New GAAP New GAAP New GAAP

• The introduction of the FRC’s New GAAP framework is the biggest financial reporting change for most companies in a generation
• All existing UK and Irish GAAP standards – SSAPs, FRSs and UITFs – have been withdrawn
• A number of choices are open to Irish and UK entities who currently apply the outgoing standards – the choice you take will depend on your size, complexity and structure
• FRS 102 – a standard relatively similar to existing Irish and UK GAAP – will be the natural choice for the majority of entities but it is important to think about your options carefully
• Many entities will face increased measurement complexity – particularly as a result of increased use of fair value measurement for some items
• New disclosure requirements will provide challenges
• The transition will present a number of key commercial challenges which need to be considered and planned for, particularly in respect of multi-year commercial arrangements and tax planning considerations
• Transition is required for periods beginning on or after 1 January 2015 with restatement of comparative information
• Some key transition options are available and key choices to be made
• For many entities, there will be a lot to do. Transition should be executed in a considered way well in advance of your first reporting date under the New GAAP. The time to act is now!

When migrating from current standards, you will need to consider which one of the available options will work best for you:

• EU IFRS – required for listed entities but all entities may elect to apply
• FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, a new standard based heavily on the IASB’s “IFRS for SMEs” – all entities, other than those required by regulation to apply EU IFRS can apply. Some reduced disclosure reliefs are included within FRS 102 which apply to certain subsidiaries and parent entities (see “qualifying entities” below)
• FRS 101 “Reduced Disclosure Framework” – a separate standard designed to allow certain subsidiaries and parent entities of Group’s who apply EU IFRS to have common policies without needing to apply the exhaustive disclosure requirements of all IFRSs (see “qualifying entities” below)
• FRS 103 “Insurance Contracts” – a separate standard relevant to entities applying FRS 102 that have insurance contracts
• FRSSE “The Financial Reporting Standard for Smaller Entities” – available only to small entities.

In all cases, you can elect to ‘trade up’ to a higher tier, for example where you may have future plans towards a possible listing or other fund raising opportunities in mind or for peer group comparison purposes.

Where a choice exists, a number of factors will need careful consideration:

• Stakeholder needs and expectations, including banking and funding counterparties
• Peer Group comparison requirements
• Medium or long term financing or listing considerations
• Appetite for disclosure
• Treatments applicable to your particular assets, liabilities or key transactions

Frequency of changes to frameworks: EU IFRS likely to have more frequent changes as new and amended standards modify requirements.

1. Commercial considerations

• Cash tax impact – taxable profits may be increased (for example, as result of recognising fair value movements as part of reported earnings)
• Existing tax planning strategies may need to be reassessed
• Distributable profits and dividend policy may be affected
• Debt agreements or facilities may be impacted, particularly with respect to covenants
• Other agreements – leases, remuneration and bonus structures
• Internal management reporting and business measurement metrics may need to be realigned
• Acquisition strategies may be impacted.

2. People considerations

• Develop and execute training plans
• Knowledge transfer.

3. Systems, Processes and Controls

• Identify information gaps, particularly in respect of new required disclosures or key measurement changes
• Identify new system needs
• Consider need for new chart of accounts
• iXBRL tagging requirements for new accounts

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.

The most challenging issues are likely to be:

• Financial Instruments & foreign currency
• Business combinations & goodwill
• Leases and transactions containing embedded leases
• Deferred tax
• Investment properties
• Defined benefit pension schemes.

It is also important not to forget the challenges which new disclosure requirements will bring.

The following is a high level assessment of some of areas of potential change:

1. Financial Instruments & foreign currency

• FRS 102 introduces a distinction between “basic” and “other” financial instruments. Instruments, other than basic financial instruments, will be measured at fair value
• Monetary items denominated in foreign currencies must be carried at the current exchange rates and cannot be carried at a forward contract rate as is currently allowed. The related foreign exchange forward contracts, typically held off-balance sheet under Existing GAAP, must be recognised on balance sheet at fair value
• Hedge accounting requirements may allow for mitigation of the volatility impact on earnings but will impose requirements in respect of documentation and testing
• Functional currency determination, particularly in respect of special purpose entities and intermediate holding companies, will be subject to more stringent assessment
• Provisions for impairment will be made on the basis of incurred losses based on objective evidence
• Certain transactions involving purchases and / or sales of non- financial items where they are not for ‘own - use’ may need to be carried at fair value.

Practical implications

• Potential for significant earnings volatility, particularly for entities who have not previously adopted FRS 26
• Items such as options, rights, warrants, futures, forward contracts, interest rate swaps, convertible instruments etc. will now need to be recognised on balance sheet at fair value where either cost or off-balance sheet treatment may have been previously applied
• Existing FRS 26 users will have some additional items recognised at fair value, with no Held-to-Maturity and no Available-for-Sale categories
• Applying hedge accounting will provide opportunities to reduce P&L volatility for many. However, entities without experience of applying fair value measurement and hedge accounting will be subject to new disciplines requiring investment in resources, systems and training
• Where existing determinations regarding functional currencies are altered, items not previously subject to retranslation – including external and intra-group debt – may now give rise to volatility. Group funding and other structures may need to be re-assessed
• Maintaining general provisions or provisions based on expected losses is not permitted, and some entities may not be able to retain existing levels of provisions.

2. Business combinations & goodwill

• More separately recognised intangible assets are likely to be recognised and amortised over finite useful lives
• The rebuttable presumption for the useful life of goodwill has been reduced to five years, unless evidence supports longer lives – amortised over that life
• Required to test for impairment where indicator exists
• Acquisition accounting applied to all transactions except in the case of Group reconstructions
• Transaction costs will be capitalised as part of the cost of the combination.
• Expertise required to separately identify and value acquired intangible assets is unlikely to be readily available internally in most entities
• Neither goodwill nor intangible assets are permitted to have indefinite useful lives. This, together with shorter amortisation lives generally, could negatively impact on reported earnings of acquisitive entities in the early years after acquisitions.

3. Leases and transactions containing embedded leases

• Agreements that transfer the right to use assets and which are not in the legal form of a lease may, for accounting purposes, be determined to be or contain leases
• Entities will need to examine carefully arrangements they may have for procuring or providing certain services – particularly with respect to outsourcing – which are dependent on specified assets or take-or-pay arrangements
• Lease incentives (e.g. rent free periods) will be recognised over the life of a lease. This may change the pattern of recognition of the lease expense since incentives were typically recognised up to the first break period previously
• Some additional judgement in lease classification applies: the 90 percent “bright” line for distinguishing operating and finance leases no longer applies.

4. Deferred tax

• Fewer exemptions are available with respect to recognition of deferred tax liabilities. For example, deferred tax will need to be recognised in respect of revalued property, regardless of any intention to sell the asset where Existing GAAP provided an exemption in this respect
• Deferred tax will be required on fair value adjustments made in a business combination
• Current and deferred tax will be measured based on rates which apply to undistributed income, a consequence of which will be to recognise close company surcharges in Ireland until such time as the distributions to avoid such charges is made
• FRS 102 and IFRS requirements diverge materially: FRS 102 requirements are based on the “timing differences plus” approach which looks at reported comprehensive income as compared to taxable profits in a manner similar to current GAAP. The IFRS approach is based on “temporary differences” or a balance sheet derived approach.

5. Investment properties

• Definition includes properties let to and used by fellow group companies
• Recognised on balance sheet at fair value with changes in value recognised in P&L
• ‘Existing’ use valuations will not be permitted - fair value based on open-market price
• Volatility may arise as a result in reported earnings
• Valuations will need to include “highest and best use” value.

6. Defined benefit pension schemes

• The deficit or surplus relating to a group defined benefit pension scheme will no longer be permitted to be recognised only in the group accounts
• Where group companies cannot individually account for their portion of the surplus/deficit, the total must be recognised in the sponsoring company’s accounts.

FRS 102 was developed using “IFRS for SMEs” as issued by the IASB at its core. However, the FRC amended it in many respects to align the requirements of FRS 102 with many existing treatments allowed by existing FRSs or EU-adopted IFRS.

Key amendments made to “IFRS for SMEs” include:

• retaining the provisions to electively capitalise development costs and borrowing costs in certain circumstances
• retaining the revaluation model for property, plant and equipment
• permitting merger accounting for group reconstruction transactions; and
• permitting hedge accounting in respect of net investments in foreign operations

In addition, Government grant accounting has been realigned with Existing GAAP and EU-adopted IFRS, while the model applied to deferred tax has been replaced with something closer to FRSs.

Both FRS 101 and FRS 102 offer opportunities to certain entities to reduce the extent of the disclosures they provide in certain areas. The reliefs are designed for use in the single entity financial statements of:

• Subsidiaries of Groups preparing publicly available consolidated financial statements 
• Parent companies of Groups preparing publicly available consolidated financial statements.

• An amended FRSSE is effective from 1 January 2015 which is very similar to the existing FRSSE with a small number of key amendments relating to Capitalised goodwill and intangible assets
• However, adopting the amended FRSSE from 1 January 2015 is a short-term option only
• The FRSSE is expected to align with FRS102 from 1 January 2016, albeit with reduced disclosures
• Who can apply it? It is primarily applicable to small companies and groups as currently defined by the Companies Acts. Current thresholds are entities with (a) turnover of less than €8.8m; (b) total assets of less than €4.4m; and (c) less than 50 employees. To qualify, an entity must meet 2 out of 3 criteria in current and preceding year.
• It is expected that micro entities will be able to apply the FRSME “the Financial Reporting Standard for Micro Entities” from 1 January 2016.

The rebuttable position for most assets and liabilities on transition to EU IFRS, FRS 101 or FRS 102 is that they are restated to reflect all requirements on a fully retrospective basis. However, there are a number of available exemptions from this which provide practical reliefs from potentially tortuous analysis of past transactions. These include in particular:

• Exemptions from re-measuring past business combinations
• The ability to regard revalued amounts carried forward from previous GAAP or fair value at the date of transition as “deemed cost” and apply cost accounting going forward
• The ability to assess relevant facts and circumstances relating to arrangements potentially containing an embedded lease at the date of transition rather than at the inception of the arrangements
• The ability to elect to commence capitalising borrowing costs, as part of a qualifying asset, only from the date of transition.

Our professionals have experience guiding our clients through successful transition. We can help you in a number of ways including:

• Full end-to-end conversion project delivering a full restatement of your current financial reporting under New GAAP with all required supporting analysis
• Specifically tailored impact assessment to assist you with evaluating and understanding your options
• Technical advice and support on key accounting and disclosure matters including:
• Practical application of hedge accounting, hedge documentation and effectiveness testing
• Acquisition accounting and allocation of purchase consideration in business combinations
• Share-based payments analysis
• Valuations
• Evaluation of other critical areas
• Deferred tax assessments
• Assessment of your specific commercial implications and challenges including support in areas such as tax, employment and remuneration issues, debt restructuring
• Support in areas of complex judgements such as valuations and impairment testing
• Training your people
• Assisting with processes, data and systems change
• Project management
• iXBRL tagging your new financial statements.