‘New’ Irish GAAP - Deloitte · ‘New’ Irish GAAP FRS 102 - Frequently asked questions ... the intermediate parent has different directors/employees from the ultimate parent

‘New’ Irish GAAP FRS 102 - Frequently asked questions

‘New’ Irish GAAP

FRS 102 – Frequently Asked

Questions

Date 10th October 2014

This document sets out some of the FRS 102 specific questions that can arise on a frequent basis and responses to them. It is not intended to be an exhaustive list and Volume B of GAAP 2014 may address other questions that arise.

FRS 102 – Frequently Asked Questions 4

1. Will intermediate holding companies have to prepare consolidated accounts under FRS 102?

FRS 102: 9.3 contains exemptions from the requirement to produce consolidated financial statements

which derive from Irish company law requirements. A company which is exempt from preparing

consolidated financial statements under current Irish GAAP should still expect to be exempt under FRS

102.

2. What additional disclosures are required for financial instruments?

Section 34.18-30 of FRS 102 contains

extended disclosures on financial instruments

which derive from IFRS 7 and which must be

included by entities that meet the definition of

a financial institution (subject to the

comments below in respect of retirement

benefit schemes), in addition to those

disclosures which are applicable to all entities

applying FRS 102. These include disclosures

around impairment, fair value and risk (incorporating credit risk, market risk and liquidity risk).

Section 34.31-34 includes further required disclosures which are specific to retirement benefit

schemes. The Accounting Council has tentatively decided that although retirement benefit schemes

are included in the definition of a financial institution, they do not have to make the disclosures required

for financial institutions. Instead they will be required to make disclosures which are specifically given

for retirement benefit schemes.

Frequently Asked Questions

A company which is exempt from preparing consolidated financial statements under current Irish GAAP should still expect to be exempt under FRS 102.


3. Under FRS 102 will derivatives be accounted for on the balance sheet?

Yes. Sections 11 and 12 of FRS 102 contains comprehensive requirements for accounting for financial

instruments, including derivatives, which are required to be held on balance sheet at fair value through

profit or loss. Specific disclosures around financial instruments will also need to be made.

There are additional financial instrument-related disclosures for financial institutions which are specified

in Section 34.

4. If, under Irish GAAP, the useful life of goodwill was assessed to be 10 years, would it be necessary to change the useful life under FRS 102?

Not necessarily. FRS 102: 19.23 states that the useful life of goodwill should be presumed to be no

more than five years (consistent with 4th

EU directive on company law), but only if an entity is unable to

make a reliable estimate of the useful life. This differs from existing Irish GAAP which states that there

is a rebuttable presumption that the maximum useful life for goodwill is 20 years.

Therefore, if an entity was able to justify a particular useful life under existing Irish GAAP, there is no

reason why that should necessarily change under FRS 102.

Note that if the useful life of goodwill is in excess of five years, 19.24(g) requires disclosure of the

useful life in the accounts, together with supporting reasons for this.

5. If, under Irish GAAP, the useful life of goodwill (or an intangible fixed asset) was assessed to be indefinite, would it be necessary to reassess under FRS 102

Yes. FRS 102 does not permit goodwill or intangible fixed assets to have indefinite useful lives. On

transition to FRS 102, entities should reassess goodwill and intangibles with indefinite lives to

determine the remaining useful life, and amortise prospectively over that period from the date of

transition. If no reliable estimate can be made, the useful life of goodwill should be presumed to be no

more than five years.

Some entities may consider whether it is possible to depart from the requirements of FRS 102 and

continue to treat goodwill/intangibles as having indefinite lives. This is addressed by the requirements

of FRS 102: 3.4-3.6 which state that departure from the requirements of FRS 102 should only happen

“in the extremely rare circumstances when management concludes that compliance with this FRS

would be so misleading that it would conflict with the objective of financial statements of entities within

the scope of this FRS.” We would expect to see this used only in the most exceptional of

circumstances.

6. Is discounting allowed for tax balances under FRS 102

No. Section 29 of FRS 102 makes it clear that neither current nor deferred tax balances may be

discounted.

7. When considering whether an entity is the extension of a parent for the purposes of working out functional currency, would a group treasury company or intermediate holding company be an extension of the parent?

GAAP 2014 Volume C, Chapter C19 3.3.4 states: “For a treasury entity, it is necessary to assess

whether it exists (1) to serve the funding and cash management needs of the group as a whole (i.e. it

constitutes an extension of the parent entity), or (2) solely to service a specific sub-group. In the latter

case, the functional currency of the treasury entity may be different from that of the parent entity.” We

would expect the answer under FRS 102 to be consistent with this position.

If an intermediate parent carries out duties related to the sub-group in which it holds investments (e.g. if

the intermediate parent has different directors/employees from the ultimate parent entity, has its own

reporting responsibilities, produces consolidated financial statements including the sub-group, actively

manages a series of operations in a geographical area and, therefore, incurs costs in a local currency),

this would indicate that the functional currency of the entity is not necessarily the same as that of its


parent entity. If the intermediate parent exists solely in order for the ultimate parent to obtain a tax,

regulatory, jurisdictional or legal type of benefit it would not otherwise receive, this indicates that it is an

extension of its parent entity.

8. I have a group defined benefit scheme and had previously taken FRS 17 exemption for accounting for the scheme within the group (using defined contribution accounting). Can I continue to use this exemption under FRS 102?

No. The multi-employer exemption is only available under FRS 102 for schemes where the participants

are not under common control. Therefore, participants in a group scheme will need to account for their

allocation of the defined benefit expense (and related plan asset or liability), where a relevant

agreement or policy exists. Otherwise, the entity that is legally responsible for the group pension plan

will need to recognise the entire net defined benefit cost (and associated plan asset/liability) in its

individual financial statements. There is no transitional provision for this requirement.

This requirement may have a significant impact on the distributable profits of entities in affected

groups.

9. Under FRS 102 does deferred tax need to be recognised on revaluation of fixed assets?

Yes. With a small list of exceptions (which do

not include this particular instance), FRS 102

requires deferred tax to be recognised on all

timing differences.

This contrasts with FRS 19, which states that

deferred tax need only be provided on revaluations of fixed assets where either a) the revaluation takes

place at FVTPL (and a timing difference arises) or b) the entity has entered into a binding agreement to

sell the revalued asset and has recognised the gains and losses expected to arise on sale.

10. If taking the disclosure exemptions in FRS 102, do the publicly available consolidated accounts have to be prepared under FRS 102 or could they be, for example, EU-adopted IFRS2?

There is no requirement, if taking the disclosure exemptions in FRS 102:1.11, for the consolidated

financial statements into which the qualifying entity is consolidated to be prepared under FRS 102.

Some of the disclosure reductions are only available if ‘equivalent’ disclosures are made in the

consolidated financial statements. The Application Guidance to FRS 100 includes useful detail on the

meaning of ‘equivalent’ for this purpose; the concept is the same as that currently applied when taking

the exemption from preparing consolidated financial statements under Regulation 9A of the European

Communities (Companies: Group Accounts) Regulations 1992.

In practice this means that disclosures included within consolidated financial statements prepared

under FRS 102, EU-adopted IFRSs, IFRSs as issued by the IASB, US GAAP, Japanese GAAP and

other GAAPs which are closely related to FRS 102 should satisfy the ‘equivalence’ test, although the

impact and materiality of any differences from FRS 102 should be considered on a case by case basis.

11. Under SSAP 20, the entity currently ‘hedges’ an investment in its foreign subsidiary in its company only accounts using a foreign currency loan. At the reporting period end it retranslates both the loan and the investment and takes the net gain/loss directly to equity. Is this possible under FRS 102?

No. Under Section 12 of FRS 102, an equity instrument is not an eligible hedging instrument and

therefore this type of accounting will no longer be possible. Under FRS 102, such investments will not

Under Section 12 of FRS 102, an equity instrument is not an eligible hedging instrument and therefore this type of accounting will no longer be possible.


be retranslated at the period end, and any FX gains/losses on a foreign exchange loan would be taken

to profit or loss.

Under FRS 102 (as well as IAS 39 and IFRS 9) the loan could be designated in a fair value hedge of

FX risk in the equity instrument (resulting in retranslation of both through the P&L rather than equity) –

but this relationship would need to be formally documented, designated and tested.

12. My group had intercompany loans between various entities in the group. Will the accounting for such loans change under FRS 102?

It depends; the significance of any the change will depend on the terms of the loan. If there are no

formal terms, companies may wish to consider putting terms in place at an early stage.

Classification: Amortised Cost or FVTPL

All financial instruments within the scope of Sections 11 and 12 will need to be classified as basic or

non-basic under the requirements set out in Section 11. Although many intercompany arrangements

will be basic, it should not assumed that this will always be the case (e.g. a convertible debt instrument

is classified as non-basic for the holder). It should also be noted that there are different rules for

preference shares and for other debt instruments:

Intercompany loans that are not preference shares will be measured at amortised cost if they

are basic, and at FVTPL if they are non-basic.

Intercompany loans that are preference shares:

o By the holder: measured at FVTPL, irrespective of whether they are basic

o By the issuer: measured at amortised cost if basic, and at FVTPL if non-basic.

In this circumstance a consolidation adjustment may be necessary to eliminate any difference.

Initial recognition: Loans at Amortised Cost

All intercompany loans that are accounted for at amortised cost are financing transactions.

This means that, on initial recognition, they must be measured at the present value of future cash flows

(plus directly attributable transaction costs). The standard requires use of the market rate of interest at

the date of initial recognition when discounting the cash flows.

In some cases this will be a significant change from FRS 4, which required initial recognition at the fair

value of consideration received after the deduction of issue costs. The following examples illustrate

when this will (or will not) result in a different accounting treatment.

Example of instrument Treatment under

FRS 4

Treatment under Section 11 of

FRS 102

1. Interest free loan with fixed

repayment date

Parent advances cash of €100 to

subsidiary.

The market rate of interest is 5%.

The loan is repayable in 5 years.

There are no transaction costs.

Recognised at €100,

because this is the

fair value of the

consideration

received.

Recognised at €78.3, because

this is the fair value of the future

cash flows.

[€78.3 = €100/(1.05)5]

Subsidiary’s initial double entry

is:

Dr Cash €100

Cr Liability €78.3

Cr Capital Contribution €21.7

Parent’s initial double entry is:

Dr Asset €78.3

Dr Cost of investment in sub

€21.7

Cr Cash €100

2. Interest free loan that is

repayable on demand (i.e. the


because this is the

Recognised at €100, because



Example of instrument Treatment under

FRS 4

Treatment under Section 11 of

FRS 102

holder (lender) has the right to

demand repayment)


subsidiary.


The holder can demand

repayment of €100 at any point

prior to maturity.


fair value of the

consideration

received

cash flows

*[see comment on FRS

102.12.11 below – because the

fair value cannot be less than

the €100 payable on demand]


is:

Dr Cash €100

Cr Liability €100


Dr Asset €100

Cr Cash €100

3. Loan with an above market rate

of interest with a stated maturity,

but repayable on demand (i.e. the

holder (lender) has the right to

demand repayment)


subsidiary.

Annual interest payments are at

6%.


The loan matures in 5 years, but

has an option for the holder

(lender) to demand repayment of

€100 plus accrued interest at any

point prior to maturity.



because this is the

fair value of the

consideration

received

Recognised at €104.3 because


cash flows.

€104.3 = 6( 1/1.05 + 1/(1.05)2 +

1/(1.05)3 + 1/(1.05)

4) +

106/(1.05)5

*[see comment on FRS

102.12.11 below – because

€104.3 is not less than the €100

payable on demand at initial

recognition]


is:

Dr Cash €100

Dr Distribution €4.3

Cr Liability €104.3


Dr Asset €104.3

Cr Cash €100

Cr Dividend receivable (P&L)

€4.3

*Where a loan is repayable on demand, FRS 102.12.11 states that the fair value is NOT

LESS than the amount payable on demand, discounted from the first date that the amount

could be required to be paid (it could, however, be more – as shown in example 3).

It should be noted that the guidance in FRS 102.12.11 is only applicable when it is the holder

(lender) that has the right to demand repayment i.e. an issuer (borrower) option to repay at

any time would not trigger the application of this guidance. Where the holder (lender) has the

right to demand repayment this guidance is applied by both the issuer (to their liability) and

the holder (to their asset).

Any difference between the fair value of consideration received and the initial carrying amount of the

loan is accounted for as a capital contribution or distribution.

Although the transaction may be accounted for as a distribution, it is not necessarily a distribution for

legal purposes. It is accepted practice for group companies to make interest free loans to each other

and this has not generally been regarded as giving rise to distributions for legal purposes.

Subsequent measurement: Loans at Amortised Cost

In the subsidiary, the amount credited to/debited from equity (as a capital contribution or distribution) is

not subsequently remeasured.


The difference between the initial carrying amount of the loan and the amounts repayable is amortised

over the life of the instrument using the effective interest rate method. Interest is accrued using the

effective interest rate (which is not necessarily the contractual rate).

In example 2 above, where there is no difference between the initial carrying amount of the loan and

the amount repayable, the effective interest rate is equal to the contractual interest rate, which is zero.

Transitional adjustments: Loans at Amortised Cost

There are no specific transitional provisions relating to the accounting for intercompany loans so the

requirements of FRS 102 must be applied fully retrospectively when transitioning. This will mean that

the carrying amount of intercompany loans may need to be adjusted on transition, depending on the

terms of the loan. The impact will be largest where an intercompany loan has not been made on

market terms and is not repayable on demand.

13. We do not have a bank account? Do they still need to prepare and present a cash flow statement?

All entities under ‘full’ FRS 102 that have cash and/or cash equivalents are required to present a cash

flow statement as laid out in Section 7. However, qualifying entities taking advantage of the reduced

disclosures in FRs 102 (or FRS 101) need not present a cash flow statement.

14. Does the IAS 12 concept of ‘backwards tracing’ in relation to the allocation of tax figures between the statements and subsequent changes to these amounts exist under FRS 102?

Yes. Section 29.22 states that “an entity shall recognise tax expense in the same component of total

comprehensive income...or equity as the transaction or other event that resulted in the tax expense.”

Whilst this is less explicit than IAS 12, which specifies that tax should be recognised in the same

statement as the related item “in the same or a different period”, there does not appear to be a

difference in substance.

15. The entity has a revaluation surplus on an investment property. What is the treatment on transition to FRS 102? Can they still keep the revaluation surplus on the balance sheet or must they write it off to the profit and loss account reserve?

On transition to FRS 102, a revaluation surplus related to investment property is generally transferred

to the profit and loss reserve as a transitional adjustment unless the entity considers an alternative

category of equity more appropriate.

16. As with investment property, can a revaluation gain on freehold property carried under the revaluation model be recognised in the profit and loss account?

No. Revaluation gains on freehold property will continue to be recognised in the statement of total

recognised gains and losses (other comprehensive income) and in the revaluation reserve.

17. The entity is confused with the new titles of financial statements in FRS 102 such as ‘statement of financial position’ and ‘satement of comprehensive income’. Can they use the original names instead?

Yes, you may use titles for the financial statements other than those used in FRS 102 as long as they are not misleading.


18. The entity maintains its buildings at valuation but under FRS 102 wants to avoid the expenses of having regular valuations carried out. Can they change their policy on transition and instead account for the premises at historical cost less accumulated depreciation and impairment?

The entity may revert to the cost model and depreciate cost from the date of acquisition to date of

transition to arrive at its opening balance for the premises under FRS 102.

Alternatively they may adopt either a previous GAAP valuation (depreciated from the date of valuation)

or fair value at date of transition as “deemed cost” and keep as a “frozen” valuation.

19. The entity had a forward foreign currency contract. Would the accounting for this contract change under FRS 102 when compared with old Irish GAAP?

It depends on whether the entity previously adopted FRS 26 or not. Reporting entities that previously

adopted FRS 26 will not see any change in the accounting. However, the reporting entities that did not

adopt FRS 26 will see significant changes. Under FRS 102 a forward foreign currency contract meets

the definition of a derivative and is initially recognised at fair value and subsequently measured at fair

value with changes in fair value recognised in the profit and loss account.

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‘New’ Irish GAAP - Deloitte · ‘New’ Irish GAAP FRS 102 - Frequently asked questions ... the intermediate parent has different directors/employees from the ultimate parent