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IRISH GAAP In 2015 How the new FRSs will impact accountants The Leinster Society of Chartered Accountants

27 th May 2014

Chartered Accountants House, 47-49 Pearse Street, Dublin 2 www.charteredaccountants.ie

EDUCATING SUPPORTING REPRESENTING

Speakers Deloitte’s •

Oliver Holt

Director of Financial Reporting Grant Thornton’s •

Fergus Condon

Financial Accounting and Advisory Services Partner and •

Peter Vale

Tax partner

Agenda • Introduction • FRS 101 • FRS 102: o General purpose accounting o Financial instruments accounting o Tax implications • Q&A and close

Irish GAAP in 2015

How the new FRSs will impact accountants Oliver Holt

The GAAPs on offer – a menu of choice

Irish GAAP 2015 in a nutshell….

FRS 100

• • ‘Application of financial reporting requirements’

Which standard to apply; application of SORPs; Statement of compliance; effective date; meaning of ‘equivalence’

FRS 101

• • ‘Reduced disclosure framework’

List of disclosure exemptions from full IFRSs for ‘qualifying entities’

FRS 102 FRS 103

• • ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’

Operational FRS derived from the IFRS for SMEs; list of disclosure exemptions from this FRS for ‘qualifying entities’

• • ‘Insurance Contracts’

applicable to entities reporting under FRS 102 that have insurance contracts (including reinsurance contracts) and/or issue financial instruments with a discretionary participation feature.

Other

FRS 100 – who does what?

7 Currently applying;

Required to apply EU adopted IFRS

(i.e. Listed group)

Opted to apply IFRS Irish FRS FRSSE

Proposed: Reduced disclosures?

No change No

Option:

IFRS (no change), or FRS 102

Option:

The GAAPs on offer – decision-making time

• • • • • FRSs 100-103 effective for periods beginning on/after 1 January 2015 Early adoption permitted: for FRS 102 – December 2012 onwards Transition to IFRSs possible at any stage Expect further consultation on the FRSSE Timeline for a calendar year end reporter:

Today, you are here!

FRSs 100-101 FRS 102 FRS 103

2012 Early adoption permitted 2013 2014 2015 1 January 2014

date of transition

31 December 2014

comparative balance sheet

31 December 2015

first year-end balance sheet

Introducing FRS 101 ‘Reduced Disclosure Framework’

What is FRS 101 exactly?

FRS 101 financial statements are… Prepared using IFRS recognition and measurement bases Technically Companies Act accounts (therefore must comply with company law) Granted a number of disclosure exemptions Available to “qualifying entities” in individual financial statements only FRS 101 Financial statements

Who is eligible to apply FRS 101?

A qualifying entity is…

• • • •

A member of a group where the parent prepares publicly available consolidated financial statements which are intended to give a ‘true and fair’ view and include equivalent disclosures at group level Included in those consolidated accounts Shareholders must have been notified in writing - objection thresholds (5% of total or 50% of the minority) Entity must make certain disclosures in its financial statements - compliance note; exemptions taken What does this mean in practice?

Most parents and subsidiaries will be qualifying entities No explicit requirement for the consolidated accounts to be prepared under IFRS Disclosure reductions are available in separate (company only) financial statements

FRS 101 accounts are Companies Act accounts

What does this mean?

Companies Act formats for primary statements Negative goodwill on balance sheet Companies Act required disclosures Goodwill impairment shall be reversed if conditions reverse FRS 101 and the Companies Act Discontinued operations must be on face of P&L Grant accounting – netting off prohibited Not permitted to fair value earn-outs

What are the disclosure reductions?

As specified by FRS 101 Not currently required in Irish Disclosed on a group basis Other • Cash flow statement & notes (IAS 7) • Key management compensation (IAS 24) • Share-based payments (IFRS 2) • Financial instruments (IFRS 7) † • Fair values (IFRS 13) † • Acquisitions (IFRS 3) • Cashflows from discontinued operations (IFRS 5) • Impairment (IAS 36) • Comparative data (IAS 16, 38, 40) • Third balance sheet (IAS 1) • Capital management (IAS 1) † • Standards not yet applied (IAS 8) • Group related party transactions (IAS 24) † No exemption for financial institutions © 2014 Deloitte & Touche

What about financial institutions?

Financial institutions can be qualifying entities, but may not take all of the exemptions provided by FRS 101.

The Glossary to FRS 100 gives a long list of entities which are financial institutions, including: • Banks, building societies, credit unions, custodian banks, broker-dealers, stock-brokers, insurance entities, friendly societies, investment trusts, VC trusts, unit trusts, open-ended investment companies and retirement benefit plans

There is also a relatively broad 'catch-all' which may be tougher to apply in practice:

“A financial institution is…any other entity whose principal activity is to generate wealth or manage risk through financial instruments. This is intended to cover entities that have business activities similar to those listed above but are not specifically included in the list above.

A parent entity whose sole activity is to hold investments in other group entities is not a financial institution.”

FRS 101 – characteristics and implications

• • Key characteristics of IFRSs/FRS 101 Greater use of fair value as a measurement basis, increasing focus on obtaining reliable results FRS 101 provides a reduced disclosure regime for some qualifying group companies – but new complexity of interaction with the Companies Acts.

• • • • Key implications More complexity than Irish GAAP in recognition, measurement and disclosure International comparability Ease of group reporting More changes from Irish GAAP and therefore potentially more significant tax impacts

FRS 101 – to adopt or not to adopt?

More than accounting Impact on tax/gearing compensation Current group framework/s

- compatible?

Cost of Conversion

- minimise?

Things to think about… Distributable profits

- decreased?

Companies Acts formats

- significant complexities?

Early adoption

- beneficial?

Disclosure reductions

- permission?

iXBRL - affected?

Leinster Society of Chartered Accounts

FRS 102

May 2014

Fergus Condon

Peter Vale

Partner Grant Thornton

FRS 102 – its origins.

• Based largely on IFRS for SMEs but with numerous differences • 35 sections grouped by topic • Glossary of defined terms • Not a

'one-stop shop'

– – still need to meet statutory requirements too – cross reference to IFRS in some instances – full IFRS for EPS, segment reporting and extractive industries • 'PBE' prefix for paragraphs specific to public benefit entities © 2014 Grant Thornton Ireland. All rights reserved.

FRS 102 – Heat Map

High Defined benefit pensions Fixed assets Impact on Financial Statements Medium Deferred Tax Leases Low Cash Low Revenue recognition / Financial Instruments Investment property Foreign currency Presentation of financial statements Medium Impact on process /systems Inter-company Business combinations/ goodwill Impairment Review High © 2014 Grant Thornton Ireland. All rights reserved.

Transition requirements

Summary of transition requirement

• statement of compliance to be included • full comparatives presented (opening balance sheet not required) • retrospective accounting except for certain areas – de-recognition of financial assets and financial liabilities – hedge accounting – accounting estimates – discontinued operations – measuring non-controlling interests • certain exemptions available which will be highlighted in sections below .

Summary of transition considerations

• explain how transition affected reported financial position and performance by: – nature of change in accounting policy – reconciliation of equity from one framework to the other at date of transition and end of period – reconciliation of profit/loss from one framework to the other at the end of the period.

FRS 102 – Areas requiring most consideration

Employee benefits – key differences – compensated absences

Current Irish GAAP: FRS 17: Retirement benefits

• no requirement to accrue for compensated absences such as sick leave

FRS 102: Section 28: Employee Benefits

• If an entity compensates employees for absences for various reasons(eg annual leave), and if these accumulate, then an entity shall recognise the expected cost of these absences when the employees renders the service.

• HR systems should be assessed to ensure capabilities for capturing necessary information.

Employee benefits – key differences – benefit schemes

group

defined

Current Irish GAAP

• group scheme = multi-employer scheme • group DB schemes can be

off balance sheet

for all group entities (except consolidated accounts), all companies account for scheme as DC

FRS 102

• group scheme ≠ multi-employer scheme • group DB schemes either entirely on

legally responsible employer

or accounting follows stated policy or

contractual agreement.

Employee benefits – key differences – multi-employer schemes

Current Irish GAAP

• can be accounted for as though it were a

defined contribution

arrangement provided the employer is unable to identify its share of the underlying assets and liabilities in the scheme on a consistent and reasonable basis

FRS 102

• can also be accounted for as a DC scheme but there is also an additional requirement to

recognise a liability for any funding arrangement

that has been agreed with the pension scheme.

Employee benefits – key differences – defined benefit schemes

Current Irish GAAP

• the cost relating to movements in the net liability is recognised in

P&L

aside from actuarial gains/losses which are recognised in the

STRGL

• an expected return on plan assets is recognised as income in the

P&L

and the interest cost relating to scheme liabilities is recognised separately as an expense

FRS 102

• cost relating to movements in the net liability is recognised in

P&L

except for the effects of

re-measurement

which are recognised in

OCI

• re-measurement comprises actuarial gains/losses

and

the return on plan assets,

excluding

amounts included in net interest on the net liability.

Employee benefits – key differences – defined benefit schemes

continued

Current Irish GAAP

• the net surplus/deficit (

net

of deferred tax) is presented on the balance sheet after other net assets • no requirement to obtain a full actuarial valuation (by a professionally qualified actuary) at each balance sheet date.

FRS 102

• deferred tax not netted against the net surplus/deficit but shown

separately

as part of the remaining deferred tax balance • no requirement to use an independent actuary to perform the actuarial valuation and no requirement to perform a comprehensive actuarial valuation annually.

Revenue – reference comparison and key differences

Current Irish GAAP

•

FRS 5

application note G – principles similar to IAS 18 – looks more from point of view of asset/liability recognition

FRS 102

•

Section 23 -

derived from IAS 18 • mostly similar to Irish GAAP but… – look at the detail – benchmark existing policies against FRS 102 – requirements

do not take it for granted they will be the same.

Business Combinations - Key differences: intangible assets acquired

Current Irish GAAP

• recognise intangible asset separately from goodwill if: – identifiable – can be measured reliably • identifiable includes being able to dispose of asset

separately

FRS 102

• recognise intangible asset separately from goodwill if: – identifiable – can be measured reliably • identifiable means separable

arising from contractual or legal rights • fair value can normally be measured reliably.

Business Combinations – Key differences: amortisation of goodwill and intangible assets

Current Irish GAAP

• if life is finite, amortise over life • rebuttable presumption that useful life does not exceed 20 years • if life is indefinite: – do not amortise – test for impairment annually

FRS 102

• life is always finite • amortise over useful life • life limited to

five years

unable to make reliable estimate

of life.

Investment properties – key differences

Current Irish GAAP: SSAP 19: Accounting for investment properties

• • • • revalue to open market value movements to STRGL property must be complete before being recognised as an investment property property let to another group company is specifically excluded from the definition of an investment property

FRS 102: Section 16: Investment property

• • • • • • definition differences fair value at each reporting date – unless cannot measure reliably

without undue cost or effort

movements to

profit or loss

deferred tax on movements no requirement for property to be complete if IP is part of a group, it is

not specifically excluded

therefore if primary aim of holding property is capital appreciation, it may be classified as an investment property.

Property, plant and equipment – key differences

Current Irish GAAP: FRS 15: Tangible fixed assets

• cost or revaluation – class-by class basis • property revaluation usually on

existing use value

FRS 102: Section 17: Property, Plant and Equipment

• cost or revaluation – class-by class basis includes borrowing costs • revaluation at

fair value

• less prescriptive on qualification of valuer or frequency of valuation • no automatic impairment review where life > 50 years.

PPE - On transition

• option to use fair value at date of transition as deemed cost for fixed assets (on an individual asset basis). May be applied to assets previously measured using cost or revaluation method. No subsequent revaluation requirement • NB: even where fair value is used as deemed cost , under company law it is still a revalued amount and therefore CA 1986 Alternative Accounting Rules apply i.e. there will need to be a revaluation reserve • clients should consider whether external valuations will need to be obtained at date of transition (1 January 2014).

Foreign currency translation – reference comparison and key differences

Current Irish GAAP

• present accounts in 'local' currency • for foreign operations: choice of closing or average rate for P&L • goodwill: choice of treatment • no recycling of exchange differences on disposal of foreign operation

FRS 102

• prepare accounts in functional currency • may present in

any currency

• foreign operations: - actual rate or average as approximation for P&L • goodwill

is retranslated

• no recycling of exchange differences on disposal of foreign operation.

FRS 102 – focus on financial instruments

Oliver Holt Director of Financial Reporting Deloitte & Touche 36

Choices available

Financial instruments – accounting policy choice

IAS 39 FRS 102 IFRS 9 Level of disclosure depends on type of entity Sections 11 & 12

• Entities reporting under FRS 102 have accounting policy choice over which recognition & measurement requirements to apply for financial instruments • Disclosure requirements of FRS 102 always apply

Choices available

Financial instruments – accounting policy choice under FRS 102

All options available now

• Can take option to apply recognition and measurement provisions of

IFRS 9: Financial Instruments

before EU endorsement

No mandatory change for some entities

• Relevant provisions of IAS 39 equivalent to FRS 26 so an entity currently applying UK GAAP including FRS 26 can avoid change (in short term)

38 It is a free choice for all FRS 102 reporters

• No requirement for entities currently required to apply FRS 26 to apply IAS 39 or IFRS 9 under FRS 102. They are free to choose to apply sections 11 & 12

Needs to be considered early

Key changes

Overview

Fair value Derivatives

• Investments in equity instruments at FVTPL or cost if FV can not be measured reliably • All ‘non-basic’ debt instruments at FVTPL • Contracts scoped out of s11 & s12: non-typical features at FVTPL • Most derivatives in scope of s11 & s12 on balance sheet at FV • Exceptions: basic loan commitments & some derivatives over equity instruments

Hedge Accounting

•

No “synthetic accounting

” • To apply hedge accounting, relationships must be formally documented, designated & tested • More restrictive than IAS 39, but similar mechanics

Disclosure

• Exemptions available for qualifying entities that are not financial institutions • Additional disclosures required for financial institutions

Key changes

Basic/ ‘non-basic’ financial instruments

What is a basic financial instrument?

• • Cash Debt instruments meeting certain conditions

  

Basic debt instruments

A zero coupon bond with fixed maturity A loan paying LIBOR + 2% with an option to repay at par plus accrued interest A loan paying a fixed rate of interest with a make-whole provision    

Non-basic debt instruments

Key changes

Basic / ‘non-basic’ & measurement

Basic debt instruments

• Generally amortised cost • Some short term payables / receivables at cost • Fair value option available, subject to conditions

Equity instruments (and derivatives over equity instruments)

• Fair Value Through Profit or Loss (FVTPL) if fair value reliably measurable • Otherwise at cost

Basic loan commitments

• Cost less impairment

Everything else

• Fair Value Through Profit or Loss (FVTPL)

41 Assets not at FVTPL assessed for impairment at end of each reporting period

Key changes

Derivatives

What is a derivative?

A financial instrument or other contract with all three of the following characteristics: (a) its value changes in response to the change in a specified underlying variable; (b) it requires little or no initial net investment; and (c) it is settled at a future date. • •

Examples:

A contract to purchase 100 barrels of oil for $95 dollars in three months time (a commodity forward) A contract to exchange cash flows of 5% for LIBOR on a notional of £100m every 6 months for the next 5 years (an interest rate swap)

Not all derivatives are within the scope of sections 11&12: ‘Own use’ scope exemptions for some contracts 42

Key changes

Synthetic accounting – not permitted under FRS 102 • Current practice under Irish GAAP excluding FRS 26. Derivatives accounted for in combination with hedged exposure: Issued floating rate debt Pay fixed - receive float IRS Issued fixed rate debt Forecast $ purchase Buy $: Sell £ forward contract Forecast £ purchase

Key changes

Hedge accounting – comparison of requirements

Section 12 IAS 39 Eligible hedged items

Specified risks in specified items only Must impact P&L. Non-financial items: FX or all risks

Eligible hedging instruments

List of instrument types terms – restrictions on All derivatives excl. some written options. Non derivatives for FX

Effectiveness requirements

Prospective only – must be ‘highly effective’ Prospective & retrospective effective’ – must be ‘highly

IFRS 9 +

Risk components in non-financial items, aggregated exposures, net positions…

Non-derivatives at FVTPL. Accounting for options improved Prospective only – no quantitative requirement

Key changes

Disclosure requirements Section 11 Section 12 Section 34 ≈ IFRS 7 Section 11: Basic Financial Instruments – General financial instruments disclosures apply to instruments is scope of sections 11 & 12 Section 12: Other Financial Instruments Issues – Hedge Accounting disclosures Section 34: Specialised Activities – Financial institutions disclosures

Income tax

Income tax – key differences

Current Irish GAAP: FRS 19: Deferred tax

• timing differences approach for deferred tax • no deferred tax on: – revaluations (usually) – fair value adjustments on acquisition • permitted to but not required to discount deferred tax assets/liabilities to reflect time value of money © 2014 Grant Thornton Ireland. All rights reserved.

FRS 102: Section 29: Income tax

• • timing differences

plus

approach • will have deferred tax on: – revaluations – fair value adjustments on acquisition

not

permitted to discount deferred tax assets/liabilities.

Income tax – Recognition and Measurement

Recognition

• DT shall be recognised in respect of

all timing differences

except as otherwise allowed (see subsequent slide).

Measurement

• Use rates and laws enacted by the reporting date and that are expected to apply to the reversal of the timing difference except for: 1.

DT relating to a non-depreciable asset (such as land) measured using the revaluation model – use tax rates/allowances applying to sale DT relating to investment property measured at FV – use tax rates/allowances that apply to sale of asset © 2014 Grant Thornton Ireland. All rights reserved.

Income tax – Recognition and Measurement

Exceptions to deferred tax rule:

• Unrelieved tax losses and other DT assets to the extent that it is probable they will be recovered against reversal of DT liabilities or other future taxable profits • No DT on permanent differences (e.g. income/expense not taxable, tax charges/allowances are greater /smaller than related income/expense in accounts) except where: There are differences between the amounts recognised on

acquisition

for accounting purposes and the amounts deductible/chargeable for tax purposes in respect of assets and liabilities acquired.

An adjustment is made to the

goodwill

for the deferred tax recognised.

Income tax – the plus part

Deferred tax on revaluations and fair value adjustments

• required in Irish GAAP where assets were marked to market but none where no binding agreement to sale was entered into at y/e date • FRS 102 requires DT on revalued assets

regardless

of whether binding sale agreement is in place • therefore additional DT on: • revaluations • fair value adjustments to assets and intangible assets arising from business combinations (excluding goodwill).

Income tax – presentation differences

Tax reconciliation note: • under FRS 102 the tax reconciliation should be to the total tax charge from continuing operations (rather than to current tax under current Irish/UK GAAP). This means that temporary/timing differences are unlikely to be reconciling items.

Income tax – cash tax issues

What are the key tax issues

• Will FRS 102 impact on the amount of corporation I have to pay?

• How will any transitional adjustments be dealt with?

• Does any of my tax planning rely on accounting treatment? How will FRS 102 impact on this planning?

• Does FRS 102 open up any future planning opportunities?

• Am I ready for it?

Income tax – transitional adjustments

Amounts being taxed twice or falling out of tax net

: • Starting point for corporation tax computation is typically the accounting profit.

• If there are transitional adjustments on conversion to FRS 102, how are these treated for tax purposes?

• The general rule is that nothing will fall out of the tax net and that nothing will be taxed twice • A 5 year spreading of any adjustments is provided (note legislation will be amended to extend scope of existing transitional rules to FRS 102) © 2014 Grant Thornton Ireland. All rights reserved.

Income tax – transitional adjustments - example 1

Profits falling out of tax net

: • Assume cost of financial instrument during FY1 • Fair Value at end of FY1 • Instrument sold in FY2 100,000 150,000 180,000 • FY1 - accounts prepared under Irish GAAP (realised basis) • FY2 - accounts prepared under IFRS (P&L includes fair value adjustments) • In FY2, the company will be taxed on FV movement of €30k.

Income tax – transitional adjustments - example 2

Double counting of expenses

: • FY1 - Co. A incurs R&D expenditure of €300k.

• Co. A expenses full €300k in P&L in FY1. Accounts prepared under Irish GAAP in FY1 • Co. A prepares accounts under IFRS in FY2 and the €300k is capitalised and amortised over 3 years.

• Potentially, the amortisation of the €300k creates a further stream of tax deductions, ie double counting of tax deductions • Schedule 17A ensures that the “extra” deductions are taxed over a 5 year period €40k each year starting in FY2 • Note timing benefit © 2014 Grant Thornton Ireland. All rights reserved.

Income tax – transitional adjustments – Revenue position

Transitional adjustments – Revenue and legislative position

: • Transitional adjustments under FRS 102 currently not catered for under Irish tax legislation • Widely held assumption is that the existing provisions in Schedule 17A covering IFRS transition will be replicated for FRS 102 • Finance Bill 2014 is expected to reflect above view • Change in legislation will be minor • Any early adopters can reasonably take this position now © 2014 Grant Thornton Ireland. All rights reserved.

Questions?

Questions/comments?

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IRISH GAAP in 2015 How the new FRSs will impact accountants The Leinster Society of Chartered Accountants

27 th May 2014

Chartered Accountants House, 47-49 Pearse Street, Dublin 2 www.charteredaccountants.ie

EDUCATING SUPPORTING REPRESENTING