This article was originally published in Accountancy Ireland and is reproduced here with their kind permission.
The New GAAP framework will lead to significant change for most entities, which many will find daunting.
A number of choices are open to Irish and UK entities who currently apply the outgoing standards – depending on the entity’s size, complexity and structure – and it is important to consider the available options carefully.
All existing UK and Irish GAAP standards – Statements of Standard Accounting Practice (SSAP), Financial Reporting Standards (FRSs) and Urgent Issues Task Forces (UITFs) – have been withdrawn. FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, a standard which is, in many ways, relatively similar to existing Irish and UK GAAP, will be the natural choice for the majority of entities.
Alternatively, FRS 101 Reduced Disclosure Framework, which is a standard that uses virtually all the same recognition and measurement rules as EU IFRS but allows significant reduced disclosures in a number of areas,is available for use in the single entity financial statements of qualifying subsidiaries where the group prepares its consolidated financial statements under IFRS. This will allow groups apply a single set of policies but with more manageable disclosure requirements. Small entities, meanwhile, can apply an amended Financial Reporting Standard for Smaller Entitites (FRSSE). This is very similar to the existing FRSSE with a small number of key amendments. It is a short-term option, however,as FRSSE is expected to align with FRS 102 with effect from 1st January 2016 – albeit with reduced disclosures.
All entities will also be entitled to voluntarily apply EU IFRS. However, it is worth noting that the changes being introduced will not broaden the scope of entities required to adopt EU IFRS. The FRC has also introduced FRS 103 dealing with insurance contracts and FRS 104 dealing with interim reporting,each of which will be significant to a certain cohort of companies.
Arising from the changes, many entities will face increased complexity with regard to measurement – particularly as a result of increased use of fair value measurement for some items – with new assets or liabilities and new items of income and expense in their financial statements. New disclosure requirements will also provide challenges.
The transition will therefore present a number of key commercial considerations which need to be addressed and planned for, particularly in respect of multi-year commercial arrangements and tax planning considerations. Transition is required for periods beginning on or after 1st January 2015 with restatement of comparative information. Some key transition options and choices are available, however.
A well-structured conversion plan involves all steps from understanding how the changes in standards will affect your financial statements to having a fully signed-off set of restated financial statements for the first reporting period. It should also result in putting your selected new reporting framework at the heart of your entity’s performance measurement and business reporting structures.
On a broader level, it is important to see transition to new financial reporting standards as more than just an accounting exercise. A multi-disciplinary approach incorporating tax, IT and technical training expertise is required if the transition is to be effective.
There are five key steps in the ‘best practice’ conversion plan.
The new framework builds neatly around four options and two frameworks. Many entities will have more than one choice available but the best fit depends on who you are and who your audience is (see Table 1).
Where a choice exists, the following factors will need careful consideration:
Groups will also need to consider the consistency requirements of company law within a group. Companies Act 2014, for example, requires a parent to ensure that the individual financial statements of the parent and all Irish subsidiaries use the same framework unless they have “good reasons” for not doing so. Groups should bear in mind that there are three options within the Companies Act accounts framework. Some subsidiaries in a group could adopt FRS 101, for example, while others adopt FRS 102 or FRSSE and not fall foul of the consistency rules as all are Companies Act accounts.
There are two important exceptions, however. Consistency rules do not apply if the parent doesn’t prepare group financial statements. The parent may also use IFRS in its individual financial statements if it prepares EU IFRS group financial statements while all subsidiaries may use a different framework, such as FRS 101.
Depending on the nature of your operations and the choices you elect to make, adopting New GAAP will bring key changes in the requirements applicable to your financial reporting. Key matters that will have broad applicability are set out in Table 2, but many others will arise in a host of areas. Preparing financial statements in compliance with the new framework is only one part of the story, however. It is also important to look at the conversion in a broader context and address all areas of impact as part of the transition.
Commercial considerations: It is important to consider the cash tax impact as taxable profits may be increased (for example, as a result of recognising fair value movements as part of reported earnings). Existing tax planning strategies may need to be reassessed while distributable profits and dividend policy could also be affected. Furthermore, debt agreements or facilities may be impacted, particularly with respect to covenants,and the same applies to other agreements such as leases, remuneration and bonus structures. Lastly, internal management reporting and business measurement metrics may need to be realigned and acquisition strategies may ultimately be impacted.
People: There will be a requirement to develop and execute training plans, and manage the orderly transfer of knowledge.
Systems, processes and controls: Those affected will need to identify information gaps, particularly in respect of new required disclosures or key measurement changes, and the needs of the new system. The need for a new chart of accounts will also require consideration, as will the iXBRL tagging requirements for new accounts.
Colm O’Sé is an audit Partner at KPMG.
|Companies Act accounts||IFRS accounts|
|FRSSE||FRS 101||FRS 102||EU IFRS|
|Consolidated ﬁnancial statements for a large or medium Irish or UK privately
|Irish or UK subsidiary of a large or medium privately owned Irish or UK group
(group ﬁnancial statements prepared under FRS102)
|Irish or UK subsidiary of a large or medium privately owned Irish or UK group
(group ﬁnancial statements prepared under EU IFRS)
|Irish or UK subsidiary of an EU-listed parent applying IFRS in consolidated
ﬁnancial statements (with group reporting under EU IFRS)
|Irish or UK subsidiary of a US-listed parent applying US GAAP in consolidated
|Small privately-owned Irish or UK group||✦||✦||✦|
* reduced disclosures may be available where the criteria are met.
|Key differences||Old Irish and UK GAAP||FRS 102||IFRS/FRS 101|
|“Look and feel”||Presentation and layout of ﬁnancial statements||Traditional P&L and balance sheet layout derived from the Companies Act||Broadly as per current GAAP||Standard IFRS layout is signiﬁcantly diﬀerent although FRS 101 users will revert
to the Companies Act layouts
|Volume and detail of disclosures||Smallest volume||Generally more than current GAAP in many areas||Signiﬁcantly more than FRS 102 for full IFRS. Reduced disclosures apply under
|Speciﬁc accounting treatments and disclosures||Functional currency determination||Determination of functional currency requires limited analysis||Detailed analysis required||Detailed analysis required|
|Derivatives (e.g. FX contracts, interest rate swaps)||Generally, held oﬀ balance sheet||All recognised on balance sheet at fair value, more disclosures||All recognised on balance sheet at fair value. Signiﬁcant disclosure
requirements under full IFRS
|Financial assets and liabilities||No speciﬁc standards for ﬁnancial assets||Classiﬁcation and measurement may diﬀer with signiﬁcantly greater use of fair
|Classiﬁcation and measurement may diﬀer. Signiﬁcant disclosure requirements
under full IFRS
|Deferred tax||Not complex, timing diﬀerences approach||Similar model to current GAAP with “timing diﬀerences plus” approach but fewer
exemptions so expect more DT
|Diﬀerent model to current GAAP based on temporary|
|Goodwill amortisation period||Up to 20 years||Presumed ﬁve years or less||No amortisation. Annual impairment test required.|
|Intangible assets||Generally amortised but indeﬁnite lived assets permitted in limited
|All assets amortised, indeﬁnite lives not permitted||All assets amortised, indeﬁnite lives not permitted|
|Investment property||Fair value movements in reserves (unless impairment)||Fair value if reliably measurable – fair value movements in proﬁt or loss||Option to measure at cost or fair value. Fair value movements in proﬁt or loss|
|Borrowing cost capitalisation||Policy choice to capitalise or expense||Policy choice to capitalise or expense||Must capitalise if criteria met|
|Development cost capitalisation||Policy choice to capitalise or expense||Policy choice to capitalise or expense||Must capitalise if criteria met|
|Intercompany balances – interest free of at below market rates||Typically held at face value||May need to apply discounting adjustment to below market interest rate||May need to apply discounting adjustment to below market interest rate|