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 21, 2014 | News
Groups, stand alone companies and company directors may have, in the past, relied on informal arrangements and verbal agreements. They may now wish, as a result of the rule changes in FRS 102, to introduce more formal documentation to ensure their intentions are reflected in the contractual terms and in the accounting, so as to reduce any unintended consequences of these loans.
This latest blog in our series on the new accounting standard FRS102 considers the impact of its rules on an area that will impact most SMEs, namely, the accounting treatment for intercompany and directors’ loans.
This standard will impactnearly all privateentitiesinonewayoranother, fom 1 January 2015 and this particular topic of inter-company and directors’ loans will prove to be one of the most tortuous to explain to clients.
It is quite common for groups to manage their finances by setting up loans between parent and subsidiaries, or directly between subsidiaries. Many private companies in Ireland are owner-managed and long term loans between many company directors and their companies are very common.
These arrangements are mainly for commercial reasons and often allow cash to be used where it is most needed and may well be cheaper than using external finance, especially if the entity receiving the loan is perceived as risky so that the rate it could borrow at externally would normally be higher.
Often, though, the loans are not on any documented commercial terms. Perhaps they bear a low interest rate or more often no specified interest rate and no set repayment terms. This lack of formality in their repayment arrangements and these non-commercial aspects of intra group and directors’ loans can have ‘interesting‘ accounting consequences under trong>FRS102.
Initial recognition
Inter company loans, like all financial assets and liabilities, are within the scope of either Section 11 (‘Basic Financial Instruments’) or section 12 (‘Other Financial Instruments Issues’) of FRS 102. Most are likely to be in Section 11, being debt instruments .Most loans to and from subsidiaries that are repayable on demand are explicitly listed in section 11 as likely to fall within its scope.
These basic instruments are initially measured at ‘the present value of the future payments discounted at a market rate of interest for a similar debt instrument’. After this initial recognition they are measured at amortised cost using the effective interest method, which means an interest charge is recognised systematically over the life of the loan, giving a constant rate of return.
When a company adopts FRS102 for the first time, it must assess all of its accounting policies and ensure that the assets and liabilities on its transition date balance sheet (i.e. in most cases 1 January 2014) are measured in accordance with the standard (except where there are specific exemptions). The amortised cost method will, in most cases, cause interest charges/income to be recognised in spite of the absence of cashflows.
Where zero-coupon loans have previously been held, unadjusted, at their face value, the balances will need to be revisited to re-present them using the amortised cost rules in FRS102.
Example
Let’s take the example of Director A, a director of a Company B, a private company, which adopts FRS 102 in its December 2015 accounts and, therefore, has a 1 January 2014 transition date.
Let’s assume that at the beginning of 2012, B took a €100,000 interest free loan from A, its director, with a five-year 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 in 2012 to establish what the accounting would have been from the outset. The revised presentation of the loan in the accounts under FRS 102 would be as follows:
| Year |
Opening balance |
Interest at 12% |
Closing balance |
| 2012 |
56,743 |
6,809 |
63,552 |
| 2013 |
63,552 |
7,626 |
71,178 |
| 2014 |
71,178 |
8,541 |
79,719 |
| 2015 |
79,719 |
9,567 |
89,286 |
| 2016 |
89,286 |
10,714 |
100,000 |
The 2013 closing value of €71,178 will be used as the carrying value of the liability in the transition date balance sheet at 1 January 2014, and the accounting continues from there.
FRS 102 is silent about the treatment of the difference of €28,822, According to the book ‘Manual of Accounting – New UK GAAP’ published by PwC in November 2013, (page 11014) states: “…in practice Director A would simply recognise the additional amount as part of the cost of investment in entity B…” Similarly B would recognise the loan liability at €71,718 and record the difference of €28,822 in equity as a capital contribution from the Director.
These numbers would of course, need re-adjustment as the discounted loan unwinds coming closer to maturity.
Protective measures
Few clients will find these accounting rule changes understandable or worthwhile. One response that is likely to be seen in practice is to ensure that there is documentation of all intercompany and director loans to include a term stating that they are ‘repayable on demand’, since section 12 of FRS 102 makes it clear that the fair value of an amount repayable on demand is not less than its face value.
Choosing to include this term, though, does mean that the receiving entity (‘B’ in this example) must show the whole loan amount as a current liability, which could damage the appearance of its balance sheet and thus hamper its ability to raise external finance in the future.
If a loan does not specify any terms, the default would normally be to assume it is repayable on demand, since the borrower has no enforceable right to avoid repaying the money.
Groups and company directors that have in the past relied on informal arrangements and verbal agreements may wish, then, to introduce more formal documentation to ensure their intentions are reflected in the contractual terms and in the accounting, and to help avoid any unintended negative consequences of these loan arrangements.
Relate Software Seminars – 2 – 4 December 2014
Meet John at the Relate Software Seminars taking place in Dublin, Galway and Cork on 2, 3 and 4 December respectively to hear more about this topic. Bookings with Relate at http://relatesoftware.selltickets365.com/
John McCarthy Consulting Seminars 15 and 17 December 2014
Some FRS 102 courses are taking place in Dublin on 15 and 17 December 2014, presented by John McCarthy, using journal entries to show how to prepare the first transition adjustments and the first set of FRS 102 financial statements.
- Camden Court Hotel, 15 December 2014 https://www.eventbrite.ie/e/frs-102-the-journal-entries-dublin-city-tickets-14533001599
- Red Cow Moran Hotel, 17 December 2014 https://www.eventbrite.ie/e/frs-102-the-journal-entries-dublin-red-cow-tickets-14532855161
NEW – FRS 102 Transition Checklist
This comprehensive FRS 102 Transition Checklist pdf publication will be available shortly for €50/ £40 + VAT . It will help users flag and address the issues that will arise on transition to the new accounting standard, which is effective for accounting periods commencing 1 January 2015 and will require the comparatives aligned with FRS 102 from the transition date which for December year ends is 1 January 2014. Watch for our upcoming blog announcing this publication.
John McCarthy FCA, Dip. IFRS, Dip. Insolvency, Certificate in Irish and UK GAAP is Director of John McCarthy Consulting Limited.
He offers consulting and training services to the accounting profession on audit, accounting, insolvency and practice management issues.
