by John McCarthy Consulting Ltd. | Feb 17, 2016 | News
Accounting for investment properties prior to the introduction of FRS 102 was probably a minority sport.
Many companies and groups that don’t’ specialize in renting properties can often have periods when some of their properties are rented out or held for capital appreciation (e.g. construction companies with property stocks that they cannot readily sell). Otherwise these properties would have been dealt with as stocks and work in progress. Because of the recent recession and the fact that some such properties are let out to generate much needed rental income, these properties may now qualify as ‘investment properties’. There are some differences between the old SSAP 19 and FRS 102.
The change in definition of an investment property (dealt with in Section 16 of FRS 102) means that entities holding properties that are not owner-occupied need to review the new requirements carefully.
There are three notable differences in the accounting for investment properties between the old and new Irish GAAP.
1. In the definition itself, old Irish GAAP excluded properties that were occupied by group companies and these had to be treated as tangible fixed assets and depreciated. FRS 102 includes them as investment properties. Therefore, these properties may no longer be depreciated and may be valued at fair value.
2. Although both GAAPs require investment property to be measured at fair value (the old GAAP terminology was different but gave essentially the same measure) the movements were recognised in different places. Under old GAAP gains and losses in value were recognised in reserves (via the Statement of Total Recognised Gains and Losses (‘STRGL’). FRS 102 requires such gains/losses to be shown as part of profit in the profit and loss account.
3. In old GAAP, gains on investment property valuations did not normally trigger deferred taxation, unless there was a binding commitment to sell, which would not usually exist at the time the valuation was conducted. In FRS 102, section 19, deferred tax must be provided on all gains and in the case of investment property, the deferred tax will appear in the profit and loss account as part of the taxation charge for the year.
The new approach means that when there are losses, there is no longer any need to apportion the loss to previously reported gains. However, reported profits will be directly impacted by the new approach. The impact may not always be positive.
On transition, loan covenants may need to be reviewed and new arrangements made with lenders, if property borrowers are not to be found in breach of covenant. These breaches could trigger demands for loan repayment, so preparation is key.
FRS 102 Transition Service
Please ask us about our bespoke FRS 102 Transition Service where we will examine client accounts before/after transition and give you a tailored report explaining the issues arising and whether the transition has been successful or not. To enquire just send an e-mail to john@jmcc.ie
Transition Checklist
We provide you with an FRS 102 Transition Checklist which helps quickly identify the issues you need to focus on. The Checklist retails for €100 + VAT and comes complete with:
- a free template letter to clients explaining the main changes to Irish GAAP and
- a free document listing the Main Differences Between Old Irish GAAP and FRS 102.
Go to http://bit.ly/20XUf7Q for details.
by John McCarthy Consulting Ltd. | Feb 1, 2016 | News
More on Parts of FRS 102 That Are Not Yet Applicable in the RoI
Following on last week’s blog piece about Section 1A Small Entities FRS 102, which as you know, does not yet apply in the Republic of Ireland (RoI). There was an error in the blog which stated that charities that were formed as companies limited by guarantee were precluded from using the FRSSE (Financial Reporting Standard for Smaller Entities). However, with the enactment of the Companies Act 2014, companies limited by guarantee may qualify as ‘small’ and may therefore use the FRSSE. Apologies for any confusion.
Meanwhile we would like to draw your attention to another matter in FRS 102. There are now twenty exemptions (where there were previously 18) in Section 35, which many companies will be trawling through, as they transition to FRS 102 for the first time.
Two additional exemptions in Section 35, namely 35.10 (u) ‘Small entities – fair value measurement of financial instruments’ and 35.10 (v) ‘Small entities – financing transactions involving related parties’ . These exemptions were included in the September 2015 version of FRS 102, specifically for ‘small’ entities.
The exemptions give some relief from the amortised cost rule on, for example, directors’ loans, but companies in the Republic of Ireland cannot avail of them just yet, because the relevant company legislation underpinning these rules has not been enacted. Hopefully this will follow soon after the forthcoming election.
The mechanics of these exemptions is that they relate to comparative information only. Companies will have to account for the transactions in accordance with FRS 102 for the first reporting period that they are allowed adopt FRS 102 and make an adjustment to opening reserves at the beginning of the first reporting period (as opposed to the date of transition).
For more on FRS 102 see the following:
1. Updated Transition Checklist (February 2016 version), for more information please click here.
To assist you with the transition work – retails for €100+VAT and accompanied by free:
2. FRS 102 Training Course
To learn the latest developments in accounting and the related company law, come along to our FRS 102 Accounting Update on Tuesday 1 March 2016 at the Camden Court Hotel, Dublin 2. Places are limited and are filling steadily.
For booking details please click here.
3. FRS 102 Transition Service
Please ask us about our bespoke FRS 102 Transition Service where we will examine client accounts before/after transition and give you a tailored report explaining the issues arising and whether the transition has been successful or not. To enquire just send an e-mail to john@jmcc.ie
Our next blog on Investment Properties and FRS 102 will follow next week.
by John McCarthy Consulting Ltd. | Jan 25, 2016 | News
Section 1A of FRS 102 Not Applicable – Suggested Solution
The unwary reader of the latest version of FRS 102 could be forgiven for not realising that Section 1A Small Entities inserted into FRS 102 in September 2015 to accommodate some exemptions for certain qualifying ‘small’ entities, does not yet apply in the Republic of Ireland (RoI). This is because the necessary amendment to Irish company law has not yet been published nor enacted. We understand the necessary law is in draft but may now be delayed by the forthcoming election.
Three other developments are also delayed because they depend on the same legislation in the RoI:
1. Paragraph 19.23 of FRS 102 regarding the useful life of goodwill was updated in September 2015. This allowed that ‘if in exceptional circumstances, an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed 10 years.’ This change was made in the UK following their implementation of the EU Accounting Directive. However, the equivalent change has not taken place in the RoI for the same reasons mentioned above. Therefore, the previous version of paragraph 19.23 still applies for the time being in RoI. That stated that the maximum life of goodwill, in the absence of a reliable estimate, shall not exceed 5 years.
2. FRS 105 the Micro-entities Regime, does not yet apply in the Republic of Ireland. It is expected that this legislation, when enacted, will exempt certain private companies (within certain criteria) from the requirement to disclose directors’ remuneration. They may also show all below market interest rate inter-company and directors’ loans at cost instead of amortised cost under FRS 102. The relevant criteria are that turnover must be less than €700,000, Balance Sheet Gross Assets less than €350,000 and less than 10 employees, provided two out of three of the criteria are satisfied for two consecutive years.
3. Appendix VI of FRS 102 which, in previous editions of the standard, listed the relevant RoI company law references, was not included in the September 2015 FRS 102 as the FRC state they will update the legislative references once the EU Accounting Directive is implemented.
To comply with EU Directives, the company legislation is required to be effective for accounting periods beginning on or after 1 January 2016. It is not yet clear whether the legislation or its commencement provisions will allow for application to earlier accounting periods such as those beginning on/after 1 January 2015.
Interim solution
In the meantime, for client companies that qualify (i.e. not regulated insurance intermediaries) the 2015 version of the FRSSE (Financial Reporting Standard for Smaller Entities) is available for periods commencing on/after 1 January 2015 for one year only.
This standard is useful as it:
- Allows for an exemption from the cash flow statement, which FRS 102 does not currently do, unless the company qualifies under FRS 101;
- Allows for below market interest rate inter-company and directors’ loans to be stated at cost;
- Largely retains the old Irish GAAP accounting rules for one last year;
- Avoids the need to transition to FRS 102 for the time being.
by John McCarthy Consulting Ltd. | Jan 15, 2016 | News
FRSSE and Companies Limited by Guarantee
A query came in from a client recently about the application of the FRSSE to charities for 2015. It’s worth repeating here, as general knowledge about the application of the FRSSE. Here is the query ‘I read somewhere that charities in Ireland cannot apply FRSSE and must go to FRS 102 for periods beginning on or after 1st January 2015, because they are classed as public companies, is this correct?’
Our response:
The Financial Reporting Standard for Small Entities 2015 was published in July 2013. It applies for one year only to financial statements of ‘small’ entities (as defined in company law) for accounting periods commencing on/after 1 January 2015.
In order to understand how to apply any standard, it is always a good idea to read the Scope section. The Scope Section is in Part 1.1 and footnote number 9 explains that companies entitled to the small company criteria can use the FRSSE.
I don’t know the date article of the you are referring to, but since 1 June 2015 (under the CA 2014), companies limited by guarantee (including many charities) may now avail of the ‘small’/’medium’ thresholds and file abridged accounts, among other things. See more below. The way in which the CA 2014 was brought into law was unprecedented, as it was based on the date the accounts are approved by the Directors.
Let’s take two companies ‘A’ and ‘B’, both limited by guarantee, with a 31 December 2014 period end. Company ‘A’’s financial statements are approved on 21 May 2015 (i.e. under the Companies Acts 1963 to 2013), while Company ‘B’’s financial statements are approved on 21 June 2015 (under the Companies Act, 2014).
The effect of these approval dates are that Company ‘A’ cannot avail of:
• Audit exemption
• Exemption from the presentation of the Cash flow statement under FRS 1
• Abridged financial statements
• The FRSSE as it is not deemed to be a ‘small’ entity, but the equivalent of a ‘public’ company as the financial statements were approved before the enactment of the Companies Act, 2014.
Company ‘B’ however can avail of:
• Audit exemption, unless it is a charity with income in excess of €100,000 when the Charities Act, 2009 requires it to have an audit
• Exemption from the presentation of the Cash flow statement as it is a ‘small’ entity
• Abridged financial statements
• The FRSSE as it is now deemed to be a ‘small’ entity, unless it is a financially regulated entity i.e. an insurance broker (as well as certain other companies included in Sections 8 and 9 of the FRSSE 2015) as the financial statements were approved on/after the date of enactment of the Companies Act, 2014.
by John McCarthy Consulting Ltd. | Nov 13, 2015 | News
The Consultative Committee of Accountancy Bodies (CCAB) in the UK has issued two new guides entitled ‘Accountants and Counter-Terrorist Financing and ‘Staying Safe within The Money Laundering Regulations’ for its accountant members.
These latest updates act as a useful reminder of some 13 essential steps that every accounting entity and Money Laundering Reporting Officer (MLRO) should already be implementing.
It is worth re-visiting these essential steps now. The guide states that you should:
1. Know your client and their business;
2. Appoint a MLRO and train your staff as to their obligations (as part of the training, the staff need to complete some form of assessment to prove they have understood the training);
3. Record and monitor details of the client’s identity;
4. Monitor money laundering identity evidence and report to the MLRO and
5. Record the MLRO’s decisions to report externally or not.
Being practical about all this means that there are eight things relating to AML for every client that need to be in place at all times:
1. Risk assessment (RA) of the client and their business;
2. Evidence of identity that the client actually exists (photo and address ID);
3. List of the names of the management of the entity;
4. Based on RA – get evidence of identity for management;
5. List of beneficial owners (BO)> 25% of capital/profits/votes;
6. Based on RA – get evidence of identity for BO – these must always be individuals;
7. Sufficient Know Your client (KYC) information about the company to help understand what is ‘normal’ for the client and
8. Written evidence should be available that steps 1-7 are always up to date.
When the client is an individual, you need to have evidence that numbers 1, 6, 7 and 8 are in place.
Last of all, carry out a regular documented review (called an Annual Compliance Review) of all the above and retain evidence of this review, even if there is no need to change the risk rating or due diligence carried out on your clients.
To hear more about your AML risks and responsibilities come to our three hour CPD course on 16 December 2015 at the Camden Court, Hotel Dublin 2, from 9.30am to 12.30pm. For booking and more information go to EventBrite
by John McCarthy Consulting Ltd. | Nov 12, 2015 | News
Bad Debts and FRS 102 – Specific Documentation Please
Things were a lot simpler five hundred years ago in 1515 and that’s an understatement. Luca Pacioli, generally recognised as the father of modern accounting, had two years left to live and accounting for bad debts was much less complex then than under the new FRS 102.
For accounting periods commencing on or after 1 January 2015, the accounting rules have changed for measuring and recognising bad debts. Under old Irish/UK GAAP bad debts were dealt with under the rules for provisions in FRS 12. Provisions in FRS 102 are covered by Section 27 ‘Impairment of Assets’ but the scope section specifically excludes ‘financial assets within the scope of Section 11 Basic Financial Instruments or Section 12 Other Financial Instruments Issues’.
As regards specific bad debt provisions the concept under new GAAP is that a bad debt is seen as an impairment of an asset while under the old rules it was regarded as a provision in case a debt goes bad. It is not acceptable under FRS 102 to make a general bad debt provision.
Because the comparatives for 2014 will also need to change, (and they will have been prepared under old GAAP) there will be a potential impact on the figures already calculated and a knock-on effect on the amount that is tax deductible. The Revenue Commissioners have introduced a five year spreading mechanism in Section 42 FA 2014 which amends Schedule 17A TCA 1997 for these and similar types of difference.
The comments here are based on the Financial Reporting Council (FRC) Staff Education Note 3 (there are 16 SENs issued to date and all are well worth reading).
Current Irish and UK accounting standards
There is a general requirement in Irish/UK company law that current assets must not be stated at more than their net realisable value. For those entities not applying FRS 26, there is little detail in current UK accounting standards on impairment of current financial assets (as opposed to fixed assets and goodwill, which are covered by FRS 11 Impairment of Fixed Assets and Goodwill). The route to justifying the quantum of bad debt provisions in the future is more complex.
FRS 102
The requirements in Section 11 of FRS 102 for impairment of financial assets make it clear that to record a write down (which a provision, in effect, is), there needs to be objective evidence, for an asset or group of assets, that there is an impairment. It would be wise to document that objective evidence, especially if your financial statements are subject to audit.
The standard gives a (non-exhaustive) hierarchy in paragraphs 11.22 and 11.23 of examples of objective evidence, which includes adverse changes in industry conditions. A blanket percentage (or general provision) applied to the whole sales ledger, while prudent, can no longer be justified in terms of the language in FRS 102.
As SEN 3 states ‘it may not be sufficient to only use days past due to calculate bad debt provisions (i.e. impairment losses on trade debtors). It is likely that the debtors will need to be stratified by more than just days past due, in order to reflect other credit risk characteristics, and the formula needs to reflect actual experience of delinquency, which is expected to continue. Such formulae would need to be kept under active review, and reflect changes in credit risk characteristics, such as a change in the customer base, not just historical loss experience.’
The bottom line is to retain certain documented experience of bad debts e.g. debts that age past 120 days which may often not be settled, so that a provision could be put in place for some or all of those balances.
