THE NEW IRISH GAAP

John McCarthy, FCAJohn McCarthy Consulting Limited

December 2015www.jmcc.ie

Things were a lot simpler in 1515

http://jmcc.ie/d7/content/things-were-lot-simpler-1515

Recent ‘Practice Makes Perfect’ blog post

Bad debt provisions now more complicated to justify

Hierarchy of impairment in 11.22 and 11.23

Revenue Commissioners interested

5 year spreading – Section 42 FA 2014

THE NEW IRISH GAAP

AGENDA1. What is New Irish GAAP?

2. FRS 105

3. What is Transition?

4. Traps for the unwary

5. Inter-company loans

March 2013 - The Terrible Trio!!

FRS 102 – The Standard That Keeps on Giving!!

www.frc.org.uk

Three versions to date March 2013/August 2014/September 2015 – read this

16 Staff Education Notes (SENs)

Applies to all private entities – not just companies

THE NEW IRISH GAAP – Private Entitieseffective for a/c periods starting 1/1/2015

Essentially Two Standards from 2016 on1. FRS 102 – ‘The Financial Reporting Standard Applicable in

the UK and Republic of Ireland’ (Sept 2015)

2. FRS 105 – ‘The Financial Reporting Standard applicable to the Micro-entities Regime’ (July 2015)

FRS 105 valid in the UK from 1/1/2016. Early application permitted.

Not yet legal in the Republic of Ireland

FRSSE – ‘Financial Reporting Standard for Smaller Entities’ is gone from 31 December 2015

Options right now – Option 1 – FRSSE

1. Switch to FRSSE 2015 for one last year – for accounts periods beginning on/after 1 January 2015 (‘small’ entities only) – not for regulated entities

Means you get to keep: The ‘old’ familiar GAAP rules for one last year Delay to FRS 102 to 31/12/2016 period ends Delay familiarisation with new software – potential downside!

Postpone a lot of headaches until early 2017

Comparatives for 2015 need changing when you switch over the December 2016 period ends to FRS 102

Witness the ‘carnage’ of the FRS 102 adopters!!!

Option 2 – FRS 102

2. Move to FRS 102 with effect from its implementation date i.e. 1 January 2015 – you have to adopt this for ‘medium’ and larger entities anyway

Bite the bullet!

Section 1A inserted for certain ‘small’ entities

Means that you also need to learn a lot of new rules/terminology right now and convert your 2014 comparatives in the 2015 financial statements

Make a clean break with old GAAP

Who knows what other issues lie ahead in 2017?

Option 3 – FRS 105

3. Move to FRS 105 with effect from its implementation date possibly

1 January 2016 – early adoption may be allowed from 1 January 2015

For micro entities only – charities excluded

Must meet two out of three criteria for two consecutive years:

Turnover < €700k

Balance sheet gross assets < €350k

Less than 10 employees

FRS 105 – UK version Shareholders’ accounts

Two formats for balance sheet

One format for the profit and loss account

Directors’ report

No notes, except if bank loans/advances – disclose terms

Fair value accounting not permitted

We await the implementation of the Accounting Directive

‘True and fair’ and micro entity accounts?

Paragraph 16 of FRS 105

Appendix IV FRS 105

FRS 102 – ‘The Financial Reporting Standard Applicable in the UK and Republic of Ireland’

All non-listed entities (‘small’ entities may use Section 1A)

Latest version published Sept. 2015 www.frc.org.uk

Consists of 35 sections – 376 pages (read a section a day)

We refer to this as a single standard rather than to several FRSs/SSAPs

Statement of compliance is mandatory in all financial statements – potential issue on monitoring visits in 2017!

THE NEW IRISH GAAP

WHAT IS TRANSITION?

‘Transition date’

“Transition date” – really important concept

Say ‘31 December 2014’ is period end

First full financial year under FRS 102 = 31/12/2015

‘Transition date’ = first day of the comparative period

Therefore the ‘Transition date’ = 1 Jan 2014

2014 requires two sets of accounts

Say September period end i.e. Transition date is………

Two sets of accounts for 2014?

2014 accounts filed with CRO/Revenue as normal

Prepare 2015 accounts under FRS 102 + file by September/October 2016 under new rules

Will need comparatives for 2014 under new rules

Transition will cause changes to previously declared reserves as at 1/1/2014 and 31/12/2014

These need re-stated as if FRS 102 always existed

Transition effects disclosed in the 2015 accounts

On first time adoption of FRS must not change the accounting followed previously for any of the following transactions:

1. derecognition of financial assets and liabilities

2. estimates;(cannot change at date of transition – can’t ‘bury’ errors in the past)

3. discontinued operations; and

4. measuring non controlling interests

Basically cannot use transition as a ‘cover’ to bury/hide any past issues

Four prohibitions – Section 35.9

May use one or more of the following exemptions in preparing its first statements under the FRS: (VIPs in red)

a) Business combinations and goodwill – may elect not to adopt Section 19 for past combinations but if do restate any previous combination must restate all later combinations (no need to break up goodwill for past acquisitions)

b) Share based payment transactions – encouraged but not required to apply Section 26 before date of transition (not widely needed)

c) Fair value as deemed cost – may use previous revaluation under previous GAAP as deemed cost under the FRS (asset could be 3-4 yrs. old – keep revaluation reserve intact)

d) Revaluation as deemed cost – may use previous revaluation as deemed cost at date of transition (i.e. must get revaluations done as at 1-1-2014)

e) Not used

20 exemptions allowed – Section 35.10

f) Separate financial statements – must measure investments in subsidiaries, associates and jointly controlled entities at cost or deemed cost

g) Compound financial instruments – need not separate two components into debt/equity if debt component is not outstanding at date of transition (same as FRS 25 for convertible loans)

h) Not used (moved to deferred tax section – must provide deferred tax on all future revaluations))

i) Service concession arrangements – not required to apply Section 34 to contracts pre date of transition (same as IFRIC 12 – PPI contracts e.g. some toll roads i.e. if physical asset on balance sheet, leave it there)

20 exemptions allowed (f) to (i)

j) Extractive industries – may elect previous GAAP measure of oil and gas assets but test for impairment under Section 27

k) Arrangements containing a lease – may elect to use date at transition rather than original date

l) Decommissioning liabilities included in PP&E – may elect to measure costs of dismantling component at date of transition rather than date of original obligation (like FRS 12)

20 exemptions allowed (j) to (l)

(m) Dormant companies – Section 365 CA 2014

(n) Deferred development costs as a deemed cost - first-time adopter may elect to measure the carrying amount at the date of transition to this FRS for development costs deferred in accordance with SSAP 13

(o) Borrowing costs – may elect to treat the date of transition to this FRS as the date on which capitalisation commences – not widely adopted

(p) Lease incentives - allowed continue to recognise any residual benefit or cost associated with these lease incentives on the same basis as that applied at the date of transition to this FRS

(q) Public benefit entity combinations – not widely adopted

20 exemptions allowed (m) to (q)

(r) Assets and liabilities of subsidiaries, associates and joint ventures – where a subsidiary becomes a first-time adopter later than its parent

(s) Designation of previously recognised financial instruments – permits a financial instrument (provided it meets certain criteria) to be designated on initial recognition as a financial asset or financial liability at fair value through profit or loss

(t) Hedge accounting (added from 1 August 2014) – allows at least an extra 33 months to document your hedging relationships from 1-1-2014 to 30-9-2016

20 exemptions allowed (r ) to (t)

(u) Small entities – fair value measurement of financial instruments (Sept 2015) - Extract

‘shall apply its existing accounting policies to the relevant financial instruments in the comparative information and is encouraged to disclose this fact;

shall disclose the accounting policies applied (in accordance with paragraph 1AC.3); and

shall treat any adjustment between the statement of financial position at the comparative period’s reporting date and the statement of financial position at the start of the first reporting period that complies with Sections 11 and 12 as an adjustment, in the current reporting period, to opening equity.’

20 exemptions allowed (u)

(v) Small entities – financing transactions involving related parties

A small entity that first adopts this FRS for an accounting period that commences before 1 January 2017 need not restate comparative information to comply with the requirements of paragraph 11.13 only insofar as they related to financing transactions involving related parties.

A small entity that chooses to present comparative information that does not comply with the financing transaction requirements of Section 11 in its first year of adoption:

20 exemptions allowed (v)

shall apply its existing accounting policies to the relevant financial instruments in the comparative information and is encouraged to disclose this fact;

shall disclose the accounting policies applied (in accordance with paragraph 1AC.3); and

shall treat any adjustment between the statement of financial position at the comparative period’s reporting date and the statement of financial position at the start of the first reporting period that complies with paragraph 11.13 as an adjustment, in the current reporting period, to opening equity. The present value of the financial asset or financial liability at the start of the first reporting period that complies with this FRS may be determined on the basis of the facts and circumstances existing at that date, rather than when the arrangement was entered into.

20 exemptions allowed (v)

THE NEW IRISH GAAP

TRAPS FOR THE UNWARY

Companies Act, 2014

Companies Act 2014 - some changes

CA 2014 applicable to financial statements signed on/after 1 June 2015

Section 330 regarding ‘statement on relevant audit information’ not applicable until a/c periods commencing on/after 1 June 2015

5 Technical Releases issued by the CAI on 5 June 2015

Traps for the unwary – differences in layout from before

No longer any need for directors to sign the P&L Account

Companies Act 2014 – some changes

Section 305 – disclosure of directors’ remuneration in abridged accounts

Disclosure of full list of directors’ names – Section 326

No longer ‘proper books of account’

It is now ‘adequate accounting records’ - Section 281

No longer ‘Registered Auditor’ – replaced in Section 336

The new phrase is ‘Statutory Auditor’ or Statutory Audit Firm’

Traps and pitfalls – Section 19.23

Maximum useful life of goodwill – still 5 years in CA 2014 but FRS 102, September 2015 version says 10 years – not yet legitimate in Irish law!! ‘After initial recognition, the acquirer shall measure goodwill

acquired in a business combination at cost less accumulated amortisation and accumulated impairment losses: An entity shall follow the principles in paragraphs 18.19 to 18.24 for

amortisation of goodwill. Goodwill shall be considered to have a finite useful life, and shall be amortised on a systematic basis over its life. If, in exceptional cases, an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed 10 years.

An entity shall follow Section 27 Impairment of Assets for recognising and measuring the impairment of goodwill.’

Traps and pitfalls – Section 19.25

Goodwill Disclosures

Was (August 2014)

‘the useful life of goodwill, and if this exceeds five years, supporting reasons for this; and…’

Now (September 2015)

‘the useful life of goodwill, and if this cannot be reliably estimated, supporting reasons for the period chosen; and…’

Business combinations and Goodwill – may elect not to adopt Section 19 for past combinations but if do restate any previous combination must restate all later combinations (no need to break up goodwill for past acquisitions)

No need to restate previous mergers/acquisitions Avoid breaking out separate intangibles, licences, franchises, valuing

them at FV assessing their separate useful lives Also – no need to ‘collapse’ goodwill/intangibles lives from 20 years to

5 (now 10???) years just yet – i.e. can postpone the ‘collapse’ to 31/12/2014 instead of 1/12/2014 i.e. earn another year’s profits to absorb the hit

Potentially retain the remaining 20 year useful life – see Travelodge

Exemption – from Section 19

Revaluation as deemed cost – may use previous revaluation as deemed cost at date of transition (i.e. get revaluations done as at 1-1-2014)

Can treat a past revaluation (prior to 1/1/2014) as ‘deemed cost’ Once off opportunity to do a revaluation of: PPE Investment property Intangible asset which meets recognition criteria and criteria for

revaluation in section 18 Watch out for deferred tax provision on revaluation – no exemption See what Travelodge UK did for YE 31/12/2012

Exemption – revaluation as deemed cost

Things to do

1. Identify the 4 prohibited restatements (i.e. retrospective application) such as accounting estimates (para 35.9)

2. Select one or more of 20 exemptions available

3. Consider timing of acquisitions before/after transition

4. Identify forward contracts, caps and collars and interest rate swaps i.e. financial instruments – Sections 11/12

5. ‘Profit’ related remuneration – profit different?

6. Tax implications – tax will usually follow GAAP

Things to do

7. Dividend planning – dividends may be different?

8. Controls may need redesigned

9. Investors/lenders may need re-educated

10. Accounting policies may need updated

11. Obtain fair values as at 31 December 2013 – ask bank

12. Examine banking covenants + renegotiate if needed

13. Systems and procedures – are they set up to capture items that need fair values?

Things to do

14. Make holiday year the same as your financial year and allow no carry forward of unused holidays

15. Prepare and present reconciliations and disclosures

16. Employees may need training

17. Change accounting date to 30 December 2015 to postpone transition by 12 months

18. Change careers!!!

THE NEW IRISH GAAP

Inter-company’ and Directors’ Loans

Financial instruments

Section 11 – ‘Basic Financial Instruments’

Section 12 - ‘Other Financial Instrument Issues’

Trade debtors/creditors, simple bank loans/investments

Directors’ loans/inter-company loans

Generally measured at amortised cost (like FRS 4)

Investments in ordinary shares that are not puttable – FVTPL or cost

Example of inter-company loan

Interest Free Loan On Five-Year Fixed Term

A subsidiary company adopts FRS 102 for its December 2015 accounts and has a 1 January 2014 ‘transition date’

At 1/1 2012 it took out a €1m interest free loan from a Director, with a 5yr. fixed term

Assuming it can determine that a market rate of interest at the time would have been 12%, it goes back to the inception date to establish what the accounting would have been from the outset

Example of inter-company loan

Year Opening Value Interest at 12% Closing Value

2012 567,427 68,091 635,518

2013 635,518 76,262 711,780

2014 711,780 85,414 797,194

2015 797,194 95,663 892,857

2016 892,857 107,143 1,000,000

• The 2013 closing value of €711,780 is used as the carrying value in the transition date balance sheet, and the accounting continues from there

• FRS 102 is silent about where the difference of €288,220 goes!!

• PwC ‘Manual of Accounting’ suggests it is a ‘capital contribution’ shown in reserves. Obviously needs adjustment each year as maturity approaches

• See the new Exemption (v) in Section 35.10 FRS 102

One way to avoid this issue

Prepare documentation that states the loans are ‘repayable on demand’

Loans then treated at face value as that is their ‘fair value’

Means that the net current assets/liabilities of the company are not as healthy as you would wish

FRS 102 is very document driven

Health warning – this ‘solution’ has not been tested yet!

Another way to avoid this issue

Prepare documentation that states the loans are long term, at a market interest rate but the lender forgives the interest

Loans then treated at face value as that is their ‘fair value’

Means that the loan stays as a long term liability

Documentation will be key

Health warning – this ‘solution’ has not been tested yet!

Summary – Initial Yr. 1 Accounting

Scenario Parent A/c Sub A/c

1. Parent to sub Dr. Loan receivable

Dr. Investment in Sub

Cr. Cash at bank

Dr. cash in bank

Cr. loan repayable

Cr. capital contribution – equity

2. Sub to parent Dr. Cash at bank

Cr. Loan payable

Cr. P&L – income from sub.

Dr. Loan receivable

DR. Distribution – equity

Cr. Cash at bank

Summary – Initial Yr. 1 Accounting

Scenario Borrower Lender

3. Sub to sub DR cash at bankCr. Loan repayable

Cr. Capital contribution - equity

Dr. loan receivable

Dr. distribution – equityCr. Cash at bank

QUESTIONS

Audit whole firm/hot file and cold file reviews

Preparation for Regulatory Body monitoring visit

Anti-Money Laundering compliance and training

FRS 102 Accounting/audit technical advice

Insolvency compliance reviews

Investment Business compliance reviews

Practice management and profitability improvement

Services

CONTACT DETAILS:

John McCarthy

Mobile 086 839 8360

E mail john@jmcc.ie

Web www.jmcc.ie

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THE NEW IRISH GAAP