The New Irish GAAP
FRS 102
September 2014
CPD Blitz
Karen Goggin, Senior Manager, Deloitte
Outline
A New Reporting Framework
FRS 102 - The Way Forward
Possible Areas of Focus
The Tax Perspective
More Than Accounting and Tax
2
Choosing your GAAP – some questions
Why replace
current Irish
GAAP?
Who will be
most
affected?
What options
are available?
What are the
main
changes?
……………….. And much more!
When is it
mandatory?
Is early
adoption
available?
What about
disclosure?
A New Reporting Framework
© 2013 Deloitte Touche Tohmatsu
New Financial Reporting Framework
FRS 101
FRS 100
FRS 102
FRC
FRSSE
5
FRS 103
SORPs
The GAAPs on offer – in a nutshell
6
FRS 100
• ‘Application of financial
reporting requirements’
FRS 101
• ‘Reduced disclosure
framework’
FRS 102
• ‘The Financial Reporting
Standard applicable in the UK
and Republic of Ireland’
The GAAPs on offer – decision-making time
 FRSs 100-102 effective for periods beginning on/after 1 January 2015
 Early adoption permitted – Has been from December 2012 onwards
 Transition to IFRSs possible at any stage
 Expect further consultation on accounting for financial instruments
2013:
FREDs
46-48 issued
2011
Choose your GAAP
Final
FRSs
100-101
2012
Final
FRS 102
2013
2014
1 January 2014
date of
transition
7
2015
31 December
2014
comparative
balance sheet
31 December
2015
first year-end
balance sheet
FRS 100 – who does what?
Currently applying:
Proposed:
Reduced disclosures?
Required to apply EU
adopted IFRS
No change
No
Opted to apply IFRS
Option:
IFRS (no change), or
FRS 101
Yes, for parent or
subsidiaries
Irish FRS
Option:
IFRS, or
FRS 102
Yes, for parent or
subsidiaries
FRSSE
Withdrawn
Withdrawn
(i.e. Listed group)
8
Introducing FRS 101
‘Reduced Disclosure Framework’
© 2013 Deloitte Touche Tohmatsu
What is FRS 101 exactly?
FRS 101 financial statements are…
Prepared using IFRS recognition and
measurement bases
Technically Companies Act accounts
(therefore must comply with company
law)
Granted a number of disclosure
exemptions
Available to “qualifying entities” in
individual financial statements only
10
FRS
101
Financial
statements
Who is eligible to apply FRS 101?
A qualifying entity is…
 A member of a group where the parent prepares publicly available consolidated
financial statements which are intended to give a ‘true and fair’ view and include
equivalent disclosures at group level
 Included in those consolidated accounts
 Shareholders must have been notified in writing - objection thresholds (5% total or
50% minority)
 Entity must make certain disclosures in its financial statements - compliance,
exemptions taken.
What does this mean in practice?
Most parents and
subsidiaries will be
qualifying entities
11
No explicit
requirement for the
consolidated
accounts to be
prepared under IFRS
Disclosure reductions
are
available in separate
(company only)
financial statements
FRS 101 accounts are Companies Act accounts
What does this mean?
Companies Act
formats for
primary statements
Negative goodwill
on balance sheet
Goodwill impairment
shall be reversed if
conditions reverse
Grant accounting –
netting off prohibited
12
Companies Act
required disclosures
FRS 101 and the
Companies Act
Continued /
discontinued
operations must be
on face of P&L
Extraordinary items
as defined in law
What are the disclosure reductions?
As specified by FRS 101
Not currently required in
Irish GAAP
Disclosed on a group basis
Other
† No exemption for financial institutions
13
• Cash flow statement & notes (IAS 7)
• Key management compensation (IAS 24)
•
•
•
•
•
Share-based payments (IFRS 2)
Financial instruments (IFRS 7)†
Fair values (IFRS 13)†
Acquisitions (IFRS 3)
Cashflows from discontinued operations
(IFRS 5)
• Impairment (IAS 36)
•
•
•
•
•
Comparative data (IAS 16, 38, 40)
Third balance sheet (IAS 1)
Capital management (IAS 1)†
Standards not yet applied (IAS 8)
Group related party transactions (IAS 24)
The Transition Challenge
 Move from IFRS
•
Companies Act presentation and other requirements
Move from Irish GAAP
•
14
First time adoption of IFRS
Benefits of FRS 101
 Reduced disclosures
 Alignment of accounting policies
 More efficient consolidation process
15
Introducing FRS 102
The Way Forward
© 2013 Deloitte Touche Tohmatsu
Why replace current Irish GAAP?
ASB is aiming to provide financial reporting standards that improve
financial reporting
Current Irish GAAP is replaced by one standard of 226 A4 pages
Organised by topic – 35 sections
Update every 3 years
17
Statement of Financial Position
Single statement of comprehensive income
or separate income statement and
statement of comprehensive income
Complete
Set of
Financial
Statements
Statement of changes in equity
Statement of cash flows
Notes, including accounting policies and
other explanatory information
18
FRS 102 – Additional Disclosures
Additional disclosures required include:
 Key judgements and estimates
 Statement of compliance
 Basic and complex financial instruments
 Key management compensation
19
Disclosure exemptions for FRS 102 preparers
As with FRS 101 these are available to 'qualifying entities':
“A member of a group that prepares publicly available financial statements, which
give a true and fair view, in which that member is consolidated.”
As specified by FRS 102:1.12
 Cash flow statements
 Key management compensation
 Financial instruments†
 Share based payments
† No exemption for financial institutions
20
Transition to FRS 102
Restated comparative information required
(unless impracticable), but no third balance
sheet
Reconciliation of equity to be presented at the
date of transition and date of last financial
statements under Irish GAAP
Reconciliation of profit or loss in last financial
statements from Irish GAAP to FRS 102
Transitional provisions for a number of areas
including assets held at valuation
21
Overview of Sections
Section 1. Scope
FRS 102 is available for use by Irish unlisted groups and listed or unlisted individual entities
preparing financial statements that are intended to give a true and fair view.
In other words, it may be applied by any entity that is not
required to apply full EU-adopted IFRSs.
Qualifying entities (as defined in the Glossary to FRS 102 – see below) can take
advantage of certain disclosure exemptions which are set out in this section.
These exemptions are available if certain requirements are met.
22
Overview of Sections
Section 1. Scope - continued
These exemptions are available if:
• the company must be a qualifying entity (see below);
• the shareholders of the company must have been notified in writing and
any objections must not be greater then 5% of allocated shares or 50% of
any minority interest
• the entity must disclose in its financial statements:
–– a brief narrative summary of the exemptions adopted;
–– the name of the parent in whose group financial statements it is
consolidated; and
–– from where those group financial statements may be obtained.
The exemptions are not available in respect of consolidated accounts.
23
Overview of Sections
Section 2. Concepts and Pervasive Principles
Identifies the qualitative characteristics underlying the financial statements.
•
•
•
•
•
•
•
•
•
•
24
Understandability
Relevance
Materiality
Reliability
Substance over form
Prudence
Completeness
Comparability
Timeliness
Balance between benefit and cost
Overview of Sections
Section 3. Financial statement presentation
The fundamental principles for the preparation of financial statements that result in
the faithful representation of transactions, other events and
conditions, are:
–– the going concern assumption;
–– consistency of presentation;
–– comparability; and
–– materiality.
25
Overview of Sections
Section 3. Financial statement presentation - continued
A complete set of financial statements includes each of the following for the current
period and
the previous comparable period:
–– a balance sheet;
–– either a single statement of comprehensive
income or a profit and loss account and a
separate statement of comprehensive income;
–– a statement of changes in equity;
–– a statement of cash flows; and
–– notes to the financial statements
26
Overview of Sections
Section 4. Statement of financial position (balance sheet)
Specifies additional information that can be
presented either in the statement of financial
position or in the notes.
Balance sheet appearance is unlikely to change,
although no longer required to present a pension
liability separately on the face of the balance
sheet.
27
Overview of Sections
Section 5. Statement of comprehensive income and
income statement
Requires the presentation of total comprehensive
income either in:
–– a single statement of comprehensive income; or
–– a separate profit and loss account and a separate
statement of comprehensive income which
presents all items recognised outside profit
or loss.
Discontinued operations must be presented
line-by-line on the face of the statement, and an
appendix is included in Section 5 of FRS 102 to
illustrate this.
28
Overview of Sections
Section 5. Statement of comprehensive income and
income statement
• A discontinued operation is defined as a
component of an entity that has been disposed
of and:
–– represented a separate major line of business or geographical area of operations;
–– was part of a single co-ordinated plan to dispose of a separate major line of
business or geographical area of operations; or
–– was a subsidiary acquired exclusively with a view
to resale.
• Extraordinary items are described as “possessing a high degree of abnormality”.
• Analysis of expenses recognised in profit or loss may be presented by nature (such
as depreciation, salaries, purchase of materials) or function (such as
cost of goods sold, administrative expenses).
29
Overview of Sections
Section 6. Statement of Changes in Equity and
Statement of Income and Retained Earnings
Key Irish GAAP conversion issues
No significant change to Irish statement of
movements in equity, although comparatives
now required.
• Additional option to combine with ‘P&L account’
to show retained profits brought/carried forward
where ‘STRGL’/equity items are limited to
dividends and prior-year adjustments.
30
Overview of Sections
Section 7. Statement of Cash Flows
Key Irish GAAP conversion issues
For groups and entities other than qualifying entities, a cash flow statement is always
required
– there is no ‘small company’ exemption.
• Definition of cash broader than under FRS 1 Cash Flow Statements (24 hour
criterion does not apply).
• ’Cash equivalents’ included in the cash flow statement.
• No explicit guidance in Section 7 on presentation of cash flows as net or gross of
sales taxes.
• Only three classifications under FRS 102 – operating, investing and financing –
compared to the more granular approach of nine classifications in FRS 1.
31
Overview of Sections
Section 8. Notes to the Financial Statements
Requires systematic presentation of information not presented elsewhere in the
financial statements, as well as information on the:
–– basis of preparation;
–– specific accounting policies;
–– judgements made in applying the accounting
policies; and
–– key sources of estimation uncertainty.
Key Irish GAAP conversion issues
Disclosure of critical judgements and key sources of estimation uncertainty is
required.
32
Overview of Sections
Section 9. Consolidated and Separate Financial
Statements
In general, few differences between FRS 102 and old Irish GAAP as the approach to
consolidated accounts and business combinations under FRS 102 broadly follows that
of IFRS 3 Business Combinations.
• Specific treatment is introduced in FRS 102 for subsidiaries held as part of an
investment portfolio, requiring such subsidiaries to be measured at FVTPL rather than
consolidated.
• Transitional provision – if a parent in its separate financial statements elects to
account for its investment in a subsidiary at cost under FRS
102, it may measure the opening position of that investment, on the date of transition,
at cost in accordance with FRS 102 or at ‘deemed cost’, being the previous carrying
value of that investment under its previous GAAP.
33
Overview of Sections
Section 10. Accounting Policies, Estimates and Errors
Key Irish GAAP conversion issues
Reduced specific guidance within FRS 102 may lead to increased need for judgement
in determining accounting policies.
• When it is difficult to distinguish a change in an accounting policy from a change in
an accounting estimate, FRS 102 states that the change should be treated as a
change in an accounting estimate.
• Errors are restated when ‘material’ rather than ‘fundamental’, which could lead to
increased restatements.
34
Possible Areas of Focus
© 2013 Deloitte Touche Tohmatsu
Overview
Specific sections to consider for an entity may include the following:
Related parties
Revenue
36
Key impacts for Irish GAAP reporters moving to FRS 102
Financial
instruments
• Comprehensive accounting guidance
• Derivatives on-balance sheet
• Limited and specific hedge accounting
Deferred tax
• Timing difference ‘plus’ approach could result in
larger deferred tax balances
• Providing for tax on undistributed investment
income
Foreign currency
37
• Transactions recorded in functional currency
• Not able to use contracted rate for synthetic
hedging
Key impacts for Irish GAAP reporters moving to FRS 102
38
Business
combinations
• Finite useful lives for goodwill and intangible assets
• Deferred tax provided on FV uplifts on acquisition
Employee Benefits
• No multi-employer exemption where entities under
common control
• Holiday pay accrual
Investments
• Movements in value of investment property in P&L
• Fair value only where it can be reliably measured
Sections 11 & 12: Financial instruments – Overview
 Accounting policy choice on measurement & recognition: Sections 11 & 12
or IAS 39/IFRS 9
 To be revisited when IFRS 9 complete (i.e. FRS 102 will be updated)
• Will depend on whether currently applying FRS 26
• Derivatives on balance sheet at fair value
Impact of
moving from
Irish GAAP
• Limited hedge accounting available – requires formal
documentation of the hedge relationship
• Much simplified disclosures compared to FRS 29, but
significantly more than ‘old’ Irish GAAP
• Includes guidance on arriving at fair value
39
Sections 11 & 12: Financial instruments – Scope
What is a financial instrument?
A contract that gives rise to a financial asset of one entity and a financial liability
or equity instrument of another entity.
Examples of financial
instruments
•
•
•
•
Ordinary shares
Preference shares
Loans
Trade receivables
Examples of non
financial instruments
•
•
•
•
Interest rate swap
FX forward
Finance lease
Share based payments
• Prepayment
• Tax liability
• Operating lease
Financial Instruments
covered by other sections
• Most leases
• Investment in subsidiaries
• Share based payments
40
• Employee benefits
• Own equity
• Insurance contracts
• Associates and jointlycontrolled entities
• Financial guarantee contracts
Sections 11 & 12: Financial instruments – Basic financial
instruments
What is a basic financial instrument?
•
Cash (incl. demand and fixed term
deposits)
•
Debt instruments meeting certain
conditions
•
Some equity instruments
•
A commitment to receive a loan that
will be basic that cannot be settled
net in cash
Basic debt instruments
Non-basic debt instruments
- A zero coupon bond with fixed
maturity
- All derivatives – other than basic
loan commitments
- A loan paying EURIBOR + 2% with
an option to repay at par plus
accrued interest
- An investment in convertible debt
- A loan paying a fixed rate of interest
with a make-whole provision
- A loan with interest indexed to the
FTSE 100
- A loan with an option to repay at fair
value
Basic instruments are within scope of section 11, everything
else is within scope of section 12
41
Sections 11 & 12: Financial instruments – Measurement
Basic debt instruments
• Generally amortised cost
• Some short term payables/receivables
at cost
• Fair value option available, subject to
conditions
Basic loan commitments
• Cost less impairment
Equity instruments
(and derivatives over equity
instruments)
• Fair Value Through Profit or Loss
(FVTPL) if fair value is reliably
measurable
• Otherwise at cost
Everything else
• Fair Value Through Profit or Loss
(FVTPL)
For items not at FVTPL transaction costs are included in
initial carrying amount. Assets not at FVTPL are assessed
for impairment at end of each reporting period
42
Sections 11 & 12: Financial instruments – Derivatives
What is a derivative?
A financial instrument or other contract with all three of the following characteristics:
(a) its value changes in response to the change in a specified underlying variable;
(b) it requires little or no initial net investment; and
(c) it is settled at a future date.
Examples:
 A contract to purchase 100 barrels of oil for $95 dollars in three months time
(a commodity forward)
 A contract to exchange cash flows of 5% for LIBOR on a notional of £100m
every 6 months for the next 5 years (an interest rate swap)
Not all derivatives are within the scope of sections 11 & 12 :
‘Own use’ scope exemption for some contracts
43
Sections 11 & 12: Financial instruments – Hedge accounting
 Specified criteria must be met – very limited scope for hedge accounting
 Limited instrument types: interest rate swap, foreign currency swap, a crosscurrency interest rate swap, commodity or foreign currency forward or future
(and foreign currency loans for net investment hedges only)
 Restrictions on the terms of instruments used
 Relationships must be formally designated and tested
Very different from current Irish practice
Potentially a key area of
complexity
44
Section 16. Investment Property
• Investment property is measured at cost on initial recognition (which
includes purchase price and any directly attributable expenditure
such as legal and brokerage fees, property transfer taxes and other
transaction costs).
Impact of
moving from
Irish GAAP
45
• Subsequently, investment property within the scope of this Section is
measured at fair value at the reporting date with any changes
recognised in profit or loss.
• If fair value cannot be measured without undue cost or effort, the
property is accounted for as property, plant and equipment in
accordance with Section 17.
Section 16. Investment Property- continued
• Able to revert to cost accounting on an asset-by-asset basis where
fair value is not available without undue cost or effort.
• Internal valuations possible (with sufficient disclosure).
Impact of
moving from
Irish GAAP
• Where fair value is used, gains and losses are recognised in P&L.
• No exception for properties used by another group company.
• Mixed use properties are split between investment property and
property, plant and equipment where possible.
46
Section 18: Intangible assets other than goodwill
 Addresses internally and externally generated intangibles
 Wider scope for intangibles than FRS 10 (but not goodwill)
• Internally generated and acquired intangibles measured at
cost or revaluation (through OCI) basis
Impact of
moving from
Irish GAAP
• Research costs expensed; development costs may be
capitalised (must meet criteria)
• Amortisation required – default 5 years maximum if
cannot be reliably estimated
• Disclose reasons for choosing UELs used
• Indicators of impairment and impairment review
• Tax impact may be complex
47
Section 19. Business Combinations and Goodwill
• Merger accounting is only permitted for group reconstructions
meeting specified criteria and certain PBE combinations;
guidance no longer addresses ‘true mergers’.
• No change to Irish acquisition method (e.g. acquisition costs,
contingent consideration), but more intangibles may be
identified separately from goodwill as no requirement for
intangibles to be capable of being disposed of or settled
separately.
Impact of
moving from
Irish GAAP
• Negative goodwill continues to be recognised and presented
on the face of the balance sheet.
• Positive goodwill amortisation period defaults to a maximum of
five years where its life cannot be reliably measured.
• Deferred tax will need to be recognised on fair value
adjustments (including recognition of any additional
intangibles) arising in business combinations, with a
corresponding adjustment to goodwill.
• Transitional provision – no restatement of ‘old’ business
combinations required.
48
Section 23: Revenue
 Similar to FRS 5 Application Note G
 Includes material from IAS 11 (construction contracts)
Impact of
moving from
Irish GAAP
49
• No significant change to main principles in Irish
GAAP
• Scope of construction contracts guidance differs from
that of SSAP 9 long-term contracts
• Specific guidance on sale of goods, rendering of
services, construction contracts, and interest,
royalties and dividends
• No change to services if following UITF 40
• Appendix of examples based on IAS 18
Section 23: Revenue - Examples
 Installation sales/fees
 Servicing fees included in the purchase price of a product
 Fees from the development of customised software
 License fees and royalties
Additional complexity where Multi-Deliverable contracts exist
50
Section 27. Impairment of Assets
• Principles consistent with FRS 11 Impairment of
Fixed Assets and Goodwill.
Impact of
moving from
Irish GAAP
• Removal of indefinite lives for goodwill and
intangible assets results in no automatic
requirement for annual impairment tests; instead
they are only required where indicators exist.
• No automatic ‘first year’ review requirement in
respect of goodwill.
• Allocation of impairment to CGUs still requires
allocation to goodwill first, but intangible assets
are no longer required to be impaired before all
other assets.
51
Section 28: Employee benefits
• Broader standard than current Irish GAAP
• Covers all forms of employee benefits
• DB schemes (consistent with IAS 19R rather than FRS 17):
- use projected unit credit method
- no requirement for external valuation
- actuarial gains & losses to OCI, no spreading
Impact of
moving from
Irish GAAP
• No multi-employer exemption available for group
defined benefit schemes
• Where exemption is available, entities will still need to
recognise a liability for contributions payable in respect of
an agreement to fund a deficit
• DC schemes – no change to current practice
• Short-term benefits - include holiday pay accrual
Section 33. Related Party Disclosures
• Definition of a related party is consistent with updated FRS
8 Related Party Disclosures.
• Some disclosure changes:
Impact of
moving from
Irish GAAP
• disclosure of key management personnel remuneration in
total (although qualifying entities can take exemption from
this requirement);
• separate disclosure for each type of related party (parent,
subsidiary, joint venture, key management personnel,
etc.);
• additional disclosures re outstanding balances (e.g.
terms and conditions, guarantees, etc.); and
• no explicit requirement to disclose the name of the
related party.
Benefits of FRS 102
 Broadly consistent with IFRS
 Reflect up-to-date thinking
 Balance consistent principles with pragmatic solutions
 Promote efficiency within groups
54
The Tax Perspective
© 2013 Deloitte Touche Tohmatsu
FRS 102 – The Tax Impact
 Starting point – Profit Before Tax (PBT)
• On-going compliance
• Transition
 Transition
• Double counting
• Amounts dropping out
 Schedule 17A
56
FRS 102 – The Tax Impact
 Impact on Effective Tax Rate (ETR)
 Business combinations
 Revaluation of properties
 Transfer pricing / Advanced pricing agreements
57
More Than
Accounting and Tax
© 2013 Deloitte Touche Tohmatsu
Key Challenges
Finance function
resources &
learning
Financial
parameters
Conversion
Corporate
structure
59
“The issues raised by the new
accounting standards go right
to the heart of the business and
its finance function,
not limited to just
accounting and tax.”
Treasury
What needs to happen?
Identify key
accounting
issues
Project
management,
communication
and training
Implement
60
Assess the
impact
(including tax)
Determine final
GAAP and
accounting
policy choices
© 2013 Deloitte Touche Tohmatsu