There are no examinable differences relating to topics in chapters 1, 2 and 3
IAS 16 requires that revaluations are made with sufficient regularity that the carrying amount does not differ materially from fair value at the year end. In UK GAAP, FRS 15 Tangible fixed assets sets out a more prescriptive timescale for revaluations.
The valuation of properties should be carried out on the basis of a 5 year cycle .
(a) A full valuation every 5 years
(b) An interim valuation in year 3 of the five-year cycle .
(c) An interim valuation also in years 1, 2 and 4 of the five-year cycle should also be done where it is likely that there has been a material change in value .
FRS 15 specifies who may carry out a full valuation .
(a) A qualified external valuer (eg a surveyor, who is independent of the company), or
(b) A qualified internal valuer, but subject to review by a qualified external valuer.
An interim valuation may be done by an internal or external, qualified valuer.
For certain types of assets (other than properties) eg company cars, there may be an active second hand market for the asset or appropriate indices may exist, so that the directors can establish the asset's value with reasonable reliability and therefore avoid the need to use the services of a qualified valuer.
For an index to be appropriate:
(a) It must be appropriate to the class of asset, its location and conditions.
(b) It must take into account the impact of technological change.
(c) It must have a proven track record of regular publication.
(d) It is expected to be available in the foreseeable future.
Such valuations must be performed every five years , and also in the intervening years where there has been a material change in value .
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Ke y ter ms
If a policy of revaluation is adopted under IAS 16, the basis of valuation is ‘fair value’. This generally means that open market values are used. FRS 15 specifies a number of different bases, depending on the nature of the asset and whether it will continue to be used by the business.
Replacement cost . The cost at which an identical asset could be purchased or constructed .
Depreciated replacement cost . Replacement cost with appropriate deduction for age, condition and obsolescence .
Recoverable amount. The higher of net realisable value and value in use.
Net realisable value . The amount at which an asset could be disposed of , less any direct selling costs.
Value in use . The present value of future cash flows obtainable as result of an asset's continued use , including those resulting from ultimate disposal .
Open market value . The best price that could be obtained between a willing seller and a knowledgeable buyer , assuming normal market conditions .
Existing use value . As for open market value , except that value is based on the assumption that the property can be used for the foreseeable future only for its existing use .
The following valuation bases should be used for properties that are not impaired.
TYPE
Specialised properties
Non-specialised properties
Properties surplus to an entity's requirements
BASIS
 These should be valued on the basis of depreciated replacement cost .
 Specialised properties are those which, due to their specialised nature, there is no general market in their existing use or condition, except as part of a sale of the business in occupation. Eg oil refineries, hospitals, chemical works, power stations, schools, colleges and universities where there is no competing market demand from other organisations using these types of property in the locality.
 The objectives of using depreciated replacement cost is to make a realistic estimate of the current cost of constructing an asset that has the same service potential as the existing asset.
 These should be valued on the basis of existing use value
(EUV), plus notional directly attributable acquisition costs where material.
 These should be valued on the basis of open market value
(OMV) less expected direct selling costs where these are material. They may be specialised or non-specialised properties.
 The assumption supporting the specified accounting treatment is that they will be sold .
Where there is an indication of impairment, an impairment review should be carried out in accordance with
FRS 11. The asset should be recorded at the lower of revalued amount (as above) and recoverable amount.
Tangible fixed assets other than properties should be valued using market value or, if not obtainable, depreciated replacement cost.
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Remember the decision to adopt a policy of revaluation of tangible fixed assets is discretionary . Do not confuse this with other scenarios where the carrying value of a fixed asset should be adjusted:
(a) FRS 15 rule that:
'if the amount recognised when a tangible fixed asset is acquired or constructed exceeds its recoverable amount, it should be written down to its recoverable amount.'
(b) FRS 11 response to indications of impairment that requires:
'A review for impairment of a fixed asset (or goodwill) should be carried out if events or circumstances indicate that the carrying amount of the fixed asset (or goodwill) may not be recoverable.'
In certain circumstances, a loss arising on revaluation is effectively tantamount to an impairment loss.
However, you must remember that this arises from the revaluation policy route rather than the indications of impairment route.
A revaluation gain or loss arises when there is a difference between the valuation of a tangible fixed asset when compared to its carrying amount.
Revaluation gains and losses are dealt with through either:
(a) Profit and loss account; or
(b) Statement of total recognised gains and losses (STRGL)
This will depend on the underlying scenarios, which are explored below.
Note: the STRGL is the UK equivalent of the ‘other comprehensive income’ section of the statement of comprehensive income under IFRS. In the exam you are not expected to prepare the STRGL so you do not need a detailed knowledge of its layout.
The key difference to note in respect of the treatment of gains and losses is that FRS 15 has a separate rule for losses resulting from clear consumption of economic benefits , which does not exist in IAS 16.
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Gain
Asset not previously revalued
Asset previously revalued upwards
Asset subjected to previous revaluation loss
Treatment of gain
 Gain credited to revaluation reserve.
 Reported in STRGL.
 Gain credited to revaluation reserve.
 Reported in STRGL.
 Portion of gain that in effect reverses the prior revaluation losses should be credited to profit and loss account, ie restores the asset to its depreciated historical cost.
 Any gain in excess of the above should be credited to revaluation reserve and reported via STRGL.
Loss
Loss clearly due to consumption of economic benefits eg physical damage or deterioration in quality of goods or services provided by the asset.
Losses owing to other causes than the above.
Asset previously revalued upwards.
Losses owing to other causes than top item above.
Asset not previously revalued upwards.
Treatment of loss
All of the loss must be debited to profit and loss account. It does not matter that the asset involved might have been previously revalued upwards. (FRS 15 suggests that this is really an impairment loss)
These losses should be recognised in the following order.
(a) In STRGL until the carrying amount reaches depreciated historical cost.
(b) In the profit and loss account.
These losses should be recognised in the profit and loss account.
Where an asset has been revalued, the depreciation charge is based on the revaluation amount, less residual value, from the date of revaluation.
The asset's residual value should also be re-estimated on revaluation, based on values prevailing at that date.
This approach entails two different and conflicting issues.
(a) The profit and loss account bears the cost of the economic benefits consumed, as measured by the enhanced depreciation charge based on the revalued figure for the tangible fixed asset.
(b) Distributable profits should not be prejudiced by the additional depreciation caused by the revaluation.
The remedy to this problem is to make an annual transfer from revaluation reserve to profit and loss account covering the amount for the additional depreciation caused by the revaluation. This is permitted by Companies Act and also represents best practice.
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The principles of the differences relating to revaluations are within the scope of paper F7. In paper P2 you could be asked to produce more detailed calculations.
The following details are available in relation to a non specialised property.
Carrying value
Depreciated historic cost
Recoverable amount
Existing use value
How should the revaluation loss be treated under FRS 15?
$960,000
$800,000
$760,000
$700,000
(a) The revaluation loss on the property is $260,000 (ie carrying value of $960,000 compared with
EUV of $700,000).
(b) The fall in value from carrying value ($960,000) to depreciated historic cost ($800,000) of
$160,000 is recognised in the STRGL.
(c) The fall in value from depreciated historic cost ($800,000) to recoverable amount ($760,000) of
$40,000 is recognised in the profit and loss account.
(d) The difference between recoverable amount ($760,000) and EUV ($700,000) is recognised in the
STRGL.
Finance costs directly attributable to the construction of a fixed asset may be capitalised if it is company policy to do so. However, this policy must be applied consistently .
All finance costs that are directly attributable to the construction of a tangible fixed asset should be capitalised as part of the cost of the asset .
Directly attributable finance costs are those that would have been avoided if there had been no expenditure on the asset .
Note that this is different to the rule under IAS 23 , where directly attributable finance costs must be capitalised. In other respects, capitalisation of borrowing costs is treated the same under UK GAAP as under IFRS.
Definitions
 Pure/basic research is experimental/theoretical work with no commercial end in view and no practical application.
 Applied research is original investigation directed towards a specific practical aim/objective.
 Development is the use of scientific/technical knowledge in order to produce new/substantially improved materials , devices , processes etc.
Accounting treatment
 Pure and applied research should be written off as incurred.
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 Development expenditure should be written off in year of expenditure, except in certain circumstances when it may be deferred to future periods .
S
E
C
T
O
R
Separately defined project
Expenditure separately identifiable
Commercially viable
Technically feasible
Overall profit expected
Resources exist to complete the project
The key differences between SSAP 13 and IAS 38 are:
(1) Deferral of expenditure that meets the criteria is a choice , not a requirement as under IFRS.
(2)
SSAP 13 requires the expenditure to be ‘separately defined’ and ‘separately identifiable’. These requirements do not exist under IFRS.
(a) Goodwill is an asset which at the date of acquisition has a definite value to the business .
(b) This asset is a measure of the extent to which the earnings of the purchased business will exceed those which could be expected from the use of its identifiable assets . Consequently, it should be capitalised and amortised so as to match costs against income (the accruals concept). This is the view adopted by FRS 10 Goodwill and intangible assets .
(a) Purchased goodwill should be capitalised and classified as an asset on the balance sheet.
(b) It should be amortised on a systematic basis over its useful economic life.
Negative goodwill arises when the price paid for a business is less than the fair value of the separable net assets acquired, for example, if the vendor needed cash quickly and was forced to sell at a bargain price .
FRS 10 states that purchased, positive goodwill and purchased intangible assets or internally-developed intangible assets which have a readily ascertainable market value should be capitalised and amortised over their useful economic life . This clearly differs from the treatment of goodwill under IFRS 3 which does not allow amortisation and requires annual impairment reviews.
The objectives stated by FRS 10 are to ensure that:
(a) Capitalised goodwill and intangible assets are charged in the P&L account as far as possible in the periods in which they are depleted .
(b) Sufficient information is disclosed in the financial statements to enable users to determine the impact of goodwill and intangible assets on the financial position and performance of the reporting entity .
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FRS 10 states that, where goodwill and intangible assets are regarded as having limited useful economic lives they should be amortised on a systematic basis over those lives .
FRS 10 gives little guidance on how to predict an asset's useful economic life , which can be very difficult for goodwill and intangibles as it is impossible to see them actually wearing out . It does, however, give examples of relevant considerations , which include certain economic and legal factors relating to the asset. An intangible may, for example, be linked to a product with a specific lifespan , or there may be time periods attached to legal rights (eg patents). It may also be necessary to look at the nature of the business and of the market in which it operates.
There is a basic assumption that the useful economic lives of purchased goodwill and intangible assets are limited to periods of 20 years or less . However, this presumption may be rebutted and a useful economic life regarded as a longer period or indefinite only if:
(a) The durability of the acquired business or intangible asset can be demonstrated and justifies estimating the useful economic life to exceed 20 years .
(b) The goodwill or intangible asset is capable of continued measurement (so that annual impairment reviews will be feasible).
The circumstances where an indefinite useful economic life longer than 20 years may be legitimately presumed are limited.
What factors determine the durability of goodwill?
FRS 10 mentions the following.
(a) The nature of the business
(b) The stability of the industry in which the acquired business operates
(c) Typical lifespans of the products to which the goodwill attaches
(d) The extent to which the acquisition overcomes market entry barriers that will continue to exist
(e) The expected future impact of competition on the business
Uncertainty about the length of the useful economic life is not a good reason for choosing one that is unrealistically short or for adopting a 20 year useful economic life by default .
In amortising an intangible asset , a residual value may be assigned to that asset only if such residual value can be measured reliably . In practice, the residual value of an intangible asset is often insignificant .
No residual value may be assigned to goodwill .
The method of amortisation should be chosen to reflect the expected pattern of depletion of the goodwill or intangible asset. A straight-line method should be chosen unless another method can be demonstrated to be more appropriate .
Whatever the useful economic life chosen, the company should be able to justify it. It should be reviewed annually and revised if appropriate .
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In addition to the amortisation, the asset should be reviewed for impairment:
(a) At the end of the first full financial year following the acquisition (' the first year review ').
(b) In other periods if events or changes in circumstances indicate that the carrying values may not be recoverable .
Goodwill and intangible assets that are amortised over a period exceeding 20 years from the date of acquisition should be reviewed for impairment at the end of each reporting period .
Where the impairment review indicates a diminution in value , the goodwill and intangible assets must be written down accordingly . The revised carrying value should be amortised over the current estimate of the remaining useful economic life .
Where goodwill and intangible assets are regarded as having indefinite useful economic lives , they should not be amortised .
'Indefinite' is not the same as 'infinite', it means merely that no limit can be fixed for it.
If the option not to amortise is taken, this constitutes a departure from the Companies Act and will need to be justified by invoking the true and fair override . Statutory Instruments 409 and 410 contain a requirement to amortise goodwill).
Goodwill and intangible assets that are not amortised (because their useful economic life is deemed to be indefinite) should be reviewed for impairment at the end of each reporting period .
If an impairment loss is recognised , the revised carrying value , if being amortised, should be amortised over the current estimate of the remaining useful economic life .
If goodwill arising on consolidation is found to be impaired , the carrying amount of the investment held in the accounts of the parent undertaking should also be reviewed for impairment .
The emphasis on impairment reviews is a key feature of FRS 10 . The ASB believes that a formal requirement to monitor the value of acquired goodwill and intangible assets using standardised methods and to report any losses in the financial statements will enhance the quality of the information provided to users of financial statements .
Negative goodwill arises when the fair value of the net assets acquired is more than the fair value of the consideration. In other words, the investor has got a bargain.
FRS 10 states that to ensure that any negative goodwill is justified:
(a) The investee's assets should be checked for impairment
(b) The liabilities checked for understatement.
Under IFRS 3 this gain on a bargain purchase is taken immediately to profit or loss. Under FRS 10 the treatment is very different.
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It is disclosed in the intangible fixed assets category , directly under positive goodwill , ie as a 'negative asset'. A sub-total of the net amount of positive and negative goodwill should be shown on the face of the balance sheet.
This presentation may seem a little odd. However, the ASB argues that negative goodwill does not meet the definition of a liability under the Statement of Principles and that this treatment is consistent with that of positive goodwill.
Negative goodwill should be recognised in the profit and loss account in the periods when the nonmonetary assets acquired are depreciated or sold.
There are two important points to note.
(a) It would be strange for the investor to pay less than its fair value for the monetary items acquired.
The value of cash, for example, is pretty universal. Therefore, it is more likely that the negative goodwill represents a shortfall in the value of the non-monetary items .
(b) The benefit of the 'bargain' of getting these non-monetary items at less than fair value will only be realised when the non-monetary items themselves are realised .
[ie it is the non-monetary assets (fixed assets, stock etc) that have been bought on the cheap, effectively at a discount (negative goodwill). Therefore, carry the discount (negative goodwill) in the balance sheet until the relevant assets are sold, or depreciated. Then transfer the relevant chunk of discount (negative goodwill) from the balance sheet to the profit and loss account.]
Hence, any negative goodwill should be credited to the profit and loss account only when the nonmonetary assets themselves are realised, and this is when they are either depreciated or sold .
FRS 10 also requires any remaining goodwill in excess of fair values of the non-monetary assets acquired should be recognised in the profit and loss account in the periods expected to benefit .
Question
Kewcumber plc acquired its investment in Marrow Ltd during the year ended 31 December 20X8. The goodwill on acquisition was calculated as follows.
Cost of investment
Fair value of net assets acquired (remaining useful life – 7 years)
Fixed assets
Stock
Non-monetary assets
Net monetary assets
Negative goodwill
£'000
700
100
800
200
£'000
400
(1,000)
(600)
Required
Calculate the amount relating to negative goodwill as reflected in the profit and loss account and balance sheet for the year ended 31 December 20X8. You should assume that all of the stock was sold before
31 December 20X8.
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Answer
Amortisation in the profit and loss account for 20X8
Non-monetary assets recognised through the profit and loss account for the year ended 31 December 20X8:
Stock (all sold)
Depreciation (£700,000  7)
Non-monetary assets recognised this year
Total non-monetary assets at acquisition
 Proportion recognised this year
£'000
100
100
200
800
¼
Hence:
Negative goodwill arising on acquisition
Proportion released to profit and loss account for year to 31.12.X8 (¼)
Balance at 31.12.X8, shown on balance sheet as deduction from positive goodwill
£'000
600
(150)
450
The balance of £450,000 will be carried forward and released into the profit and loss account over the next
6 years at £75,000 per annum, ie in the periods expected to be benefited.
In outline, there are many similarities between FRS 11 and IAS 36 but there are several differences of detail.
The impairment should be recognised as an expense in the profit and loss account.
The general rule is that impairment losses on revalued fixed assets should be recognised in the statement of total recognised gains and losses until the carrying value of the asset reaches its depreciated historical cost with any further impairment recognised in the profit and loss account.
However, there may be specific circumstances where the impairment is clearly caused by a consumption of economic benefits , eg damage, in which case the loss is recognised in the profit and loss account . ie such impairments are regarded as additional depreciation rather than as a decline in value.
The key difference to be aware of here is that FRS 11 requires all impairments that result from consumption of economic benefits to be recognised in the profit and loss account irrespective of whether the asset had previously been revalued.
You have seen how impairments are calculated on cash generating units (CGUs) under IFRS. The same principle exists in FRS 11 but is known as an ‘income generating unit. There is also a difference in the order in which impairments are allocated to the various assets within the IGU.
Where the recoverable amounts of fixed assets can be estimated individually, these assets should be written down to their individual recoverable amounts then any impairment loss calculated (ie where carrying amount exceeds value in use) for the IGU should be allocated:
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(a) First, to any goodwill in the unit.
(b) Thereafter to any capitalised intangible asset in the unit.
(c) Finally, to the tangible assets in the unit (pro-rata or other method).
The rationale behind the above allocation is to write down the assets with the most subjective valuations first.
No intangible asset with a readily ascertainable market value should be written down to below NRV .
Similarly, no tangible asset with a reliably measured net realisable value should be written down below its
NRV .
Question
Nutrinitious Foods Limited has suffered an impairment loss of $90,000 on one of its income generating units because low market entry barriers has enabled competitors to develop and successfully market rival products.
The carrying value of net assets in the income generating unit, before adjusting for the impairment loss are as follows:
Goodwill
Patent (with no market value)
Land and buildings
Plant and machinery
$'000
50
10
120
60
240
Demonstrate how the impairment loss of $90,000 should be allocated under FRS 11 and explain how this differs from the treatment that would be required under IAS 36.
Answer
Remember the batting order is:
 Goodwill
 Capitalised intangible fixed assets
 Tangible fixed assets, on a pro-rata basis
Hence:
$'000
50
10
30
90
Goodwill
Patent
Land and buildings (30 ×
Plant and machinery (30 ×
120
180
60
)
180
)
Pre-impairment
$'000
50
10
120
Impairment loss
$'000
(50)
(10)
(20)
Postimpairment
$'000
–
–
100
60
240
(10)
(90)
50
150
This allocation is different to International . IAS 36 allocates the loss first to goodwill and then pro-rata to other non-current assets. It makes no distinction between tangible and intangible assets .
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Rymachines plc is a manufacturing company with a number of separate factories scattered around
England, and its head office in York. The chief accountant, Arthur Isation, is concerned about the effect on their figures for the year ending 31 December 20X7 of various transactions involving fixed assets. He has come to you with the following information.
(a) A revaluation exercise took place on 1 July 20X7. Items of plant that originally cost $80,000 on 1
January 20X5 were revalued to $97,500. The plant was, and still is, being depreciated down to zero over a ten year period from new.
(b) They are rather concerned regarding their ability to replace a specific type of machine because the price has risen so dramatically. With this in mind, Arthur would like to charge extra depreciation of
$25,000 to 'retain more in the business to enable them to replace assets at the higher prices'.
(c) The useful lives of one group of plant has been revised downwards as follows:
Plant costing $140,000 is 3 years old at the balance sheet date, and was originally to be depreciated over 7 years. The machinery is not surviving as well as hoped and it is now envisaged that it will be worthless in two years time.
(d) The company operates a factory in Wiltshire which has suffered a decline in its volume of business since a Czech competitor company began marketing its products in England. None of the other businesses of Rymachines plc are affected.
The summarised balance sheet of this division shows:
Goodwill
Tangible fixed assets
Other net assets (excluding tax and financing)
$'000
100
420
110
630
The future cash flows of the division have been estimated and discounted using a risk-adjusted interest rate to give a value in use for the division as a whole of $390,000.
There is no realistic prospect of selling the business as a going concern. The fixed assets could be sold for $265,000 and the related costs would amount to $15,000. The other net assets would be expected to realise their carrying value.
Required
Draft notes in preparation for a meeting with Mr Isation explaining the accounting treatment required in respect of each of the points raised.
Notes for meeting with Arthur Isation, chief accountant of Rymachines plc on treatment of fixed assets.
(a) Revaluation of plant
Depreciation charge in the profit and loss account for the period should be based on the carrying amount of the asset in the balance sheet. FRS 15 stresses the importance of the entire amount being charged through profit and loss account for the year.
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Rymachines have revalued mid year, hence the appropriate depreciation charge for the year will be
(assuming depreciation calculated on a monthly basis):
$
1st 6 months
80 , 000
10
97 , 500
2nd 6 months
7 .
5
Charge for the year

6
12
=

6
12
=
4,000
6,500
10,500
Note that this is $2,500 higher than if no revaluation had taken place and this should be disclosed if material.
The revaluation as at 1 July 20X7 will amount to (97,500 – (80,000 should be credited to a revaluation reserve.
Best practice would be to transfer an amount equivalent to the excess depreciation on the revalued amount from revaluation reserve to profit and loss account as the revaluation reserve in effect becomes realised.
(b) Supplementary depreciation
Supplementary depreciation, namely that in excess of the depreciation based on the carrying amount of the assets, should not be charged in the profit and loss account. This does not, however, preclude the appropriation of retained profits to, for example, a reserve specially designated for replacement of fixed assets.
The additional $25,000 should not be accounted for as conventional depreciation. The depreciation charge must be based on the balance sheet carrying amount, and the additional $25,000 should merely be an intra reserves transfer ie from profit and loss account reserve to a plant replacement reserve.
(c) Revision of useful lives
When, as a result of experience or of changed circumstances, it is considered that the original estimate of the useful economic life of an asset requires revision, the effect of the change in estimate on the results and financial position needs to be considered.
It would appear that the estimate of future useful life is being made at the balance sheet date, which would involve a normal $20,000 charge in respect of the year just finished (year ended 31
December 20X7), and a charge for the remaining two years of estimated useful life of
( 140 , 000  60 , 000 )
2
 £ 40 , 000
(d) Under FRS 11, where there is an indication that an impairment has occurred a review must be carried out to establish whether the recoverable amount is less than the carrying value of the assets.
The recoverable amount (usually calculated for an income generating unit rather than an individual asset) is defined as the higher of
(i) net realisable value (265,000 – 15,000 +110,000)
(ii) value in use (ie discounted future cash flows)
$360,000
$390,000
Therefore the assets must be adjusted for an impairment of $240,000, allocated as follows:
$100,000 to goodwill
$140,000 to tangible fixed assets.
The total will be charged as part of operating profit and disclosed as an exceptional item. (This assumes that none of the tangible fixed assets have been revalued, otherwise the impairment of
$140,000 could have been charged to the revaluation reserve until the carrying value equalled depreciated historical cost and thereafter to the profit and loss account).
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Under FRS 11 the reversal of an impairment loss on intangible assets and goodwill should be recognised in the current period if, and only if :
(a) an external event caused the recognition of the impairment loss in previous periods, and subsequent external events clearly and demonstrably reverse the effects of that event in a way that was not foreseen in the original impairment calculations; or
(b) the impairment loss related to an intangible asset with a readily ascertainable market value and the net realisable value based on that market value has increased to above the intangible asset's impaired carrying amount .
The reversal of the impairment loss should be recognised to the extent that it increases the carrying amount of the goodwill or intangible asset up to the amount that it would have been had the original impairment not occurred . However, the reversal of an impairment loss recognised under (b) above should not be recognised beyond the extent that it increases the carrying amount of the intangible asset to its net realisable value .
IFRS specifically prohibits reversal of an impairment loss for goodwill. Realistically reversals of impairments for goodwill will be very rare under UK GAAP. Goodwill does not have a readily ascertainable market value, and there will be very few situations where the original goodwill recovers its value, as opposed to new goodwill being created.
You have learned that under IAS 40, entities choose between:
(a) the cost model; or
(b) the FV model for all of their investment properties.



Under IAS 40, gains and losses on investment properties carried at fair value go to profit or loss .
The UK GAAP accounting treatment is governed by SSAP 19 Accounting for investment properties and can be summarised as:
 investment properties are than 20 years not depreciated , except where a leasehold has an unexpired term of less revalued every year to open market value increases in value are taken to the investment revaluation reserve (IRR) for diminutions in value:
– permanent diminutions are charged to the profit and loss account
– temporary diminutions are charged to the IRR even if this produces a temporary deficit on that account
Notice that SSAP 19 gives no choice, investment properties must be carried at open market value and that, apart from permanent diminution in value, under SSAP 19 gains and losses go to equity.
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The main difference is in the scope of the standards:


IAS 19 covers various short and long-term benefits.
FRS 17 Retirement benefits only covers retirement benefits
Until recently, the treatment of actuarial gains and losses was different. However, following the 2011 revision of IAS 19, this difference has been eliminated.
FRS 17 requires immediate recognition of all actuarial gains and losses in the statement of total recognised gains and losses (ie the UK GAAP equivalent of ‘other comprehensive income’). IAS 19 now also requires immediate recognition of actuarial gains and losses (termed ‘remeasurements’) in other comprehensive income.
Here is an example of the accounting under FRS 17:
The net pension liability of Sonya plc as at 1 January 20X3 comprised the following:
Pension fund assets
Pension fund liabilities
The following information relates to the year ended 31 December 20X3.
$
10,000,000
(10,400,000)
400,000
Current service cost
Interest rate
Expected return on assets
Contributions paid
Pensions paid
Actual return on assets
Actuarial valuation of liabilities at 31.12.X3
$800,000
5%
3%
$1,020,000
$560,000
$400,000
$11,000,000
How will the pension scheme assets, liabilities, gains and losses will be recognised in the financial statements for the year ended 31 December 20X3?
Balance sheet
Pension liability (W1)
Pension reserve
Profit and loss account
Included in operating expenses
Other finance charges – 520,000 (journal (a)) – 300,000 (journal (c))
Statement of total recognised gains and losses
Actual return less expected return on pension scheme (journal (f))
Experience gains and losses arising on the scheme liabilities (journal (g)
$
(140,000)
(140,000)
800,000
220,000
100,000
160,000
Paper P2 UK GAAP Supplement 2013 15

Working: Pension liability
B/f
Current service cost
Interest
Expected return
Contributions
Pensions paid
Actuarial gains
Journals
(a) DEBIT
CREDIT
P&L account operating profits
Obligations
Current service cost
(b) DEBIT P&L account interest charge
CREDIT Obligation
Restatement of opening liability (10,400,000  5%)
© DEBIT
CREDIT
Pension fund assets
P&L account interest receivable
Expected return (10,000,000  3%)
(d) DEBIT
CREDIT
Pension fund assets
Cash
Contributions
(e) DEBIT Obligations
CREDIT
Pensions paid
Pension fund assets
(f) DEBIT
CREDIT
Pension fund assets
STRGL
Re actual return (400,000 – 300,000)
(g) DEBIT
CREDIT
Pension fund obligations
STRGL
Re actuarial gain obligations
Journal
(a)
(b)
©
(d)
(e)
(f)/(g)
$
800,000
520,000
300,000
1,020,000
560,000
Asset
$
10,000,000
Liability
$
10,400,000
800,000
300,000
1,020,000
(560,000)
10,760,000
100,000
10,860,000
Net deficit = $140,000
520,000
(560,000)
11,160,000
(160,000)
11,000,000
100,000
160,000
$
800,000
520,000
300,000
1,020,000
560,000
100,000
160,000
The only examinable differences relate to the principles of accounting for deferred tax. FRS 19 focuses on timing differences . These are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods.
Timing differences arise because certain items are included in the accounts of a period which is different from that in which they are dealt with for taxation purposes.
Under FRS 19 deferred taxation is the tax attributable to timing differences.
Deferred tax. Estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods.
Deferred taxation under FRS 19 is therefore a means of ironing out the tax inequalities arising from timing differences.
16 Paper P2 UK GAAP Supplement 2013

(a) In years when corporation tax is saved by timing differences such as accelerated capital allowances, a charge for deferred taxation is made in the P&L account and a provision set up in the balance sheet.
(b) In years when timing differences reverse , because the depreciation charge exceeds the capital allowances available, a deferred tax credit is made in the P&L account and the balance sheet provision is reduced.
Under IAS 12 a ‘balance sheet’ approach is taken, based on temporary differences . Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the statement of financial position.
All timing differences are temporary differences, but there are some temporary differences which do not give rise to timing differences. The most obvious is the revaluation of an asset , which gives rise to a temporary difference but not a timing difference .
Revaluation of a fixed asset does not create an unavoidable tax liability and so does not affect the deferred tax provision. The exception to this is where an agreement has been entered into to dispose of the asset at the revalued amount, and the gains and losses expected to arise on the sale have been recognised at the balance sheet date. In this case, FRS 19 requires deferred tax to be recognised on the timing difference. As the revaluation gain will be recognised in the statement of total recognised gains and losses and credited to the revaluation reserve, the deferred tax on the revaluation gain or loss will also be recognised in the statement of total recognised gains and losses taken to the revaluation reserve.
Z Ltd owns a property which has a carrying value at the beginning of 20X9 of £1,500,000. At the year end the property is revalued to £1,800,000.At the year end, it has entered into a contract to sell the property for £1,800,000. The tax rate is 30%. How will this be shown in the financial statements under each of the following assumptions?
(a) At the year end, Z Ltd has entered into a contract to sell the property for £1,800,000.
(b) Z Ltd is intending to sell the property but has not yet found a buyer.
(a)
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
Profit for the financial year
Unrealised surplus on revaluation of property
Deferred tax on revaluation surplus
Total gains and losses relating to year
£'000
X
300
(90)
X
The journal entries will be as follows:
Property
Deferred tax
Revaluation reserve
Dr
£'000
300
Cr
£'000
90
210
(b) If there is no binding contract to sell the property, the revaluation would still be reflected, but no deferred tax would be recognised.
Under IAS 12 a temporary difference would have been recognised when the asset was revalued . It would not have been necessary to have a sale agreement. A taxable difference is recognised even if the
Paper P2 UK GAAP Supplement 2013 17

entity does not intend to dispose of the asset . The deferred tax would be charged to the revaluation surplus on the asset.
Reporting entities are permitted but not required to discount deferred tax assets and liabilities to reflect the time value of money.
The ASB believes that, just as other long-term liabilities such as provisions and debt are discounted, so too in principle should long-term deferred tax balances. The FRS therefore permits discounting and provides guidance on how it should be done. However, the ASB stopped short of making discounting mandatory, acknowledging that there is as yet no internationally accepted methodology for discounting deferred tax, and that for some entities the costs might outweigh the benefits. Entities are encouraged to select the more appropriate policy, taking account of factors such as materiality and the policies of other entities in their sector.
IAS 12 prohibits discounting of deferred tax assets and liabilities.
In paper P2 you may be asked to apply the principles you have learned about the differences between IAS
12 and FRS 19. You may have to calculate deferred tax provisions under FRS 19.
The following example illustrates the main differences:
Question
(a) At 30 November 20X1 there is an excess of capital allowances over depreciation of $90 million. It is anticipated that the timing differences will reverse according to the following schedule:
Depreciation
Capital allowances
30 Nov 20X2
$m
550
530
20
30 Nov 20X3
$m
550
520
30
30 Nov 20X4
$m
550
510
40
(b) The directors wish to revalue a property by $10 million as at 30 November 20X1.
(c) The balance sheet as at 30 November 20X1 includes deferred development expenditure of $40 million. This relates to a new product which has just been launched and the directors believe it has a commercial life of only two years.
(d) Corporation tax is 30% and the company wishes to discount any deferred tax liabilities at a rate of
4%
Required
Explain the deferred tax implications of the above and calculate the deferred tax provision as at 30
November 20X1 in accordance with FRS 19.
Note: Present Value Table (extract)
Present value of $1 ie (1+r)-n where r = interest rate, n = number of periods until payment or receipt.
4
5
Periods
(n)
1
2
3
4%
0.962
0.925
0.889
0.855
0.822
Answer
18 Paper P2 UK GAAP Supplement 2013

(a) Accelerated capital allowances: full provision should be made for the excess capital allowances.
The provision should be discounted based on a calculation of the timing of its reversal.
(b) Revaluation: assuming there is no binding contract to sell the property, no provision is required.
(c) Deferred development expenditure: the amount capitalised (which will have been allowable for tax as incurred) is a timing difference. Full provision is again required, discounted based on the timing of reversals.
Provision:
Accelerated capital allowances (W1)
Deferred development expenditure (W2)
Discount
Discounted provision for deferred tax
$m
27
12
39
(2.8)
36.2
2
Workings
1 Capital allowances
Timing differences $90m
 undiscounted provision $90m × 30% = $27m
Years to come
02
03
04
Reversal of timing difference
$m
20
30
40
90
Deferred tax liability
(× 30%)
$m
6
9
12
27
Deferred development expenditure
Timing difference £40m
 undiscounted provision £40m × 30% = £12m
Years to come
02
03
Reversal of timing difference
£m
20
20
40
Deferred tax liability
(× 30%)
£m
6
6
12
Discount
.962
.925
.889 factor
.962
.925 factor
Discount
Discounted
Discounted
$m
5.8
8.3
10.7
24.8 liability
£m
5.8
5.6
11.4 liability
3 Total discounted provision (24.8 + 11.4) = £36.2m
There are no examinable differences relating to topics in chapters 7, 8 and 9
Paper P2 UK GAAP Supplement 2013 19

There are a number of differences between FRS 8 and IAS 24.
FRS 8 can be summarised as follows.
(a) FRS 8 Related party disclosures requires the disclosure of:
(i) Information on related party transactions .
(ii) The name of the party controlling the reporting entity and, if different, that of the ultimate controlling party whether or not any transactions between the reporting entity and those parties have taken place.
(b) No disclosure is required in consolidated financial statements of intragroup transactions and balances eliminated on consolidation.
(c) Disclosure is not required of transactions entered into between two or more members of a group, provided that any subsidiary undertaking which is a party to the transaction is wholly owned by a member of that group.
IAS 24 does require the disclosure of related party transactions and balances in the separate financial statements of both parent and subsidiary entities , regardless of the fact that these transactions and balances involve a wholly owned subsidiary.
Disclosure of transactions and balances – FRS 8
Financial statements should disclose material transactions undertaken by the reporting entity with a related party. Disclosure should be made irrespective of whether a price is charged .
The disclosure should include :
(a) The names of the transacting parties.
(b) A description of the relationship between the parties.
(c) A description of the transactions .
(d) The amounts involved.
(e) Any other elements of the transactions necessary for an understanding of the financial statements.
(f) The amounts due to or from related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date.
(g) Amounts written off in the period in respect of debts due to or from related parties.
IAS 24 requires information about the nature of related parties but does not require them to be identified by name .
Both FRS 8 and IAS 24 require the disclosure only of material related party transactions (under the general principle that standards only apply to items that are material). However, FRS 8 takes the concept of materiality further than IAS 24. Under IAS 24 the materiality of a transaction is considered in relation to the financial statements of the reporting entity. Under FRS 8 the materiality of related party transactions;
'is to be judged, not only in terms of their significance to the reporting entity, but also in relation to the other related party when that party is:
(a) A director, key manager or other individual in a position to influence, or accountable for stewardship of, the reporting entity.
(b) A member of the close family of any individual mentioned in (a) above.
(c) An entity controlled by any individual mentioned in (a) or (b) above.'
20 Paper P2 UK GAAP Supplement 2013

Here there is a difference between UK GAAP and IFRS which is referred to as the 90% rule .
Transfer of risks and rewards incidental to ownership can be presumed if at the inception of a lease the present value of the minimum lease payments amounts to substantially all (normally 90% or more) of the fair value of the leased asset .
Both UK GAAP and IFRS base the classification of a finance lease upon transfer of risks and rewards .
However, while SSAP 21 uses the 90% rule , IAS 17 gives examples of situations that would normally lead to a lease being classified as a finance lease. One of these is:
‘at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset’.
Others are issues such as ownership being transferred at the end of the lease, the lease term being for the major part of the economic life of the asset and the lessee having the option to purchase at the end of the lease term, on terms which make it reasonably certain that the option will be exercised.
The additional points examinable at P2 are:
Land and buildings
Under IAS 17 land and buildings are separately classified. Land is generally considered to have an indefinite life, so is normally classified as an operating lease, whereas the building element could be either an operating or a finance lease.
SSAP 21 does not require property leases to be separated into land and buildings. Under SSAP 21 more buildings are therefore likely to be classified as operating leases.
However, an amendment to IAS 17 came into effect in January 2010 which stated that land and buildings should be considered as operating or finance leases according to the substance of the transaction. Part of the thinking is that for long-term leases, such as 999 years, the lessee does become party to the risks and rewards of ownership of the land. So this brings IAS 17 more into line with SSAP 21.
Operating lease incentives
In UK GAAP this is addressed by UITF 28 Operating lease incentives . Abstract 28 deals with the way in which both lessors and lessees should account for incentives given by the lessor to the lessee. The
Abstract reflects the UITF's view that the rental, net of any incentive, should be recognised as rental expense or income over the period of the lease or, as appropriate, the period to the next rent review .
Under IFRS this issue is address by SIC 15, which stipulates that the incentive should be spread over the lease term .
Sale and leaseback – accounting by seller/lessee
Under SSAP 21, in a sale and leaseback transaction which results in a finance lease , any apparent profit or loss (that is, the difference between the sale price and the previous carrying value) should be deferred and amortised in the financial statements of the seller/lessee over the shorter of the lease term or the useful life of the asset.
IAS 17 also requires the excess of sales proceeds over the carrying value of the asset to be deferred and amortised but over the lease term.
Paper P2 UK GAAP Supplement 2013 21

Section 399 of the Companies Act 2006 states that if a company is a parent company at the end of a financial year, the directors, as well as preparing individual accounts for the year, must prepare group accounts for the year unless the company is exempt from the requirement.
Exemptions:
(a) The requirement to prepare group accounts does not apply to small companies
(b) A company that is included in the accounts of a larger group within the EEA (s 400)
(c) A company that is included in the accounts of a larger group outside the EEA (s 401)
(d) A company, none of whose subsidiaries need to be included in the consolidation. (s 402)
Where a company takes advantage of exemptions (b) and (c) it must disclose that it has taken advantage of the exemption and also the name and country of incorporation of the parent undertaking who prepares those group accounts.

Exclusion of a subsidiary
There may be situations where consolidation would not give a true and fair view of the group
' s affairs: this would be exceptional.
 s 405 of the Companies Act 2006 permits exclusion from consolidation under the following circumstances.
Reason Accounting treatment
Severe long-term restrictions
Held exclusively for subsequent resale; never been consolidated
Dissimilar activities
The subsidiary
' s inclusion is not material
Balance sheet: equity method up to date of severe
restrictions subject to any write-down for impairment
P&L a/c: dividends received only
IAS 27 states that a parent is control is lost.
Current asset at the lower of cost and net realisable value
Equity method
FRS 2 accepts this, as accounting standards only
apply to material items not permitted to
exclude a subsidiary that operates under severe restrictions except where
CA 2006 permits exclusion from consolidation in all of the circumstances cited above. CA 2006 permits exclusion for another reason, dismissed as invalid by the ASB.
– Information cannot be obtained without disproportionate expense or undue delay.
The consolidated balance sheet will obviously follow a different format to the consolidated statement of financial position under IFRS. Other than that, the major differences are in the treatment of goodwill, contingent consideration and acquisition expenses and in the calculation of minority (non-controlling) interest.
22 Paper P2 UK GAAP Supplement 2013

Goodwill arising on consolidation is one form of purchased goodwill , and is therefore governed by FRS
10. As explained earlier FRS 10 requires that purchased goodwill should be capitalised and classified as an asset on the balance sheet. It is then eliminated from the accounts by amortisation or impairment through the profit and loss account.
The unamortised (or unimpaired) portion will be included in the consolidated balance sheet under fixed assets .
Under IFRS 3 there are two possible methods of valuing goodwill on an acquisition:
 at the non-controlling interest's net assets or proportionate share of the fair value of the acquiree's identifiable
 at their (full) fair value
Under UK GAAP only the first of these, ie the “ partia l” method is used. There is no full fair value option.
This means that when an impairment of goodwill is recognised, none will ever be allocated to the minority
(non-controlling) interest, as only the group’s share of goodwill is recognised.
In calculating goodwill, fair values must be attached to the assets and liabilities of the subsidiary at acquisition.
FRS 7 defines the identifiable assets and liabilities acquired as:
‘The assets and liabilities of the acquired entity that are capable of being disposed of or settled separately , without disposing of a business of the entity’.
IFRS 3 does not contain a requirement that assets should be separable. The effect of this is that goodwill may be higher in some acquisitions treated under UK GAAP as more of the other intangibles of the subsidiary may fail to meet the ‘separability’ condition.
Under FRS 7 Fair Values in Acquisition Accounting the treatment of contingent consideration differs from the requirement of IFRS 3 in respect of the treatment of subsequent changes to the estimated value of contingent consideration.
Under IFRS 3, if a provisional figure has been used for the contingent consideration, adjustments made in the first year after the acquisition may be reflected through goodwill. After this, any further adjustments will be recognised in profit or loss . Under FRS 7, these adjustments can be reflected in goodwill, without any time limit , up to the point when the payment is actually made.
The parent acquired 60% of the subsidiary’s £100m share capital on 1 Jan 20X6 for a cash payment of
£150m and a further payment of £50m on 31 March 20X7 if the subsidiary’s post acquisition profits have exceeded an agreed figure by that date.
In the financial statements for the year to 31 December 20X6, three scenarios are possible:
(a) The amount has already been exceeded.
(b) It is probable that the amount will be exceeded by 31 March and this can reliably measured.
(c) It is not probable that the amount will be exceeded.
In the case of (a) and (b), the cost of the combination will be £200m (150 + 50)
In the case of (c) the cost of combination will be £150m. (We have ignored discounting in this example).
Should this estimate prove to be incorrect, the cost of acquisition can be adjusted , leading to an adjustment of goodwill . For instance, if the cost of the combination was shown as £200m at 31
December 20X6 but in March 20X7 the additional £50m was not payable, the financial statements at 31
December 20X7 would shown the cost of the combination as £150m and goodwill would be reduced by
£50m.
Paper P2 UK GAAP Supplement 2013 23

Under FRS 7 expenses of the combination, such as lawyers and accountants fees are added to the cost of the combination. However, the costs of issuing equity are treated as a deduction from the proceeds of the equity issue. Share issue costs will therefore be debited to the share premium account. Issue costs of financial instruments are deducted from the proceeds of the financial instrument.
Under IFRS 3 these expenses are not added to the cost of the combination – they are written off to profit or loss as incurred.
FRS 2 defines minority interest in a subsidiary undertaking as the 'interest in a subsidiary undertaking included in the consolidation that is attributable to the shares held by or on behalf of persons other than the parent undertaking and its subsidiary undertakings'.
The term ‘minority interest’ is used in UK GAAP rather than non-controlling interest, but as we saw above in relation to goodwill, only the ‘partial’ method is used in UK GAAP. The calculations are the same as you have seen in the context of IFRS 3.
Peppa Ltd has owned 75% of the share capital of Salt Ltd since the date of Salt Ltd's incorporation. Their latest balance sheets are given below.
PEPPA LIMITED – BALANCE SHEET
Fixed assets
Tangible assets
30,000 £1 ordinary shares in Salt Ltd at cost
Net current assets
Net assets
Capital and reserves
80,000 £1 ordinary shares
Reserves
SALT LIMITED BALANCE SHEET
Tangible fixed assets
Net current assets
Net assets
Capital and reserves
40,000 £1 ordinary shares
Reserves
Prepare the consolidated balance sheet.
£
50,000
30,000
80,000
25,000
105,000
80,000
25,000
105,000
£
35,000
15,000
50,000
40,000
10,000
50,000
All of Salt Ltd's net assets are consolidated despite the fact that the company is only 75% owned. The amount of net assets attributable to minority interests is calculated as follows.
Minority share of Salt’s net assets (25%  £50,000)
£
12,500
24 Paper P2 UK GAAP Supplement 2013

This simplified working is more commonly used in UK examples, but it gives exactly the same answer as the working you will be more familiar with:
$
NCI at acquisition (25%  £40,000)
NCI share of post acquisition retained earnings (25%  £10,000)
10,000
2,500
12,500
FRS 9 requires joint ventures to be accounted for as follows:
The venturer should use the gross equity method showing in addition to the amounts included under the equity method, on the face on the balance sheet, the venturer's share of the gross assets and liabilities of its joint ventures, and, in the profit and loss account, the venturer's share of their turnover distinguished from that of the group. Where the venturer conducts a major part of its business through joint ventures, it may show fuller information provided all amounts are distinguished from those of the group.
Under IFRS 11, published in 2011 , joint ventures must be accounted for using the equity method as per
IAS 28 Associates and joint ventures, as for associates. This is similar to the UK FRS 9 treatment for associates. IFRS 11 also distinguishes between joint ventures and jointly controlled operations. Jointly controlled operations are similar to’ joint arrangements that are not entities’ under the UK FRS 9.
Parachute has a 50% interest in Jump, an entity set up and controlled jointly with a third party.
The balance sheets of the two companies as at 31 December 20X5 are as follows:
FIXED ASSETS
Tangible assets
Investment in Jump
CURRENT ASSETS
Stocks
Others
CREDITORS: AMOUNTS FALLING DUE WITHIN
ONE YEAR
NET CURRENT ASSETS
CAPITAL AND RESERVES
Share capital
Profit and loss reserve
Parachute Group
$'000 $'000 $'000
Jump
$'000
406
10
416
160
160
100
200
300
(150)
150
566
200
366
566
50
110
160
(120)
40
200
20
180
200
Their respective profit and loss accounts for the year ended 31 December 20X5 are as follows:
Turnover
Cost of sales and expenses
Dividend from Jump
Profit before tax
Tax
Profit after tax
Parachute Group
$'000
490
(280)
20
230
(100)
130
Jump
$'000
312
(200)
–
112
(32)
80
Paper P2 UK GAAP Supplement 2013 25

Dividends charged to profit and loss reserve during the period:
Note
60 40
During December 20X5 Parachute transferred goods to Jump for $50,000. Parachute sells goods at a mark-up of 25%. Jump had not paid Parachute's invoice or sold any of the goods to third parties by the year end.
There was no goodwill arising on Parachute's original investment.
Required
Prepare a consolidated balance sheet and profit and loss account as at 31 December 20X5 including the joint venture.
Parachute Group – Consolidated balance sheet as at 31 December 20X5
FIXED ASSETS
Tangible assets
Investment in joint venture
CURRENT ASSETS
Stocks
Others
Share of gross assets [((160 + 160)  50%) - (W3) 5]
Share of gross liabilities (120  50%)
CAPITAL AND RESERVES
Share capital
Profit and loss reserve (W2)
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
NET CURRENT ASSETS
$'000
155
(60)
100
200
300
150
Parachute Group – Consolidated profit and loss account for year ended 31 December 20X5
Turnover: group & share of joint venture (490 + (312 ×
50%) – (50 × 50%))
Less: share of joint venture's turnover ((312 × 50%) – (50
× 50%))
Group turnover
$'000
621
(131)
$'000
490
Cost of sales and expenses (280 + (W3) 5)
Share of operating profit of joint venture (112 × 50%)
Profit before tax
Tax
Group
Joint venture (32 × 50%)
Profit after tax
100
16
(285)
56
261
(116)
145
150
651
$'000
406
95
501
200
451
651
Notes
(1)
Notes
(2)
26 Paper P2 UK GAAP Supplement 2013

Notes
(1) The effect of the gross equity method in the balance sheet (statement of financial position) is to split out the figure of $95,000 into the underlying assets and liabilities. In this example there is also an adjustment to eliminate the group share of the unrealised profit on goods sold by the parent to the joint venture, treated in the same way here as under IFRS.
(2) The additional disclosure in the profit and loss account (income statement) is to show the group share of the joint venture’s turnover. This is calculated and added to the group turnover. Then, on the next line, the group share of the joint venture’s turnover is shown as a deduction. This looks odd at first glance but the joint venture amount has only been included as a disclosure and the group’s share of the joint venture’s profit is added just before the total of profit before tax.
Workings
1 Group structure
Parachute
50%
2
3
Jump Pre acq'n P&L reserve $0 (set up by Parachute)
Consolidated profit and loss reserve
Per question
PUP (W3)
Pre-acquisition profit and loss reserve
Group share of post acquisition P&L reserve:
Jump (180  50%)
Parachute
$'000
366
(5)
90
451
Jump
$'000
180
(0)
180
Provision for unrealised profit on stocks
Investor's share of unrealised profit in stocks:
$50,000  25%/125%  50% = $5,000
... Dr Cost of sales & Profit and loss reserve $5,000
Cr Investment in joint venture $5,000 (as the stocks are held by Jump).
There are no examinable differences relating to topics in chapter 13
You have seen that under IFRS 3 there is a conceptual difference between two types of disposal. If a disposal results in a loss of control , a profit or loss on disposal is calculated. If control is retained , no profit or loss is recognised but an adjustment is made to the parent’s equity to reflect the reallocation of ownership between parent and non-controlling equity holders.
This conceptual difference does not exist in FRS 2. All disposals and part disposals of investments in subsidiaries will result in a profit or loss on disposal under UK GAAP.
There is also a difference in the calculation of the gain or loss, with no fair value adjustments made to any remaining interests.
Paper P2 UK GAAP Supplement 2013 27

Under FRS 2 , if the holding is still a subsidiary then it must still be consolidated line by line .
A comparison of the sale proceeds and the consolidated net asset value attributable to the shares sold at the date of disposal will give the profit or loss on disposal . This is shown as an exceptional item after profit before tax in the consolidated profit and loss account .
Smith Ltd bought 80% of the share capital of Jones Ltd for £324,000 a number of years ago. At that date
Jones Ltd's P&L account balance stood at £180,000. The balance sheets at 30 September 20X8 and the summarised P&L accounts to that date are given below.
Smith Ltd Jones Ltd
£'000
Fixed assets
Investment in Jones Ltd
Net current assets
360
324
270
954
£'000
270
–
270
540
Share capital and reserves
£1 ordinary shares
Profit and loss account
540
414
954
180
360
540
Profit before tax
Tax
Retained profit
Retained profit b/f
Retained profit c/f
153
45
108
306
414
126
36
90
270
360
No entries have been made in the accounts for any of the following transactions.
Assume that profits accrue evenly throughout the year and that any goodwill has been amortised through the profit and loss account.
Ignore taxation.
Required
Prepare the consolidated balance sheet and P&L account at 30 September 20X8 if Smith Ltd sells one quarter of its holding in Jones Ltd for £160,000 on 30 June 20X8.
28 Paper P2 UK GAAP Supplement 2013

Partial disposal: subsidiary to subsidiary(control retained)
CONSOLIDATED BALANCE SHEET AS AT 30 SEPTEMBER 20X8
Fixed assets (360 + 270)
Net current assets (270 + 160 + 270)
Share capital and reserves
£1 ordinary shares
Profit and loss account (see below)
Minority interest (40%  540)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30 SEPTEMBER 20X8
Profit before tax (153 +126)
Exceptional item (W1)
Tax (45 + 36)
Profit after tax
Minority interest
20%  90  9/12
40%  90  3/12
Profit attributable to members of Smith Ltd
Retained profit brought forward (W2)
Retained profit carried forward
Workings
1 Group profit on disposal
Sale proceeds
Less net assets of Jones now sold
20%  ((540 – 90) + (9/12  90))
2 Retained profit brought forward
Smith
Jones: 80%  (270 – 180)
Goodwill fully amortised
£'000
13.5
9.0
£'000
279.0
56.5
81.0
254.5
22.5
232.0
342.0
574.0
£'000
630
700
1,330
540
574
1,114
216
1,330
£'000
160.0
103.5
56.5
£'000
306
72
(36)
342
When the subsidiary becomes an associate, the underlying asset is carried in one line on the balance sheet.
Under IFRS the investment retained is shown at fair value . This is not done under UK GAAP. In practice this means that the group profit on sale is likely to be higher under IFRS.
This can be illustrated using the same example as above but with a changed requirement:
Paper P2 UK GAAP Supplement 2013 29

Required
Prepare the consolidated balance sheet and P&L account at 30 September 20X8 assuming that Smith Ltd sells one quarter of its holding in Jones Ltd for £160,000 on 30 June 20X8 and that the remaining investment will be treated as an associate.
Partial disposal: subsidiary to associate
CONSOLIDATED BALANCE SHEET AS AT 30 SEPTEMBER 20X8
Fixed assets
Investment in associated undertaking (40% 
Net current assets (270 + 340)
540)
Share capital and reserves
£1 ordinary shares
Profit and loss account (see below)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
£'000
360
216
610
1,186
540
646
1,186
FOR THE YEAR ENDED 30 SEPTEMBER 20X8
Profit before tax*
(153 + (9/12  126)) + (3/12
Exceptional item (W1)
Tax (45+ (9/12  36)) + (3/12
 126 
 36
40%)
 40%)
Profit after tax
Minority interest (20%  90  9/12)
Profit attributable to members of Smith Ltd
Retained profit brought forward (W2)
Retained profit carried forward
£'000
260.1
133.0
75.6
317.5
13.5
304.0
342.0
646.0
* Note. Per FRS 9 Associates and joint ventures disclosure should be made of group's share of associate's operating profit. However, PBT is used here for the sake of simplicity (and this difference is not specifically examinable per the list of examinable differences prepared by ACCA).
Workings
1
2
Group profit on disposal
Sale proceeds
Less: net assets of Jones now sold
40%  ((540 – 90) + ((9/12  90))
Retained profit brought forward
Smith
Jones 80%  (270 – 180)
Goodwill fully amortised
£'000
340
207
133
£'000
306
72
(36)
342
IFRS 3 follows a similar principle as for disposals. The treatment depends on whether the ‘control boundary’ is crossed. A goodwill calculation is only carried out when a controlling interest is acquired.
Any previously- held investment is remeasured to fair value and any gain or loss on the remeasurement recognised in profit or loss. The previously-held investment at FV then becomes part of the consideration transferred in the goodwill calculation.
There is no requirement under UK GAAP to remeasure the previously-held investment to fair value.
30 Paper P2 UK GAAP Supplement 2013

In respect of goodwill, under FRS 2, three situations are considered:
(1) The parent owned an investment that gave no special influence then acquired additional shares and this moved the holding from an investment (measured at cost or under the alternative accounting rules) straight to subsidiary.
(2) The parent owned an investment accounted for as an associate (ie. the investor was able to exert significant influence) and a further acquisition gives control, so the investment is now a subsidiary.
(3) The parent already controls a subsidiary and acquires a further stake in that company.
In circumstance (1) the only rule to remember is only take account of the subsidiary and calculate goodwill when control is achieved. The cost of the original investment plus the cost of the new investment is compared to the total share of net assets to calculate goodwill.
Where the acquired company is accounted for as an associate (circumstance (2)), goodwill is calculated at the associate stage and again when control is acquired. In each case it is calculated as the cost of the shares less the group share of the shares plus pre-acquisition profits. The share of the subsidiary’s post acquisition reserves will be calculated using a ‘step by step’ approach.
Circumstance (3) follows the same approach as circumstance (2).
Suppose that X Ltd bought 20,000 ordinary £1 shares in Y Ltd in 20X1 when the reserves of Y Ltd stood at £27,000 and a further 20,000 shares in 20X2 when the reserves of Y Ltd were £42,000. Finally, a purchase of 30,000 shares in 20X3 when the reserves of Y Ltd were £60,000 gave X Ltd a controlling interest over the 100,000 shares of Y Ltd. The cost of the shares purchased was £30,000 in 20X1,
£34,000 in 20X2 and £56,000 for the final 30,000 shares in 20X3.
What is the group share of post acquisition profits of Y Ltd, and what is the goodwill arising on consolidation at the date of the final acquisition in 20X3? Assume that no dividends were paid in these three years.
Purchase
20X1
20X2
20X3
% of shares in Y Ltd
bought
20%
20%
30%
% of shares in Y Ltd
now held
20%
40%
70% (controlling interest)
X Ltd exercises significant influence over the financial and operating policies of Y Ltd.
If X Ltd accounted for Y Ltd as an associate, we would use the step by step method . This method calculates post acquisition profits by computing the proportion of reserves attaching to the shares at the time of each individual purchase .
Post acquisition profits would be:
(a) on shares bought in 20X1:
20% of profits since 20X1 = 20% of £(60,000 – 27,000) =
(b) on shares bought in 20X2:
(c)
20% of profits since 20X2 = 20% of £(60,000 – 42,000) =
(since no dividends were paid out on profits in this time)
On shares bought in 20X3
(no post acquisition reserves yet in respect of this slice of the investment)
£
6,600
3,600
0
10,200
Paper P2 UK GAAP Supplement 2013 31

Goodwill arising on consolidation would be :
Cost of acquired entity
FV identifiable NA acquired:
SC
P&L reserve
Group share
Total goodwill
20X1 acq’n
£'000 £'000
30
100
27
127
20%
(25.4)
4.6
20X2 acq’n
£'000 £'000
34
100
42
142
20%
(28.4)
5.6
18.2
20X3 acq’n
£'000 £'000
56
100
60
160
30%
8
(48)
If X Ltd did not exercise a significant influence when it bought the shares of Y Ltd in 20X1 and 20X2, but only gained control when it made its final purchase in 20X3, the pre acquisition profits would be calculated on the basis of reserves at the date of acquisition of control, ie in our example on the basis of reserves of
£60,000 at the date of acquisition in 20X3.
Reserve working : share of Y Ltd's post acquisition retained reserves = £0 (as the consolidation is being performed as at the date of the acquisition).
Goodwill on consolidation would be
Cost of acquired entity (30 + 34 + 56)
Fair value of net assets acquired:
Share capital
Reserves
Fair value adjustment (W7)
Group share (70%)
£m
100
60
160
£m
120
(112)
8
Under IFRS, all consolidations are performed using acquisition accounting.
Under UK GAAP, there is another method, called merger accounting. It is used for business combinations that are not, in substance, acquisitions of one entity by another, but the formation of a new reporting entity as a substantially equal partnership where no party is dominant.



The standard, FRS 6 Acquisitions and mergers sets very strict criteria for its use and as a result, merger accounting is very rarely used.
In your P2 exam, you will not be tested on the detail of the method, but you need to understand the basic principles of merger accounting and when it may be applied in the context of group reconstructions.
The main features of merger accounting are:
Net assets are combined with no restatement to fair values
Reserves are ‘pooled’; no distinction is made between pre- and post-acquisition reserves
No goodwill arises
32 Paper P2 UK GAAP Supplement 2013

This method may be appropriate in the following types of reconstruction where there is no identifiable
‘acquirer’ and the substance of the combination is a new entity where parties have combined as a substantially equal partnership.
A group may restructure itself internally to achieve a desired effect. For example:
Before After
Shareholders Shareholders
P P
S
1
S
1
S
2



S
2
Reasons for such a reorganisation include:
S
1
can be sold off (perhaps to reduce group gearing) without selling off S potential tax advantages (e.g. loss relief)
2 divisionalisation so that S
1
and S
2
report independently to P.
A discontinued operation is one which meets all of the following conditions.
(a) The sale or termination must have been completed before the earlier of 3 months after the year end or the date the financial statements are approved. (Terminations not completed by this date may be disclosed in the notes.)
(b) Former activity must have ceased permanently .
(c) The sale or termination has a material effect on the nature and focus of the entity's operations and represents a material reduction in its operating facilities resulting either from:
(i) Its withdrawal from a particular market (class of business or geographical); or from
(ii) A material reduction in turnover in its continuing markets.
(d) The assets, liabilities, results of operations and activities are clearly distinguishable , physically, operationally and for financial reporting purposes.
Note: Under IFRS 5 a discontinued operation is one that has either been disposed of or is classified as held for sale. In order for the operation to be classified as held for sale, the sale should be expected to be completed within one year from the date of classification. Contrast this with the UK requirement that the sale must be completed by the earliest of 3 months after the year end or the date the statements are approved. In practice this will mean that a discontinued operation can be recognised earlier under IFRS than under UK GAAP.
Paper P2 UK GAAP Supplement 2013 33

(a) Results
The results of the discontinued operation up to the date of sale or termination or the balance sheet date should be shown under each of the relevant profit and loss account headings .
(b) Profit/loss on discontinuation
The profit or loss on discontinuation or costs of discontinuation should be disclosed separately as an exceptional item after operating profit and before interest.
(c) Comparative figures
Figures for the previous year must be adjusted for any activities which have become discontinued in the current year.
All statutory headings from turnover to operating profit must be subdivided between that arising from continuing operations and that arising from discontinued operations. In addition, turnover and operating profit must be further analysed between that from existing and that from newly acquired operations.
This contrasts with IFRS , where IFRS 5 requires the result of discontinued operations to be shown as a one-line item. There is no requirement under IFRS to show separately the results of newly acquired operations .
Only figures for turnover and operating profit need be shown on the face of the P & L account; all additional information regarding costs may be relegated to a note.
34 Paper P2 UK GAAP Supplement 2013

PROFIT AND LOSS (extract)
EXAMPLE 1 (as shown in FRS 3)
Turnover
Continuing operations
Acquisitions
Discontinued operations
Cost of sales
Gross profit
Net operating expenses
Operating profit
Continuing operations
Acquisitions
Discontinued operations
Less 20X2 provision
PROFIT AND LOSS ACCOUNT EXAMPLE 2 (to operating profit line)
Turnover
Cost of sales
Gross profit
Net operating expenses
Less 20X2 provision
Operating profit
Profit on sale of properties
Provision for loss on operations to be discontinued
Loss on disposal of the discontinued operations
Less 20X2 provision
Profit on ordinary activities
before interest
Continuing
Operations
20X3
£m
550
(415)
135
(85)
50
9
59
Acquisitions
20X3
£m
50
(40)
10
(4)
6
6
Discontinued of operations
20X3
£m
175
(165)
10
(25)
10
(5)
(17)
20
(2)
50
6
56
(15)
10
20X3
£m
550
50
600
175
20X3
£m
775
(620)
155
(104)
__
51
Total
Total
20X2 as
20X3 restated
£m
775
£m
690
(620) (555)
155 135
(114) (83)
10 __
51
9
52
6
(30)
(17)
20
63 28
20X2 as restated
£m
500
190
690
(555)
135
(83)
40
12
52
Paper P2 UK GAAP Supplement 2013 35

NOTES TO THE FINANCIAL STATEMENTS
Note required in respect of profit and loss account example 1
Cost of sales
Net operating expenses
Distribution costs
Administrative
expenses
Other operating income
Less 20X2 provision
Continuing
£m
455
56
41
(8)
89
0
89
Discontinued
£m
165
13
20X3
12
0
25
(10)
15
Total
£m
620
69
53
(8)
114
(10)
104
Note required in respect of profit and loss account example 2
Turnover
Cost of sales
Net operating expenses
Distribution costs
Administrative
expenses
Other operating income
Operating profit
Continuing
£m
56
41
89
(8)
20X3
Discontinued
£m
13
12
0
25
Total
£m
69
53
(8)
114
Continuing
£m
500
385
46
34
(5)
75
40
There are no examinable differences relating to topics in chapter 16
Continuing
£m
385
46
34
(5)
75
20X2
(as restated)
Discontinued
£m
170
5
3
0
8
20X2
(as restated)
Discontinued
£m
190
170
5
3
0
8
12
Total
£m
690
555
51
37
(5)
83
52
Total
£m
555
51
37
(5)
83




The specific differences that are examinable in F7 in relation to statements of cash flows are not examinable in paper P2. The only additional difference that is examinable in P2 relates to the exemptions available from preparing a statement of cash flows.
IAS 7 gives no exemptions but under the UK standard, FRS 1 Cash flow statements , the following entities are exempt from preparing a cash flow statement:
 A subsidiary, where 90% or more of its voting rights are controlled within a group, providing the consolidated financial statements in which the subsidiary is included are publicly available
Mutual life assurance companies
Pension schemes
Open-ended investment funds
Small companies and groups (as per s444 of Companies Act 2006)
36 Paper P2 UK GAAP Supplement 2013

IFRS 8 bases the segmental report on internal management reporting. Reportable segments are based on segments that are being treated as reportable by the ‘chief operating decision-maker’. In this way, segment data reflects the operational strategy of the business. This could lead to segments being based on the class of business or on geographical areas, depending on which basis is used by the chief operating decision maker.
SSAP 25 requires segment information to be disclosed for both business and geographical segments , defined as follows:
A class of business is a distinguishable component of an enterprise that provides a separate product or a separate group of related products or services.
A geographical segment is an area comprising an individual country or group of countries in which a company operates or to which it supplies products or services.
SSAP 25 uses a ‘risks and returns’ approach, to determine how segments should be identified . The aim behind this principle is to provide useful information for the user of financial statements where an entity carries on operations in different classes of business or in different geographical areas that:
(a) earn a return on investment that is out of line wit the remainder of the business, or
(b) are subject to different degrees of risk, or
(c) have experienced different rates of growth, or
(d) have different potentials for future development.
SSAP 25 is a disclosure standard so does not contain any detailed measurement rules. It does require that the information is reconciled to corresponding figures the financial statements. This implies that the segmental information should be based on the same accounting polices as are used in the financial statements. IFRS 8 requires the amounts reported to be those reported to the chief operating decision maker, implying that this could be management information.
Under SSAP 25 , companies can dispense with the disclosure of segmental information if, in the opinion of the directors, it would be seriously prejudicial to the interests of the company: a statement to that effect is required. This is not allowed under IFRS 8 .
There are no examinable differences relating to topics in chapters 18, 19 and 20
You have studied the IFRS for SMEs and may be aware of the existence of the UK ‘equivalent’, the
Financial reporting standard for smaller entities (FRSSE)
The UK FRSSE is an accounting standard developed specifically for smaller entities, by collecting together in one document, and in simplified form, the requirements of other accounting standards and UITF
Abstracts that are applicable to smaller entities.
The latest version of the FRSSE was published in June 2008, including the application of the most recent accounting standards.
It is a 'one-stop shop' standard for smaller entities bringing together in a single document the contents of the current FRSSE and the accounting requirements of companies legislation applicable to smaller companies.
Paper P2 UK GAAP Supplement 2013 37

Scope
The FRSSE may be adopted by companies qualifying as small under companies legislation. This means companies that satisfy at least two of the following criteria:



Turnover not more than £6.5 million.
Balance sheet total not more than £3.26 million
No more than 50 employees
Smaller entities that choose to comply with the FRSSE are exempt from applying all other accounting standards and UITF Abstracts. Smaller entities that choose not to adopt the FRSSE should apply SSAPs, other FRSs and UITF Abstracts.
IFRS for Small and Medium-sized Entities (July 2009)
The main difference in principle between the UK FRSSE and the IFRS for SMEs is in its definition of the entities that may use it. The IFRS for SMEs defines small and medium-sized entities as those that:
(a) do not have public accountability (i.e. do not issue debt or equity instruments in a public market or hold assets in a fiduciary capacity for outsiders); and
(b) publish general purpose financial statements for external users.
There is no size test , as this would be difficult to apply to companies operating under different legal frameworks.
Recent developments
In January 2012 the ASB issued FREDs 46 to 48, setting out revised proposals for the future of financial reporting in the UK and Republic of Ireland.
 FRED 46 (FRS 100) sets out the application of financial reporting requirements in the UK and
Republic of Ireland.


FRED 47 (FRS 101 or IFRS with reduced disclosures ) outlines the reduced disclosure framework available for use by ‘qualifying entities’ choosing to report under IFRS.
FRED 48 (FRS 102 or FRSUKI) is the Financial Reporting Standard applicable in the UK and
Republic of Ireland, including the reduced disclosures available for ‘qualifying entities’ reporting under this FRS. This proposed FRS is based upon the IASB’s IFRS for SMEs but has been further amended from earlier versions.
FREDs 46 and 47 became FRS 100 and 101 respectively in November 2012, which is after the cut-off date for your exam.
More detail on the FRSUKI
For all entities choosing not to apply IFRS or IFRS with reduced disclosures, the ASB is proposing the use of a new standard based on the IASB’s IFRS for SMEs. The ASB's proposed standard, FRS
102 or FRSUKI, runs to less than 300 pages and has been adapted to comply with UK and EU law, extended and amended to address the needs of a broader group of preparers in response to feedback on FRED 44.
Implications
(a) All entities currently reporting under UK GAAP will be required to report under FRSUKI but may voluntarily adopt IFRS. The three tier system previously proposed is eliminated, so that the application of EU-adopted IFRS will not be extended beyond that required by regulation.
(b) Accounting treatments permitted under current accounting standards are introduced. Previously the
ASB had proposed keeping changes to the IFRS for SMEs to a minimum. It now proposes that where an accounting treatment is permitted currently in UK and Irish accounting standards and in international accounting standards it should be retained. This means that the options to revalue land and buildings, capitalise borrowing costs or carry forward certain development expenses have been incorporated into the FRSUKI.
38 Paper P2 UK GAAP Supplement 2013

(c) The requirements are aligned more closely to company law, with the majority of the presentation requirements for the balance sheet and income statement being replaced by the formats in company law rather than in the IFRS for SMEs.
(d) There are amendments to accounting for deferred taxation, updates to consolidation requirements and accounting for pension plans, and the introduction of an option to recognise grant income over the life of a grant.
(e) Qualifying entities will be able to take advantage of reduced disclosure requirements that include exemption from disclosure of a cash flow statement, certain financial instruments, related party and share based payments disclosures. The reliefs available are different between IFRS and FRSUKI.
(f) Small entities currently eligible to apply FRSSE will continue to be able to do so . Should a new framework for micro entities be introduced as a result of EU consultation processes, the ASB would then review the status of the FRSSE and consult again on how to amend the FRSSE to accommodate any change.
(g) Guidance for public benefit entities is to be incorporated into the FRSUKI (FRED 48)
Paper P2 UK GAAP Supplement 2013 39

40 Paper P2 UK GAAP Supplement 2013