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September 2013

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The Future of Irish GAAP

Current Irish GAAP is a mixture of company law, FRSs, SSAPs and UITFs, which were developed by the Accounting Standards Board (now the Financial Reporting Council). Although a number of the standards were updated in line with IFRS e.g. financial instruments, other standards remain unchanged and are no longer in line with evolving business practices. The development of a new simplified framework (FRS 102) is the result of a project over a long number of years to standardise financial reporting and move away from the current framework of FRSs, SSAPs and UITFs.

All non-listed entities will effectively have the option of adopting either FRS 102 or IFRS. Although entities could elect to follow full IFRSs when current Irish GAAP is replaced, the relative brevity of FRS 102, at less than 230 pages in length, will appeal to many. The adoption of either FRS102 or IFRS will be mandatory for periods commencing on or after 1 January 2015. 

Applying FRS 102

FRS 102 is derived from the IASB’s IFRS for SMEs, reflecting a simplified version of full IFRSs, but incorporates changes made by the FRC, one of which widens the scope of the standard significantly compared to the IFRS for SMEs. This has the effect that any entity not required to apply full IFRSs will be able to apply FRS 102.


Key areas of accounting impact for Irish GAAP preparers

Topic

FRS 102

Irish GAAP

Acquired goodwill and intangibles

Amortisation, assumed over 5 years where useful economic life cannot be reliably estimated.

Amortisation assumed over maximum life 20 years.

Investment entities

Fair value through profit and loss (FVTPL) allowed where interest in the subsidiary meets the widened definition of ‘held exclusively with a view to resale’.

Investment companies unlikely to be exempt from consolidating subsidiaries.

Share based payments

Relaxation on need to use option pricing model where appropriate to the circumstance of the entity.

Option pricing model must be used.

Multi-employer pension schemes

No exemption from defined benefit accounting in individual accounts where entities in the scheme are under common control.

Wider exemption is available to group entities.

Financial instruments

In general, ‘basic’ financial instruments at cost, and ‘complex’ instruments e.g. derivatives, at FVTPL, limited hedge accounting permitted, no ‘synthetic instrument accounting’ e.g. floating swapped to fixed rate, option to use IAS 39.

Comparatively few rules on financial instruments. Derivatives often ‘off balance sheet’. Some use FRS 26.

Investment property

Use FVTPL unless cannot be measured reliably without undue cost or effort, in which case use cost.

Mandatory revaluation to open market value through STRGL.

Income Tax

Timing difference plus approach used.

Deferred tax calculated using a timing difference approach.

Foreign currency

Transactions recorded in functional currency, not able to use contracted rate.

SSAP 20 ‘Foreign currency translation’ uses local currency.


While the format and presentation of financial statements prepared under FRS 102 will continue on the basis of the Companies Acts requirements, there are significant additional disclosures which include:

  • Cashflow statement unless the company qualifies for reduced disclosure
  • Key judgements and estimates disclosure
  • Statement of compliance
  • Basic and complex financial instruments
  • Key management compensation

A company can avail of reduced disclosures under FRS 102, where the company is a member of a group that prepares publicly available financial statements, which give a true and fair view, in which that member is consolidated. Significant disclosure exemptions include:

  • Cashflow statement
  • Key management compensation
  • Share based payments
  • Financial  instruments

The conversion process

The new standard will be mandatory for periods beginning on or after 1 January 2015. This means that companies with a calendar year end not choosing to adopt early,  will need to be able to prepare the comparatives for that first set of new financial statements for periods beginning on or after 1 January 2014. Early adoption is permitted, with effect for periods ending on or after 31 December 2012.

Companies will be required to assess the impact of moving from to FRS 102 in the following ways:

  • Restated comparative information required (unless impracticable) but unlike IFRS “no third balance sheet” required
  • Reconciliation of equity to be presented at the date of transition and date of last financial statements under Irish GAAP
  • Reconciliation of profit or loss in last published financial statements to FRS 102
  • Transitional provisions for a number of areas including business combinations, assets held at fair value/valuation and share-based payments.

Other considerations

Converting to a new accounting regime is not just an accounting issue. Entities will have to determine the impact of the accounting changes on tax payments and the impact on the effective tax rate arising from changes in the basis of deferred tax. Those with experience of the transition to IFRS a few years ago will have been there before, but for the majority with accounting changes, the tax impact will have to be fully considered and managed.

The financial statements themselves are likely to look different following a change of GAAP and it is important to bear in mind the practical challenges of changing accounts templates, rewriting accounting policies and identifying the required disclosures.

Other business issues which also need to be considered, include:

  • Systems and reporting
    • Can accounting systems currently in place support a revised chart of accounts?
    • How will management reporting and forecasting be affected?
    • Are there any accounting differences which require budgets and forecasts to be updated or reworked?
    • How will the different accounting regime impact on key performance indicators?
  • Remuneration Schemes
    • Are any bonuses, share-based payments or other remuneration structures linked to financial measures? If so, will these schemes need to be revisited as a result of the new accounting regime?
  • Distributable profits
    • How will the new accounting regime impact on dividend payments up through a group structure?
    • Will a pension deficit be recognised, affecting the ability to pay up profits?
    • If reserves are adversely affected, will the capital structure of subsidiaries need to be altered to allow dividend flows through a group?
  • Staff and training
    • Do directors and staff have sufficient knowledge of the content of the new standards to be able to make an informed decision as to which regime to adopt?
    • Is there sufficient staff expertise and resources to manage the change?
    • Will training be required for key staff to implement the accounting changes or to understand the new numbers?
  • Pensions
    • Is there a group defined benefit scheme? If yes, and the multi-employer exemption in FRS 17 is used, which entities in the group will recognise their share of the liability or asset on their individual books under the new regime?
    • How will the new standards impact on the accounting for any pension schemes (particularly group defined benefit schemes no longer able to take the multi-employer exemption under FRS 102)?
  • Banking covenants and finance
    • How will the change impact on the terms of any banking or legal covenants?

Application of the FRSSE

The FRSSE will continue to be available to the numerous small companies and businesses in Ireland, with only some very small consequential changes at this stage, which should not significantly impact those currently using that standard. The Financial Reporting Council (FRC) expects to consult further on the future of financial reporting for small companies once current European Commission proposals to further simplify financial reporting for small companies have been finalised.

Given the significant changes, qualifying companies may consider adopting the FRSSE as opposed to FRS102 as it offers a stable platform, easier application and reduced disclosures. The qualifying criteria is as follows:

  • Turnover less than €8.8m
  • Total assets less than €4.4m
  • Less than 50 employees

Companies must satisfy at least two of the criteria for two years in a row in order to qualify to apply the FRSSE.

Impact of changes on SORPs

Some SORPs will remain in use and will be updated following the issue of FRS 102 in its final form. Therefore entities which currently apply SORPs will, for the most part, still be using them. The three SORPs that have been confirmed as being withdrawn when FRS 102 becomes effective are those for oil and gas, leasing and banking segments. The FRC is undertaking a separate consultation on the future of insurance accounting. This will take the form of a separate standard: FRS103.

Next steps

The introduction of FRS 102 will now mean that a significant number of companies will need to reassess their accounting regime, either by choice or out of necessity. The main lesson from the transition to IFRS in 2005 was that forward planning is vital for a successful transition. Finance teams should ensure they understand their options and the potential impact on their business and put the structures in place for a smooth transition.

Full implementation is not required until 2015 and that may sound a long way off, but an opening balance sheet will be required from 2014. Planning should start now!

Laura Hunter

Laura Hunter

Laura Hunter

Director

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