0. FRS 102: IN PRACTICE

1. SEMINAR – 17 FEBRUARY 2016
PRESENTER: Paula Galloway

3. TIMETABLE FOR CHANGE 31 December Reporter 31 March Reporter
Opening balance sheet (1 January 2014)
Comparative year balance sheet (31 December 2014)
Financial statements for the year ended 31 December 2015
31 December
Reporter
Opening balance sheet (1 April 2014)
Comparative year balance sheet (31 March 2015)
Financial statements for the year ended 31 March 2016
31 March Reporter
FRSSE - ONE YEAR LATER

4. MY CLIENT Manufacturing Rents additional space
31-Dec-15
£'000
Fixed Assets
10,550
Investment Properties
2,500
Intangible Assets
150
Current Assets
8,160
Current Liabilities
(3,820)
Net Current Assets
4,340
17,540
Creditors (over 1 year)
(4,600)
Provisions and deferred income
(500)
Deferred Tax
(530)
Pension Scheme Deficit
(1,000)
Net Assets
10,910
Equity Capital 30
Revaluation reserve
2,000
Profit and Loss account
8,800
Manufacturing
Rents additional space
Holds investment property
Sells overseas

5. CURRENT ASSETS / LIABILITIES - STOCKS
LIFO no longer allowed (13.18)
Spares (higher value) reclassified as fixed assets (17.5)

6. CURRENT ASSETS / LIABILITIES – DEBTORS/ FOREIGN EXCHANGE
Year end rate – not contract rate
Forward contracts are financial instruments
Hedge accounting

7. CURRENT ASSETS / LIABILITIES – DEBTORS/FOREIGN EXCHANGE
Example
My Client sells goods to a US customer on 1 November The invoice is for $100,000 for settlement in 3 months ie 31 January 2016.
On 1 November 2015, My Client enters into a forward contract to sell $100,000 on 31 January 2016 at a contracted rate of $1.62:£1.
Details of GBP to USD exchange rates are below:
Date
Spot rate
Forward Rate
1 November 2015
1.6
1.62
31 December 2015
1.57
1.59
31 January 2016
1.55
n/a

8. CURRENT ASSETS / LIABILITIES – FOREIGN EXCHANGE
Summary of impact on financial statements
Year ended 31 Dec 2015
SSAP 20 £
FRS 102 £
Profit and Loss
Sales
61,728
62,500
FX Gain -
1,194
Loss on derivative
(1,165)
62,529
Balance Sheet
Debtors
63,694
Derivative liability

9. CURRENT ASSETS / LIABILITIES - DEBTORS
Financing arrangements
Discounting

10. FINANCIAL INSTRUMENTS
BASIC
Cash and bank accounts
Trade and other accounts receivable/payable
Loans from banks or other third parties
Loans to and from group companies
OTHER
Options and forward contracts
Interest rate swaps
Investments in convertible debt
Rights, warrants and future contracts
AMORTISED COST
FAIR VALUE
INVOICE PRICE/NPV
HEDGE ACCOUNTING PROVISIONS

11. FINANCIAL INSTRUMENTS
Taxation follows Accounting, with exceptions
FOREX Gains and Losses Example
Direct impact on profits chargeable to Corporation Tax
Timing of charge to Corporation Tax
Transitional deferred tax position

12. CURRENT ASSETS / LIABILITIES – HOLIDAY PAY
Example: Facts
Employees of My Client are permitted 24 days annual leave which must be taken in the holiday year which commences on 1 April. My Client’s financial year end is 31 December.
At 31 December an employee, pro-rata is entitled to have taken 18 days holiday. My Client calculates from holiday records that outstanding holiday (i.e. holiday not taken from an allowance of 18 days) is 56 days for all employees at the same grade. My Client considers that it is appropriate to make an accrual for the 56 days outstanding holiday measured at the average salary per day.
Overall impact
On the date of transition to FRS 102, a new provision would be recognised for short-term employee benefits with a corresponding adjustment to opening retained earnings. In future years, assuming the annual holiday allowance, the pattern of holidays taken and holiday year remain constant, the movement in the provision from one year to the next will probably be limited.

13. CURRENT ASSETS / LIABILITIES - LEASES
Operating lease incentives
Straight line
Period (lease term) – non cancellable period
Operating lease disclosures – total future lease payments by years

14. CURRENT ASSETS / LIABILITIES - LEASES
Lease Incentives
Example: Facts
My Client leases a property for 10 years from 1 January 2014 with a market rent review at the end of year 5. At the outset of the lease the landlord agreed to a 2 year rent free period. The annual rental year 3 to 10 is £100,000 per annum.
UITF 28
The lease incentive is allocated over the lease term on a shorter period ending on the date from which a market rental is payable – normally the first break period/rent review in this case 5 years – annual charge of £60,000 in year 1 to 5 and £100,000 thereafter. [At 31 December 2015 a creditor of £120,000]
FRS 102
The incentive should be amortised over the period of the lease – annual charge of £80,000 over 10 years. [At 31 December 2015 a creditor of £160,000]

15. MY CLIENT Current Assets Current Liabilities Stock: Spares
Debtors: Financial instruments /financing arrangements
Current Liabilities
Creditors: Holiday Pay, lease incentives

16. FIXED ASSETS – PROPERTY, PLANT & EQUIPMENT
Changes
Residual Values – assess on current values
Transitional arrangements (valuation)
Revaluation (sufficient regularity)
Deferred taxation
Reminder
Capitalisation policy
Depreciation – component approach
Subsequent expenditure

17. FIXED ASSETS Transition Example – Facts
Property A acquired on 31 December 1980 for £100,000. Revalued regularly, current value £150,000.
Decision – not to continue with a policy of revaluation
Options:
Elect to use the most recent revaluation (£150,000) as deemed cost
Restate to original cost £100,000

18. FIXED ASSETS – PROPERTY, PLANT & EQUIPMENT
UK tax legislation departs from the accounting standards – no Corporation Tax impact
Deemed Cost revaluation & Revaluation model – significant deferred tax implications
Current UK GAAP – taxable profits vs. accounting profit
FRS 102 – taxable profits vs. other comprehensive income
Example
Property acquired 1 January 2006 for £1,000,000 valued on 31 December 2015 at £1,500,000.
Assuming indexation of £100,000 there is a potential capital gain of £400,000.
If disposed of at that point in time there would be a corporation tax liability at 20% of £80,000.
This equates to the deferred tax liability which would be recognised in the accounts.
The gain will be charged to corporation tax only when the gain is realised on disposal.

19. FIXED ASSETS - LEASES Classification
- (90% test) – present value of minimum lease payments
- Substantially all the risks and rewards of ownership

20. FIXED ASSETS - LEASES Classification Example: Facts (specialist plant)
My Client leases a bespoke piece of machinery from Company A. The machinery was constructed for use in My Client’s business, to its specification and is used in producing an item for which My Client holds the patent, so a third party would not legally be able to use the machinery without significant alteration. The lease is for a period of seven years and the expected useful life of the machinery is at least 10 years. The present value of the minimum future lease payments is 70% of the asset’s fair value at inception.
SSAP 21
The present value of the minimum lease payments is only 70% of the fair value of the asset at the inception of the lease, therefore, it may be classified as an operating lease.
FRS 102
Under FRS 102, the lease would pass the condition set out in paragraph 20.5(e) (assets of specialised nature) and so would be classified as a finance lease.

21. FIXED ASSETS – INVESTMENT PROPERTIES
Gains / losses on revaluation – through P&L
Provision for deferred tax
Group properties (individual company accounts)

22. KEY CHANGES – INVESTMENT PROPERTIES
Revaluation
Example – Facts
On 1 January 2015, the carrying amount of an investment property was £2m. An updated valuation of £2.5m is received on 31 December 2015.
SSAP 19
Under SSAP 19, the gain of £0.5m would be recognised as follows:
Dr: Investment property £0.5m
Cr: Investment property revaluation reserve (STRGL) £0.5m
The revaluation is transferred to a revaluation reserve
FRS 102
Under FRS 102, the gain of £0.5m would be recognised as follows:
DR: Investment property £0.5m
Cr: Profit and loss £0.5m (not reserves)

23. FIXED ASSETS - GOODWILL
No indefinite useful life
UEL not to exceed 10 years if no reliable estimate
Goodwill / intangibles /Acquisitions

24. MY CLIENT
Fixed Assets
Property, Plant and Equipment: Valuation Policy, Residual Values, Deferred Tax
Investment Property: Valuation, Profit/Loss, Deferred Tax
Intangible Assets: Goodwill amortisation

25. CREDITORS DUE OUTWITH ONE YEAR – INTERCOMPANY LOANS/OTHER LOANS
Included within scope of section 11 (Basic Financial Instruments)
Valued at the present value of the future payments discounted at a market rate of interest for a similar debt instrument (fixed repayment date)

26. KEY CHANGES – INTERCOMPANY LOANS
Example: Facts
1 January 2014 an inter group loan of £10,000 is received, repayable on 31 December Interest at 5%, market interest 10%.
NPV of loan at 1 January is:
Discount Cash flow NPV
Year £ £454
Year £10, £8,678
£9,132
Amortised cost
Interest (10%) Cash flow December
£9, £ (£500) £9,545
£9, £ (£10,500)
Accounting treatment

27. PROVISIONS AND DEFERRED INCOME – GOVERNMENT GRANTS
Performance model/accrual model
SSAP 4 (Accrual model)
The grant is deferred and shown as a liability. It is then released to the profit and loss account over the expected useful life of the related asset.
Recognition of depreciation charge on the factory (£600,000 / 50 years)
Dr Depreciation (P&L) £12,000
Cr Fixed assets £12,000
Release the grant to the P&L (£200,000 / 50 years)
Dr Deferred grants £4,000
Cr P&L (grant income) £4,000
FRS 102 Performance model or accrual model
Where the entity elects to apply the performance model, the whole grant is recognised in profit or loss immediately where there are no provisions requiring deferral of the grant received.

28. PENSIONS Defined benefit obligations
- on one balance sheet in group scheme
- independent actuary/annual valuation
- profit/loss charge
Multi employer schemes (funding agreement liability)

29. PENSIONS Tax legislation departs from accounting standards
Restated accruals will have no tax impact – Only pension payments made in the accounting period attract Corporation Tax relief
Changes to the profit and loss charge for defined benefit pension schemes may impact on the deferred tax position however the materiality would need to be assessed on a case by case basis

30. MY CLIENT Financial Instruments: Creditors due outwith one year
Intercompany loans
Interest rate hedge
Creditors due outwith one year
Government Grants
Performance/accrual model
Provisions and deferred income
Pension
Impact on profit/loss charge
Pensions scheme accounting

31. OTHER AREAS TO CONSIDER
FRSSE
Disclosures
Terminology (practice/ learning)
Impact on Auditors/ audit requirements

32. FRS 102 – THE BUSINESS IMPLICATIONS
Loan covenant tests
Bonus/share schemes
Acquisition criteria/assessment
Resource (Training) \ Cost (Group Structure)
Financial instruments
Distributable Reserves (revaluations)

33. QUESTIONS

34. CONCLUSION
In summary -