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
THE NEW IRISH GAAP
John McCarthy, FCA
John McCarthy Consulting Limited
December 2015
www.jmcc.ie
Things were a lot simpler in 1515
 http://jmcc.ie/d7/content/things-were-lot-simpler-1515
 Recent ‘Practice Makes Perfec...
THE NEW IRISH GAAP
AGENDA
1. What is New Irish GAAP?
2. FRS 105
3. What is Transition?
4. Traps for the unwary
5. Inter-co...
March 2013 -TheTerribleTrio!!
FRS 102 –The StandardThat Keeps on
Giving!!
 www.frc.org.uk
 Three versions to date March 2013/August
2014/September 201...
THE NEW IRISH GAAP – Private Entities
effective for a/c periods starting 1/1/2015
Essentially Two Standards from 2016 on
1...
Options right now – Option 1 – FRSSE
1. Switch to FRSSE 2015 for one last year – for accounts periods beginning
on/after 1...
Option 2 – FRS 102
2. Move to FRS 102 with effect from its implementation date i.e. 1 January
2015 – you have to adopt thi...
Option 3 – FRS 105
3. Move to FRS 105 with effect from its implementation date possibly
1 January 2016 – early adoption ma...
FRS 105 – UK version
 Shareholders’ accounts
 Two formats for balance sheet
 One format for the profit and loss account...
‘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 (‘smal...
THE NEW IRISH GAAP
WHAT IS TRANSITION?
‘Transition date’
 “Transition date” – really important concept
 Say ‘31 December 2014’ is period end
 First full finan...
Two sets of accounts for 2014?
 2014 accounts filed with CRO/Revenue as normal
 Prepare 2015 accounts under FRS 102 + fi...
 On first time adoption of FRS must not change the accounting followed
previously for any of the following transactions:
...
May use one or more of the following exemptions in preparing its first
statements under the FRS: (VIPs in red)
a) Business...
f) Separate financial statements – must measure investments in subsidiaries,
associates and jointly controlled entities at...
j) Extractive industries – may elect previous GAAP measure of oil
and gas assets but test for impairment under Section 27
...
 (m) Dormant companies – Section 365 CA 2014
 (n) Deferred development costs as a deemed cost - first-time adopter may
el...
(r) Assets and liabilities of subsidiaries, associates and joint
ventures – where a subsidiary becomes a first-time adopter...
(u) Small entities – fair value measurement of financial instruments (Sept
2015) - Extract
 ‘shall apply its existing acco...
(v) Small entities – financing transactions involving related
parties
 A small entity that first adopts this FRS for an acc...
 shall apply its existing accounting policies to the relevant financial
instruments in the comparative information and is ...
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 r...
Companies Act 2014 – some changes
 Section 305 – disclosure of directors’ remuneration in
abridged accounts
 Disclosure ...
Traps and pitfalls – Section 19.23
 Maximum useful life of goodwill – still 5 years in CA 2014 but FRS
102, September 201...
Traps and pitfalls – Section 19.25
 Goodwill Disclosures
 Was (August 2014)
 ‘the useful life of goodwill, and if this ...
 Business combinations and Goodwill – may elect not to adopt Section
19 for past combinations but if do restate any previ...
 Revaluation as deemed cost – may use previous revaluation as deemed
cost at date of transition (i.e. get revaluations do...
Things to do
1. Identify the 4 prohibited restatements (i.e. retrospective
application) such as accounting estimates (para...
Things to do
7. Dividend planning – dividends may be different?
8. Controls may need redesigned
9. Investors/lenders may n...
Things to do
14. Make holiday year the same as your financial year and
allow no carry forward of unused holidays
15. Prepa...
THE NEW IRISH GAAP
Inter-company’ and
Directors’ Loans
Financial instruments
 Section 11 – ‘Basic Financial Instruments’
 Section 12 - ‘Other Financial Instrument Issues’
 Tr...
Example of inter-company loan
 Interest Free Loan On Five-Year Fixed Term
 A subsidiary company adopts FRS 102 for its D...
Example of inter-company loan
Year Opening Value Interest at 12% Closing Value
2012 567,427 68,091 635,518
2013 635,518 76...
One way to avoid this issue
 Prepare documentation that states the loans are
‘repayable on demand’
 Loans then treated a...
Another way to avoid this issue
 Prepare documentation that states the loans are long
term, at a market interest rate but...
Summary – Initial Yr. 1 Accounting
Scenario Parent A/c Sub A/c
1. Parent to sub Dr. Loan receivable
Dr. Investment in
Sub
...
Summary – InitialYr. 1 Accounting
Scenario Borrower Lender
3. Sub to sub DR cash at bank
Cr. Loan repayable
Cr. Capital
co...
QUESTIONS
 Audit whole firm/hot file and cold file reviews
 Preparation for Regulatory Body monitoring visit
 Anti-Money Launderi...
 CONTACT DETAILS:
 John McCarthy
 Mobile 086 839 8360
 E mail john@jmcc.ie
 Web www.jmcc.ie
 Register for our blogs ...
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John McCarthy - FRS 102

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A renowned speaker on the subject of FRS 102, which replaces all existing accounting rules for private Irish companies from 1 January 2015. This new standard is attracting a lot of attention as these standards become applicable and John is already consulting and lecturing widely, helping firms and businesses implement the changes.

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John McCarthy - FRS 102

  1. 1.  THE NEW IRISH GAAP John McCarthy, FCA John McCarthy Consulting Limited December 2015 www.jmcc.ie
  2. 2. 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
  3. 3. THE NEW IRISH GAAP AGENDA 1. What is New Irish GAAP? 2. FRS 105 3. What is Transition? 4. Traps for the unwary 5. Inter-company loans
  4. 4. March 2013 -TheTerribleTrio!!
  5. 5. FRS 102 –The StandardThat 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
  6. 6. THE NEW IRISH GAAP – Private Entities effective for a/c periods starting 1/1/2015 Essentially Two Standards from 2016 on 1. 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
  7. 7. 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!!!
  8. 8. 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?
  9. 9. 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
  10. 10. 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
  11. 11. ‘True and fair’ and micro entity accounts?  Paragraph 16 of FRS 105
  12. 12. Appendix IV FRS 105
  13. 13. 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!
  14. 14. THE NEW IRISH GAAP WHAT IS TRANSITION?
  15. 15. ‘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………
  16. 16. 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
  17. 17.  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
  18. 18. 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
  19. 19. 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)
  20. 20. 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)
  21. 21.  (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)
  22. 22. (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)
  23. 23. (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)
  24. 24. (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)
  25. 25.  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 20 exemptions allowed (v)
  26. 26. THE NEW IRISH GAAP TRAPS FOR THE UNWARY
  27. 27. Companies Act, 2014
  28. 28. 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
  29. 29. 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’
  30. 30. 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.’
  31. 31. 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…’
  32. 32.  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
  33. 33.  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
  34. 34. 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
  35. 35. 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?
  36. 36. 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!!!
  37. 37. THE NEW IRISH GAAP Inter-company’ and Directors’ Loans
  38. 38. 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
  39. 39. 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
  40. 40. 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
  41. 41. 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!
  42. 42. 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!
  43. 43. 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
  44. 44. Summary – InitialYr. 1 Accounting Scenario Borrower Lender 3. Sub to sub DR cash at bank Cr. Loan repayable Cr. Capital contribution - equity Dr. loan receivable Dr. distribution – equity Cr. Cash at bank
  45. 45. QUESTIONS
  46. 46.  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
  47. 47.  CONTACT DETAILS:  John McCarthy  Mobile 086 839 8360  E mail john@jmcc.ie  Web www.jmcc.ie  Register for our blogs online THE NEW IRISH GAAP

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