issues as the accounting for the loss of control is similar to that which was done under old GAAP.
Section 9 requires that acquisitions or disposals in interests of subsidiaries that does not result in a change/loss of control after the transaction is accounted for as an equity transaction. Under old GAAP the acquisitions were accounted for under acquisition accounting and goodwill recognised, and on disposal the profit/loss on disposal was recognised in the consolidated financial statements. Therefore where such transactions occurred pre transition they cannot be restated. However, where such transactions occur after transition, transition adjustments will be required.
Section 35.10(f) provides an exemption for entities that prepare separate and individual accounts and who hold an investment in a subsidiary, associate or joint venture. This exemption allows an entity to treat the carrying amount at the date of transition to be its deemed cost. Given that under old GAAP, it would have already been carried at cost, this exemption has no real effect as the concepts in FRS 102 are similar to old GAAP. Note however where an entity does not intend to apply fair value accounting it cannot use the fair value as deemed cost going forward. If a fair value option is chosen an adjustment will be required on transition. See the principal transition adjustments section below for example of application.
Section 35.10(r) provides a choice to subsidiaries, associates, joint ventures who adopt to FRS 102 later than its group to measure its assets and liabilities at either:
- the carrying amounts that would be included in the parent’s consolidated financial statements based on the parent’s date of transition to FRS 102, excluding adjustments that were made for consolidation procedures and for the effects of business combination in which the parent acquired the subsidiary; or
- the carrying amounts required by the rest of FRS 102 based on the subsidiaries date of transition.
In effect the subsidiaries associates and joint ventures can choose to apply the choices taken by the parent in the consolidated financial statements and roll these forward to the date of transition for the subsidiary. For example in the Group financial statements the parent may have decide to apply a revaluation as a deemed cost for its subsidiaries on transition to FRS 102 and therefore not apply the revaluation option going forward. In the consolidated accounts it adjusted the subsidiary results based on this exemption. Assume this revalued amount was CU100,000. The subsidiary can take this CU100,000 as deemed cost and apply depreciation on this to get to the opening balance under FRS 102 at the subsidiarys date of transition. Once the parent has made a choice the subsidiary cannot change that choice.
If not the entity can decide on its own exemptions and measure these at its date of transition. Taking the above example, the entity could decide it will apply a policy of revaluation for fixed assets.
Consolidated financial statements on the other hand where the subsidiary has not been transitioned to FRS 102 before that date need to determine what the subsidiary results would be under FRS 102 when preparing its first set of FRS 102 financial statements, there are no exemptions.
Principal transition adjustments
(1) Fair value adjustments and deferred tax on fair value adjustment where the fair value option is taken.
Under old GAAP investments in subsidiaries in the individual financial statements could only be carried at cost less impairment. However on transition to FRS 102, these is a choice to either carry these at cost less impairment, fair value through profit and loss or fair value through OCI. Where investments in subsidaries are recognised at fair value in the individual financial statements on transition to FRS 102, deferred tax will need to be recognised on transition as well as an adjustment to reflect the investment at its fair value. The deferred tax rate to be used depends on the tax rate that will be payable on settlement i.e. whether the investment is held for dividend income or for future sale.
Example 19: Adoption of fair value through profit and loss on transition
Company A in its individual financial statements has adopted a policy of fair valuing investments in subsidiaries through the profit and loss. Assume 1 January 2014 is the date of transition. The carrying value under old GAAP was CU100,000 at 1 January 2014 and 31 December 2014 & 2015 which represented the original cost. The fair value of the investment at 1 January 2014, 31 December 2014 and 31 December 2015 was CU120,000, CU95,000 and CU125,000 respectively. Assume a deferred tax rate of 20% (being the capital gains tax rate as it will be settled through sale for the purposes of this example). The adjustments required on transition to reflect the fair value policy and the related deferred tax are:
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU120,000-CU100,000) |
20,000 |
|
|
Cr Profit and Loss Reserves |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Deferred Tax in P&L (CU20,000*20%) |
4,000 |
|
|
Cr Deferred Tax Liability |
|
4,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2014 year assuming the above journals are posted to reserves etc.
|
|
CU |
CU |
|
Dr Fair Value Movement in Subsidiaries in P&L |
25,000 |
|
|
Cr Investments in Subsidiaries (CU120,000-CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2014
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,000 |
|
|
Cr Deferred Tax in P&L (CU20,000*20%) |
|
4,000 |
Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU500 would be recognised ((CU100,000-CU95,000)*10%).
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 |
|
|
Cr Fair Value Movement in Subsidiaries in P&L |
|
30,000 |
Being journal to reflect uplift in value from 2014 to 2015
|
|
CU |
CU |
|
Dr Deferred Tax in P&L ((CU125,000-CU100,000)*20%) |
5,000 |
|
|
Cr Deferred Tax Liability |
|
5,000 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 was not recognised in 2014 as per the narrative above as the asset was not deemed recoverable.
Note if the investment were to be settled or realised through receipt of future dividends, the tax rate on the receipt of the dividend should be used in the above example.
Example 20: Adoption of fair value through other comprehensive income on transition
If we take example 19 above and assume Company A in its individual financial statements has adopted a policy of fair valuing investments in associates through other comprehensive income this time. The journals required would be as follows.
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU120,000-CU100,000) |
20,000 |
|
|
Cr Revaluation Reserve |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve (CU20,000*20%) |
4,000 |
|
|
Cr Deferred Tax Liability |
|
4,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2014 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Fair Value Movement in Profit and Loss |
5,000 |
|
|
Dr Fair Value Movement in Subsidiaries in OCI/Revaluation Reserve |
20,000 |
|
|
Cr Investments in Subsidiaries (CU120,000-CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2014. The CU5,000 is posted to the profit and loss as there is nothing left in the revaluation reserve after the CU20,000 has been debited in line with Section 17
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,000 |
|
|
Cr Deferred Tax in Revaluation Reserve (CU20,000*20%) |
|
4,000 |
Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU1,000 would be recognised ((CU100,000-CU95,000)*20%)
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 |
|
|
Cr Profit and Loss Fair Value Movement |
|
5,000 |
|
Cr Fair Value Movement in Subsidiaries in Revaluation Reserve/OCI |
|
25,000 |
Being journal to reflect uplift in value from 2014 to 2015. CU5,000 credit to profit and loss as CU5,000 had previously been debited to the profit and loss for the downward valuation.
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve/OCI ((CU125,000-CU100,000)*20%) |
5,000 |
|
|
Cr Deferred Tax Liability |
|
5,000 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 was not recognised in 2014 as per narrative above as the asset was not deemed recoverable.
Note if the investment were to be settled or realised through receipt of future dividends the tax rate on the receipt of the dividend should be used for the deferred tax rate in the above example.
(2) Acquisitions/disposals which did not result in a change in control after the date of transition
Section 22 requires that acquisitions or disposals in interests of subsidiaries that does not result in a change/loss of control after the transaction are accounted for as equity transactions. Under old GAAP the acquisitions were accounted for under acquisition accounting and goodwill recognised, and on disposal the profit/loss on disposal was recognised in the consolidated financial statements. Section 35.9 makes it clear that where such acquisitions or disposals occurred pre transition date, they must not be restated instead this is applied prospectively. Hence where acquisitions have occurred in the comparative year included in the first set of FRS 102 financial statements a transition adjustment will be required.
Example 21: Acquisition not resulting in a change of control after date of transition
Prior to 1 January 2014, Parent A owned 55% of Company B which was consolidated in the financial statements. On 2 January 2014 the parent acquired the remaining 45% from the non-controlling party for CU1,300,000. The date of transition to FRS 102 is 1 January 2014. In the 2014 financial statements under old GAAP the parent calculated the goodwill acquired as a result of this transaction and reflected the additional fair value of assets and liabilities acquired at that date. Under old GAAP as a result of this transaction goodwill of CU200,000 was recognised and PPE uplift of CU100,000 was booked. The useful life of the PPE and goodwill is 10 years, hence the NBV of this goodwill and PPE was CU180,000 and CU90,000 at 31 December 2014. The NBV of this goodwill and PPE was CU160,000 and CU80,000 at 31 December 2015.
The transition journals required to show the correct treatment under FRS 102 in 31 December 2014 accounts are:
|
|
CU |
CU |
|
Dr Equity-Profit and Loss Reserves |
300,000 |
|
|
Cr Goodwill |
|
200,000 |
|
Cr Fixed Assets – PPE |
|
100,000 |
Being journal to reverse old GAAP posing
|
|
CU |
CU |
|
Dr Goodwill – Balance Sheet |
20,000 |
|
|
Cr Goodwill Amortisation P&L (CU200,000/10yrs) |
|
20,000 |
|
Dr Fixed Assets PPE |
10,000 |
|
|
Cr Depreciation P&L (CU100,000/10yrs) |
|
10,000 |
Being journal to reverse depreciation and amortisation charged for 2014 under old GAAP
An adjustment will also be required in 31 December 2015 financial statements to reverse any amortisation/depreciation charged on the additional goodwill/PPE revaluation if the consolidated accounts have already been produced. The journals will be the same as the above.
Example 22: Disposal resulting in no change in control in the subsidiary after date of transition
Parent A previously owned 100% of Company B which was consolidated in the financial statements for the year ended 31 December 2014. During the year the company disposed of 25% to a third party for CU300,000. The original cost of the investment in the individual entity accounts was CU1,300,000. The net assets of the subsidiary at the date of disposal was CU800,000 plus goodwill of CU50,000 in the consolidated accounts. Assume there were no fair value adjustments as the fair value of the net assets at the original date of acquisition were equal to the entity’s net assets.
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Profit on Disposal of 25% of Subsidiary in P&L |
87,500 |
|
|
Cr Equity -Profit and Loss Reserves ((CU850,000*25%) =CU212,500-CU300,000) |
|
87,500 |
Being journal to reflect disposal as an equity transaction and not show the profit on disposal in the consolidated financial statements.
(3) Adjustments required to adjust prior year consolidated financial statements for subsidiaries results under FRS 102.
The subsidiaries individual financial statements will need to be restated to comply with FRS 102 which may
result in a different profit reported than was previously determined under old GAAP. As a result an adjustment will be required on transition to show the comparative consolidated financial statements equal to the FRS 102 compliance numbers.
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]