The wait is over
The arrival of the New Irish GAAP is upon us
The wait is over; for accounting periods commencing on or after 1 January 2015 a large majority of Irish companies will be required to change their financial reporting regime to the new Irish GAAP regime.
Many Irish entities will have already selected their new financial reporting framework, but for those who have not they may have to select to adopt one of the following standards:
- FRS 101 (EU-IFRSs with reduced disclosure) only allowable if they are a qualifying entity i.e. a qualifying entity is a member of a group whose parent prepares publicly available consolidated financial statements, which give a true and fair view, in which that member is consolidated, with certain conditions to be met. FRS 101 accounts are “companies act” accounts, prescribing presentation of primary statements and certain disclosures.
- FRS 102 (replacement for old Irish GAAP). It should also be noted that many of the SORPs have been amended in line with FRS 102.
- FRS 103 is also available, mainly for insurers, however, we shall not focus on it in this article.
While some may choose to adopt IFRS, it is envisaged that most private companies will elect to adopt FRS 102, which is largely based on IFRS for SMEs, with some major adaptations to retain some of the more significant options available under “Old Irish GAAP”.
Companies should be considering the key changes and the main issues that will be faced by a company on the introduction of FRS 102.
Primary Statements & Disclosure notes:
While the format and presentation of financial statements prepared under FRS 102 will continue on the basis of the Companies Acts requirements, some of the primary statements and disclosures will be considerably amended, the following being a high level summary of the impacts:
• Statement of Cashflows is a compulsory requirement, unless the company meets the definition of a qualifying entity under the standard.
• Introduction of a new primary statement: Statement of Changes in Equity.
• Key judgements and estimates disclosure
• Statement of compliance.
• Basic and complex financial instruments.
• Key management compensation.
In general, the tax impact on the transition from old Irish GAAP to FRS101/102 (new Irish GAAP) or IFRS can be split into 3 categories: -
- Transitional Adjustments
The transition to New Irish GAAP/IFRS may result in income or expenses dropping out of the p&l or being double counted. In this case, there are transitional tax measures which capture these amounts that drop out or are double counted and ensure they are adjusted for in the tax computation. The adjustment in the tax computation is usually spread over a period of 5 years.
An example of this might be a fee of, say €300, received in respect of a 3 year contract and which was received and accounted for (prior to the application of New GAAP) up-front as part of taxable trading income. If, under New GAAP, the fee is to be accounted for over the period of the contract at a rate of €100 per year and assuming that the company moves to New GAAP at the beginning of year 2, the position might be as follows:
Irish GAAP Treatment
As the tax treatment would tend to follow the accounting treatment €300 would be taxed in year 1, €100 in year 2 and €100 in year 3. In the absence of a transitional measure, this would result in tax being charged on €500 even though the actual real fee income is €300. The transitional measure requires the double counting (in this case €200) to be identified. This is then allowed as a deductible amount over a period of 5 years.
Ongoing Tax Impact
The timing of income and expenses from a tax perspective will generally follow the accounting treatment. Thus if the changeover to new GAAP/IFRS results in a change to the timing of income/expense recognition for accounts purposes, then this may have a knock on effect on the timing for tax purposes.
This has particular relevance for financial instruments. Under Irish GAAP unrealised gains and losses on financial instruments may not have been fair valued through the p&l. Instead the gains/losses on financial instruments would have been recognised in the p&l when realised and brought into the tax net at this stage also. Under New Irish GAAP, unrealised fair value gains and losses may be recognised in the p&l. The timing of the taxation of such amounts will follow the accounting treatment and thus a company could end up paying tax on an unrealised fair value gain before they have actually recognised that gain. Similarly, a deduction may be available for an unrealised fair value loss in advance of actually realising this loss. Depending on whether there is a gain/loss, this may have a negative/positive impact on cash flow.
Tax Accounting i.e. Deferred Tax etc
The instances in which deferred tax arise are greater under New GAAP/IFRS than under old Irish GAAP. For example under New GAAP, it is likely that a deferred tax liability will need to be recognised on the revaluation of property. This differs from old Irish GAAP in that a deferred tax liability would broadly only have been recognised if there was a binding contract in place to sell the asset.
What exemptions are available under FRS 102?
The key areas where exemptions are available are as follows:
• Presentation of a statement of cash flows and related notes
• Detailed disclosures on the valuation and effect of share-based payment schemes*
• Disclosure of key management personnel compensation and intragroup related party transactions
• Financial Instrument disclosures*+
• Reconciliation of a number of share capital disclosures requirements.
* Only available where equivalent disclosures are included in the consolidated financial statements in which the qualifying entity is included.
+ Not available for financial institutions, which are widely defined.
The exemptions in FRS 102 are available if certain requirements are met:
• the company must be a qualifying entity (defined earlier in this article);
• the shareholders of the company must have been notified in writing and, in general, make no objection to use of the exemption; and
• certain disclosures must be included in the company must state in its financial statements.
Converting to the new accounting regime is not just an accounting or tax issue. Companies will also need to consider the impact of the change on other areas of the business, such as:
• Systems and reporting
Has your accounting system been updated to support the new GAAP e.g. a revised chart of accounts, ability to prepare iXBRL accounts etc?
Has an impact assessment been performed to identify significant accounting changes and impact on KPI’s?
• Remuneration Schemes
Are any bonuses, share-based payments or other remuneration structures linked to financial measures? If so, do these schemes need to be revisited as a result of the new accounting regime?
• Distributable profits
Will the use of a different GAAP 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 new standards to make an informed decision as to which regime to adopt?
Do you have sufficient staff expertise and resources to manage the change?
Has training been arranged for key staff to implement and understand the accounting changes?
Is there a group defined benefit scheme? If yes, and the multi-employer exemption in FRS 17 is currently used, which entities in the group will recognise their share of the liability or asset on their individual books under the new regime?
• Banking covenants and finance
How will the change impact on the terms of any banking or legal covenants?
The introduction of FRS 101, FRS 102, and also FRS 103, will now mean that a significant proportion of companies will reassess their accounting regime either by choice or out of necessity. Forward planning is vital for a successful transition so if your business is not already planning their conversion