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Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
Accounting Issues In A Downturn April 2010
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Accounting Issues In A Downturn April 2010

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Presentation I gave to the Institute of Certified Public Accountants in Ireland

Presentation I gave to the Institute of Certified Public Accountants in Ireland

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  • 1. ACCOUNTING ISSUES IN A DOWNTURN APRIL 2010
  • 2. PRESENTED BY: <ul><li>Deirdre Kiely </li></ul><ul><li>CPA, ACCA </li></ul>
  • 3. Irish/UK GAAP
  • 4. Seminar Contents <ul><li>FRS15 Tangible Fixed Assets </li></ul><ul><li>FRS 10 Goodwill and Intangible Assets </li></ul><ul><li>FRS 11 Impairment of Fixed Assets &amp; Goodwill </li></ul><ul><li>SSAP 19 Accounting for Investment Properties </li></ul><ul><li>SSAP 21 Accounting for Leases &amp; Hire Purchase Contracts </li></ul>
  • 5. TRUE AND FAIR VIEW Section 3 Companies Act, 1986 – Overriding principle
  • 6. FRS 15 Tangible Fixed Assets
  • 7. FRS 15 Tangible Fixed Assets <ul><li>Replaced SSAP 12 </li></ul><ul><li>Sets out the principles for: </li></ul><ul><li>initial measurement </li></ul><ul><li>valuation and </li></ul><ul><li>depreciation </li></ul><ul><li>of tangible fixed assets excl. Investment Property </li></ul>
  • 8. FRS 15 Tangible Fixed Assets (contd) <ul><li>Initial Measurement </li></ul><ul><li>At cost: </li></ul><ul><li>Cost comprises of purchase price (less </li></ul><ul><li>discounts/rebates) and any costs directly attributable </li></ul><ul><li>to bringing the asset into working condition for </li></ul><ul><li>intended use. </li></ul>
  • 9. FRS 15 Tangible Fixed Assets (contd) <ul><li>Valuation </li></ul><ul><li>Revaluations - optional </li></ul><ul><li>If adopted do not need to apply to all classes of tangible assets but must revalue all assets in a class </li></ul><ul><li>If adopted must perform full valuation every 5 years and interim valuation year 3. </li></ul><ul><li>Interim valuations years 1,2 and 4 if material change in value </li></ul>
  • 10. FRS 15 Tangible Fixed Assets (contd) <ul><li>Valuation </li></ul><ul><li>Revaluation gains go to the STRGL </li></ul><ul><li>Reversal of revaluation gains go to the STRGL until the revaluation reserve is depleted and thereafter to the P&amp;L </li></ul><ul><li>Disclosure requirements </li></ul>
  • 11. FRS 15 Tangible Fixed Assets (contd) <ul><li>Depreciation </li></ul><ul><li>Subjective test – estimated useful economic life </li></ul><ul><li>Period over which the asset will be consumed by the entity </li></ul><ul><li>If no depreciation is charged e.g. Hotel, assess for impairment annually </li></ul><ul><li>Don’t depreciate land </li></ul>
  • 12. FRS 15 Tangible Fixed Assets (contd) <ul><li>Depreciation </li></ul><ul><li>Useful economic life should be reviewed at each balance sheet date and revised if expectations are significantly different to the original estimate. </li></ul><ul><li>Change in an estimate is not a change in accounting policy </li></ul><ul><li>Depreciate the carrying amount of the asset over the revised useful economic life </li></ul>
  • 13. FRS 15 Tangible Fixed Assets (contd) <ul><li>Website Development Cost </li></ul><ul><li>Significant costs incurred on website development </li></ul><ul><li>Planning costs, infrastructure development costs, design and content costs </li></ul><ul><li>Capital or expense? </li></ul><ul><li>UITF Abstract 29 provides direction on this </li></ul>
  • 14. FRS 15 Tangible Fixed Assets (contd) <ul><li>Website Development Cost </li></ul><ul><li>Is it an enduring asset and are there reasonable grounds for supporting that future economic benefits in excess of the cost will be generated by the website? </li></ul><ul><li>Revenues direct from website: </li></ul><ul><li>Orders placed via the Website </li></ul><ul><li>Amounts paid by subscribers to gain access </li></ul><ul><li>Selling advertising space </li></ul>
  • 15. FRS 15 Tangible Fixed Assets (contd) <ul><li>Website Development Cost </li></ul><ul><li>If it is an enduring asset capitalise, if not, expense </li></ul><ul><li>Generally expense websites used only for Advertising or promoting the entities own products or services </li></ul><ul><li>Tangible asset v Intangible asset? </li></ul>
  • 16. FRS 15 Tangible Fixed Assets (contd) <ul><li>Impairment of Tangible Assets </li></ul><ul><li>Where there is an indication of impairment must perform an impairment review </li></ul><ul><li>Impairment reviews – FRS 11 </li></ul>
  • 17. FRS 10 Goodwill and Intangible Assets
  • 18. FRS 10 Goodwill and Intangible Assets <ul><li>Replaced/ significant change from SSAP 22 </li></ul><ul><li>Goodwill and Intangible assets </li></ul><ul><li>Objective is to ensure Goodwill and Intangibles are charged to P&amp;L over the periods in which they are depleted </li></ul>
  • 19. FRS 10 Goodwill and Intangible Assets (contd) <ul><li>Goodwill </li></ul><ul><li>Purchased Goodwill = Price paid less the sum of a fair value of its assets and liabilities </li></ul><ul><li>Positive Goodwill and Negative Goodwill – both in the balance sheet </li></ul><ul><li>Capitalise Purchased Goodwill </li></ul><ul><li>Do not capitalise internally generated Goodwill </li></ul>
  • 20. FRS 10 Goodwill and Intangible Assets (contd) <ul><li>Intangible Assets </li></ul><ul><li>Trademarks, Patents, Copyrights, Licences, Franchises, Intellectual Property </li></ul><ul><li>Excludes: Oil and Gas exploration and R&amp;D </li></ul><ul><li>Capitalise at cost if acquired separate to the business </li></ul><ul><li>If acquired as part of a business capitalise </li></ul><ul><ul><li>Separate to goodwill if value can be reliably measured </li></ul></ul><ul><ul><li>As part of goodwill if value cannot be reliably measured </li></ul></ul><ul><li>Internally generated – capitalize if ascertainable market value </li></ul>
  • 21. FRS 10 Goodwill and Intangible Assets (contd) <ul><li>Amortisation </li></ul><ul><li>Goodwill/Intangible assets amortized over useful economic life ‘UEL’ </li></ul><ul><li>UEL – rebuttable presumption of not greater than 20 years </li></ul><ul><li>Review the UEL at the balance sheet date and revise if necessary </li></ul>
  • 22. FRS 10 Goodwill and Intangible Assets (contd) <ul><li>Impairment </li></ul><ul><li>First review performed at the end of first full financial year following initial recognition but refer to the indicators of impairment under FRS 11 which may result in an earlier review </li></ul><ul><li>Thereafter review annually and impair if carrying value not recoverable in full </li></ul><ul><li>Impair in accordance with FRS 11 </li></ul>
  • 23. FRS 11 Impairment of Fixed Assets and Goodwill
  • 24. FRS 11 Impairment of Fixed Assets and Goodwill <ul><li>Applies to all categories of fixed assets, intangible assets and goodwill but excludes Investment Properties </li></ul><ul><li>Assets carried at not more that recoverable amount </li></ul><ul><li>Most likely impaired – Property/Goodwill/Investments </li></ul><ul><li>Must perform impairment review if there is some indication that impairment has occurred </li></ul>
  • 25. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Examples of indications of impairment: </li></ul><ul><ul><li>The current economic climate </li></ul></ul><ul><ul><li>Evidence of obsolescence or physical damage to the fixed asset </li></ul></ul><ul><ul><li>Adverse change in either the business or the market in which the fixed asset or goodwill is involved </li></ul></ul><ul><ul><li>Significant reorganisation </li></ul></ul><ul><ul><li>A major loss of key employees </li></ul></ul><ul><ul><li>Significant increase in market interest rates </li></ul></ul>
  • 26. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Impairment Review </li></ul><ul><li>Comparison between carrying value </li></ul><ul><li>of the assets in the balance sheet </li></ul><ul><li>with the recoverable amount </li></ul>
  • 27. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Definitions </li></ul><ul><li>Recoverable amount is the higher of net realisable value ‘NRV’ and value in use ‘VIU’. </li></ul><ul><li>NRV = amount the asset can be sold for (at arms length in normal conditions) less selling costs/taxation (OMV) </li></ul><ul><li>If the asset fails the NRV test perform the VIU test </li></ul>
  • 28. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Definitions </li></ul><ul><li>VIU = present value of future cash flows </li></ul><ul><li>Prepare cashflows for the smallest income generating unit which can be; </li></ul><ul><ul><li>Individual asset or </li></ul></ul><ul><ul><li>Groups of assets or </li></ul></ul><ul><ul><li>The whole factory </li></ul></ul>
  • 29. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Value in use test </li></ul><ul><li>Apply a discount rate to the cashflows of the income generating unit to determine present value </li></ul><ul><li>Discount rate: </li></ul><ul><ul><li>Market rate for similar assets </li></ul></ul><ul><ul><li>Weighted average cost of capital of a comparable listed company </li></ul></ul><ul><ul><li>Weighted average cost of capital of the entity under review - incremental borrowing rate </li></ul></ul>
  • 30. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Example </li></ul><ul><li>XYZ Limited car dealership </li></ul><ul><li>ABC Limited manufacturing company </li></ul>
  • 31. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Must take tax into account </li></ul><ul><li>When comparing NRV and VIU must take tax into </li></ul><ul><li>account. If NRV is €100 and deferred tax of €30 and </li></ul><ul><li>VIU is €110 with deferred tax of €45 recoverable </li></ul><ul><li>amount is based on NRV. </li></ul>
  • 32. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Impairment Loss </li></ul><ul><li>Recognise in the profit and loss account </li></ul><ul><li>Previously revalued asset – loss to STRGL until back to historical cost and then to P&amp;L </li></ul><ul><li>Assignment of loss in a single income generating unit: </li></ul><ul><ul><li>First to Goodwill </li></ul></ul><ul><ul><li>Next to Intangible assets </li></ul></ul><ul><ul><li>Pro rata to all fixed assets </li></ul></ul>
  • 33. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Impairment Loss </li></ul><ul><li>Exceptional Item on P&amp;L </li></ul><ul><li>Disclosures in the financial statements </li></ul><ul><li>Review remaining useful life and depreciate over revised remaining useful life </li></ul>
  • 34. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Reversal of Impairment Loss </li></ul><ul><li>Example: </li></ul><ul><li>Land impaired on refusal of planning permission </li></ul><ul><li>however if planning permission refusal is reversed </li></ul><ul><li>may be appropriate to reverse the impairment </li></ul><ul><li>Can reverse goodwill impairment however exercise with caution (IAS 36 prohibits reversal) </li></ul>
  • 35. FRS 11 Impairment of Fixed Assets and Goodwill (contd) <ul><li>Application </li></ul><ul><li>Vodafone – 27% of equity value was impaired </li></ul><ul><li>RBS - Impairment of £32.6bn mainly goodwill </li></ul><ul><li>HSBC - $10.6bn impairment of goodwill </li></ul><ul><li>Rio Tinto - $8.0bn mainly goodwill </li></ul>
  • 36. SSAP 19 Accounting for Investment Properties
  • 37. SSAP 19 Accounting for Investment Properties <ul><li>Old accounting standard introduced in the early 1980’s. </li></ul><ul><li>Amended in 1994 when FRS3 introduced the STRGL. </li></ul><ul><li>Investment Property is Land &amp; Buildings where: </li></ul><ul><ul><li>All construction &amp; development work complete </li></ul></ul><ul><ul><li>Properties are held for investment purposes or rental </li></ul></ul><ul><li>Excludes Properties: </li></ul><ul><ul><li>Held for consumption in the business operations </li></ul></ul><ul><ul><li>Occupied by group companies </li></ul></ul><ul><ul><li>Held on a lease with unexpired term of less than 20 yrs </li></ul></ul>
  • 38. SSAP 19 Accounting for Investment Properties (contd) <ul><li>Investment properties are not depreciated. </li></ul><ul><li>Valued in the balance sheet at open market value ‘OMV’ </li></ul><ul><li>Investment properties must be valued annually. </li></ul><ul><li>Difficult to determine OMV in current environment. </li></ul><ul><li>No requirement for valuer to be qualified or independent – can be valued by a director. May cause difficulties for auditors! </li></ul><ul><li>Disclose valuers name, qualification, whether internal or external and basis of valuation. </li></ul>
  • 39. <ul><li>Listed companies must value annually by a qualified valuer who can be internal or external. Valued at least every five years by an external valuer. SSAP19 no longer applies to listed entities since the adoption of IFRS in 2005. </li></ul>SSAP 19 Accounting for Investment Properties (contd)
  • 40. SSAP 19 Accounting for Investment Properties (contd) <ul><li>Movements in the value of Investment Properties should be taken to the ‘ STRGL ’ . </li></ul><ul><li>If expected to be permanent the deficit goes to the profit and loss account and not the STRGL. </li></ul><ul><li>Companies Act requires a charge to P&amp;L only in respect of write downs expected to be permanent. </li></ul><ul><li>What’s the different is between temporary and permanent. </li></ul><ul><li>Impair on an individual asset basis i.e. do not comingle the assets </li></ul>
  • 41. SSAP 19 Accounting for Investment Properties (contd) <ul><li>Stock of trading properties to investment properties </li></ul><ul><li>UITF Abstract 5 </li></ul><ul><ul><li>Timing - when management decide </li></ul></ul><ul><ul><li>Transfer at lower of cost and NRV </li></ul></ul><ul><ul><li>Any diminution in value charge to P&amp;L account </li></ul></ul><ul><ul><li>Apply SSAP 19 rules once transferred </li></ul></ul>
  • 42. SSAP 21 Accounting for Leases and Hire Purchase Contracts
  • 43. SSAP 21 Accounting for Leases and Hire Purchase Contracts <ul><li>SSAP21 was introduced in 1984 and amended in 1997. </li></ul><ul><li>Deals with accounting treatment of Leases and Hire Purchase agreements. </li></ul><ul><li>Leases are classified into: </li></ul><ul><ul><li>Finance Leases </li></ul></ul><ul><ul><li>and </li></ul></ul><ul><ul><li>Operating Leases </li></ul></ul>
  • 44. SSAP 21 Accounting for Leases and Hire Purchase Contracts (contd) <ul><li>Finance Lease </li></ul><ul><ul><li>Risks and rewards of ownership, except legal title, are transferred to the lessee </li></ul></ul><ul><ul><li>Asset is capitalized and obligation to make future payments recognised as a liability </li></ul></ul><ul><ul><li>HP agreements normally accounted for in a similar way </li></ul></ul>
  • 45. SSAP 21 Accounting for Leases and Hire Purchase Contracts (contd) <ul><li>Operating Lease </li></ul><ul><ul><li>Risks and rewards of ownership remain with the lessor </li></ul></ul><ul><ul><li>Annual rental costs are charged to the P&amp;L account </li></ul></ul>
  • 46. SSAP 21 Accounting for Leases and Hire Purchase Contracts (contd) <ul><li>Operating Lease Incentives </li></ul><ul><ul><li>Initial period - Rent free period </li></ul></ul><ul><ul><li>Initial period - Reduced rent </li></ul></ul><ul><ul><li>Up-front cash payment </li></ul></ul><ul><ul><li>Contribute to relocation costs etc </li></ul></ul>
  • 47. SSAP 21 Accounting for Leases and Hire Purchase Contracts (contd) <ul><li>Operating Lease Incentives </li></ul><ul><ul><li>SSAP 21 does not deal with accounting treatment for lease incentives </li></ul></ul><ul><ul><li>Recognise lease rentals on a straight line basis over the lease term even if not paid on that basis </li></ul></ul>
  • 48. SSAP 21 Accounting for Leases and Hire Purchase Contracts (contd) <ul><li>Operating Lease Incentives </li></ul><ul><li>UITF Abstract 28 </li></ul><ul><ul><li>Recognise the incentives as a reduction of rental expense </li></ul></ul><ul><ul><li>Allocate the benefit over the shorter of the lease term and a period ending on a date from which market rents will be payable </li></ul></ul>
  • 49. SSAP 21 Accounting for Leases and Hire Purchase Contracts (contd) <ul><li>EXAMPLE - Operating Lease Incentive </li></ul><ul><li>XYZ Limited entered into a 21 year property lease in October 2004 at an annual rent of €100,000. It had a ‘break option’ clause on the 5 th anniversary i.e. October 2009 exercisable by the tenant. In September 2009 the landlord and tenant entered into an agreement that ‘in consideration of the tenant not exercising the break option the landlord granted the tenant a rent free allowance of €93,750’. This reduction was to be accommodated by reducing the monthly rent by €4,166.67 per month for 22 months from 1 October 2009 to 1 July 2011 and by €2,083.38 for 1 August 2011. </li></ul><ul><li>There is no further break option in the lease so from the date of this new agreement there are 16 years left to expire. </li></ul><ul><li>UITF 28 provides that ‘the benefit should be allocated over the shorter of the lease term and a period ending on a date which it is expected that the prevailing market rental will be payable. </li></ul>
  • 50. SSAP 21 Accounting for Leases and Hire Purchase Contracts (contd) <ul><li>ANSWER - Operating Lease Incentive </li></ul><ul><li>The incentive of €93,750 should be allocated over 23 months at €4,076.08 per month as the rent will revert to €100,000 per annum on the 1 September 2011. It is assumed that will be market rent at that time. </li></ul>
  • 51. Thank you
  • 52. Deirdre Kiely [email_address] Tel 01 418 2088

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