This document reviews several Irish Financial Reporting Standards (FRS). It summarizes FRS 11 on impairment of fixed assets and goodwill, which requires impairment reviews when indicators exist and defines how to measure impairment. It also summarizes FRS 12 on provisions, contingent liabilities, and contingent assets, explaining how and when to recognize provisions versus disclose contingent liabilities. Finally, it provides high-level information on FRS 15 regarding tangible fixed assets.

1. Financial Repor ting Review of Accounting Standards
Review of Accounting Standards
In the first of two articles, Deirdre Kiely CPA, examines
FRS11, FRS12 and FRS15.
The current economic environment poses particular
challenges for those involved in the preparation of accounts and
financial reporting. In times of economic uncertainty issues such
as impairment of assets, provisions for costs associated with
restructuring and reorganization, reviewing the useful economic
life of fixed assets, accounting for pension deficits, going
concern, stocks and work in progress, investment properties etc
are all very topical and require a revisit of the related accounting
standards. In this, the first of two articles reviewing accounting
standards, I will examine the Financial Reporting Standards
“FRS’s” on Impairment of Fixed Assets and Goodwill, Provisions,
Contingent Liabilities and Contingent Assets and Tangible Fixed
Assets addressing some of the current challenges that preparers
of accounts under Irish GAAP are experiencing.
When reviewing accounting standards it is always important to
remember the overriding principle set down in the Companies
Act requiring that accounts be prepared to give a true and fair The standard applies to all fixed assets and purchased
view. goodwill included in the balance sheet with certain exclusions.
FRS 11 – Impairment of Fixed Assets and The standard requires that the impairment review comprise of
a comparison of the carrying amount of the fixed asset or
Goodwill goodwill with its recoverable amount at the balance sheet date.
In the current economic environment reviewing asset and The recoverable amount is defined as the higher of net
investment classes for impairment is imperative. FRS 11 sets realizable value and the value in use. Net realizable value is
out the circumstances when impairment reviews are required defined as the amount that the asset could be disposed of,
and how impairment should be measured. While the FRS does adjusted for any direct selling costs and deferred taxation. Value
not impose an obligation for all fixed assets and goodwill to be in use is the present value of future cash flows obtainable as a
tested for impairment every year there is an obligation to review result of the asset’s continued use, including those resulting
for impairment if there is some indication that impairment has from its ultimate disposal and adjusted for deferred taxation. To
occurred. The current economic climate would be such an the extent that the carrying amount exceeds the recoverable
indicator to suggest that a possible impairment has occurred amount, the fixed asset or goodwill is impaired and should be
sufficient to result in an obligation to review. Other impairment written down. The impairment loss should be recognized in the
indicators include: profit and loss account unless it arises on a previously revalued
fixed asset, in which case it should be recognized in the
• Evidence of obsolescence or physical damage to the fixed
statement of total recognized gains and losses until the carrying
asset;
amount of the asset reaches its depreciated historical cost and
• A significant adverse change in either the business or the thereafter recognised in the profit and loss account. It may be
market in which the fixed asset or goodwill is involved, such appropriate to disclose the impairment as an exceptional item.
as the entrance of a major customer: the statutory or other When an impairment loss is recognised the remaining useful life
regulatory environment in which the business operates: any should be reviewed and the revised amount depreciated over
‘indicator of value’ used to measure the fair value of a fixed the revised remaining useful life.
asset on acquisition;
• A commitment by management to undertake a significant FRS 12 – Provisions, Contingent Liabilities
reorganization; and Contingent Assets
• A major loss of key employees; Within the past twelve months a significant number of
companies in Ireland have undergone some form of
• A significant increase in market interest rates or other market restructuring varying from a few staff layoff’s to wide scale
rates of return that are likely to affect materially the fixed rationalization and reorganization. When preparing the accounts
asset’s recoverable amount. of such entities consideration must be given as to when the
costs of such restructuring should be recognized in the
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3. Financial Repor ting Review of Accounting Standards
accounts. The treatment in the financial statements will Reliable Estimate
depend on whether such costs are regarded as
An estimate is always possible where a reasonable
provisions and which satisfy the criteria of recognition or
range of possible outcomes can be determined and the
as contingent liabilities and which satisfy the criteria to
FRS states that except in extremely rare cases, an entity
disclose by way of note. In cases involving redundancies
will be able to determine a range of possible outcomes
and restructuring consideration must be given to what
and can therefore make an estimate of the obligation
actions had taken place prior to the balance sheet date,
that is sufficiently reliable to use in recognizing a
such as:
provision. In extremely rare cases where no reliable
• Whether a formal restructuring plan, agreed by the estimate can be made, a liability exists that cannot be
board, was in place; recognized, in that case the liability is disclosed as a
contingent liability.
• Had implementation commenced;
• Was the plan communicated to employees and Contingent Liabilities
customers;
Contingent liabilities on the other hand should not be
• Can a best estimate of costs, necessarily required by recognized but disclosed by way of note to the accounts.
the restructuring, be determined. A contingent liability is defined as
• a possible obligation that arises from past events and
Provisions whose existence will be confirmed only by the
FRS 12 requires that a provision should be recognized occurrence of one or more uncertain future events
when: not wholly within the entity’s control; or
• an entity has a present obligation (legal or • a present obligation that arises from past events but
constructive) as a result of a past event; is not recognized because:
• it is probable that a transfer of economic benefits will (i) it is not probable that a transfer of economic
be required to settle the obligation; and benefits will be required to settle the
obligation; or
• a reliable estimate can be made of the amount of
(ii) the amount of the obligation cannot be
the obligation.
measured with sufficient reliability
Unless these conditions can be met no provision
should be recognized. FRS 15 – Tangible Fixed Assets
When reviewing tangible fixed assets during the
Present Obligation As a Result of a current economic environment preparers of financial
Past Event statements should consider any potential impacts on the
useful economic life and residual values of tangible fixed
Where it is not clear whether a present obligation assets. FRS 15 sets out the principles of accounting for
exists, a past event is deemed to give rise to a present the initial measurement, valuation and depreciation of
obligation if, taking account of all available evidence, it is tangible fixed assets with the exception of investment
more likely than not that a present obligation exists at the properties which continue to be accounted for in
balance sheet date. For an event to be an obligating accordance with SSAP 19. The standard provides that the
event, it is necessary that the entity has no realistic useful economic life of a tangible fixed asset should be
alternative to settling the obligation created by the event. reviewed at each balance sheet date and revised if
This will be the case only where the settlement of the expectations are significantly different from previous
obligation can be enforced by law or, in the case of a estimates. If a useful economic life is revised the carrying
constructive obligation, the event (which may be an amount of the tangible fixed asset at the date of revision
action of the entity) creates valid expectations in other should be depreciated over the revised remaining useful
parties that the entity will discharge the obligation. The economic life. The standard also provides that where the
only liabilities recognized in an entity’s balance sheet are residual value is material it should be reviewed at each
those that exist at the balance sheet date. Where an balance sheet date to take account of reasonable
entity can avoid future expenditure by its future actions, expected technological changes based on prices
for example by changing its method of operation, it has prevailing at the date of acquisition or revaluation. Any
no present liability for that future expenditure and no change in the estimated residual value should be
provision is recognised. accounted for over the asset’s remaining useful
economic life except to the extent that the asset has
Probable Transfer of Economic Benefits been impaired at the balance sheet date.
For a liability to be recognized there must also be the The second part of this article will feature in the
probability of a transfer of economic benefits to settle the March 2010 edition of Accountancy Plus.
obligation. Probability is defined as more likely than not
to occur. Where the probability test is not satisfied the Deirdre Kiely is a CPA and Partner of “Audit & Advisory”
entity should disclose the liability as a contingent liability with FGS Partnership.
unless the transfer of economic resources is remote.
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