Financial Reporting
The Future of Irish GAAP is Here
By BDO
May 28, 2013 - 9:47:36 AM

The FRC has issued three new standards; FRS 100, FRS 101 and FRS 102.  They apply to periods beginning on or after 1 January 2015 but can be adopted immediately.
 
Background
The three new standards are FRS 100 ‘Application of Financial Reporting Requirements’, FRS 101 ‘Reduced Disclosure Framework’ and FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.

The new framework is mandatory for accounting periods beginning on or after 1 January 2015 and must be applied to such periods, however early adoption is permitted. Current Irish GAAP will be withdrawn at this date and will no longer apply.

FRS 100 is a short 13 page standard which essentially acts as the ‘Road Map’ for entities and provides guidance on the application of the new standards, in other words who does what?

FRS 101 provides guidance on the ‘Reduced Disclosure Framework’ (RDF) which permits qualifying entities to avail of certain disclosure exemptions. The principles for reduced disclosures are based around the relevance of certain disclosures to the readers and cost constraint where the disclosure requirement places undue burden/ cost on the preparers of financial statements that are not justified by the benefits to the users of those financial statements.
 
FRS 102 is a single standard document comprising 226 pages. It is organised into 35 sections and will form the basis of financial reporting for the vast majority of Irish entities. The reduced disclosure framework applies to qualifying entities applying FRS 102.

The FRC in their efforts to ensure and maintain stability will leave FRS 102 intact for 3 years before any proposed update. As UITFs will be abolished any new abstracts will be known as FRC abstracts.

The FRSSE will continue to remain in existence for smaller entities.

Why is the change necessary?
Current Irish GAAP is a mixture of company law; SSAPs FRSs and UITFs developed by the ASB along with a number of ‘cut and paste’ FRSs from IFRS to fill in gaps e.g. share based payments and financial instruments.

Some standards still in use date back to the 1970s and are considered no longer ‘fit for purpose’ having not kept up with evolving business practices.

This has culminated in an incoherent mix of old standards such as SSAP 4 (accounting for government grants) and SSAP 9 (stocks and long term contracts) and more recent converged standards e.g. FRS 12 (provisions);

In brief:

What is my transtion date ?	The framework is effective for years commencing on or after 1 January 2015. For  December year ends the first financial statements will be to 31 December 2015. For comparative balance sheet purposes the transition date in this case will be 1 January 2014.
Will existing accounting systems need to be updated?	If already set up for existing Irish GAAP then it is possible some refinement to the system will be needed, or worst case scenario, a larger scale update to enable transition.
What staff training will be required for the transition?	The finance team will require training to understand the key differences and how these impact on the accounting entries. Practical issues to consider: - who needs training? - how will this be delivered and by whom? Can this be done in house or will an external provider be required?
Will there be an impact on distributable  reserves?	The adoption of the new framwork may have an impact on the entity's ability to dividend and will need to assess the impact and plan accordingly.
Any other issues to consider?	Does the entity have any loan facilities that contain debt or performance covenants? Are there any management or remuneration agreements based on company results? Tax planning strategies, charge and payments should be considered along with regular forecasting and budgeting.

FRS 23 – 29 (financial instruments and foreign exchange) which are heavily aligned with IFRS.

Current Irish standards may permit transactions to go unrecognised particularly financial instruments where a reporting entity has not adopted FRS 26. Many Irish companies for example buy foreign currency forward to hedge their foreign exchange risk yet no entries appear in the books until settlement thereby not reflecting the embedded derivative inherent in the contract.

It is important though, that the given the nature and size of private enterprise in Ireland and UK and their respective target audience (certain creditors, shareholders and banks), the perception is that IFRS is suited to large listed entities raising public capital and not necessarily the most appropriate suite of standards for general companies. This   has lead to the development of the new simplified framework.

Expected benefits of replacing current GAAP
With the proposed change the FRC have aimed to deliver a financial reporting standard that provides for the following:

• A single standard addressing all areas of accounting
• Common accounting language
• Simpler, shorter and clearer than current Irish GAAP
• Cost effective to apply
• Broadly consistent with IFRS
• Efficient within groups
• Consistent in terms of principles with pragmatic solutions.

As the new standards are broadly in line with IFRS , the costs associated with training accountants should be reduced as they will no longer need to understand two completely separate accounting frameworks.

However any switch to a new framework is likely to involve significant transitional costs, including software, education and training. Some entities will be more affected than others however overall the FRC believes this will be offset by the simplification of reporting for many entities.

How will the framework impact current Irish GAAP financial statements?
Existing GAAP will be withdrawn in its entirety and all SSAPs, FRSs (with the exception of FRS 27 Life Assurance) and UITFs will cease to exist. SORPs will eventually be withdrawn to be accommodated where relevant by sections of FRS 102 and a separate consultation will be undertaken in relation to accounting for insurance business (FRS 103 – update due later in 2013).

The main proposed changes are:

• Introduction of a new regime for financial instruments. A significant change to the way financial reporting is currently handled under Irish GAAP. This will be expanded when IFRS 9 is finalised
• New requirements for defined benefit pension plans
• Requirement for investment properties to be carried at fair value with revaluation gains and losses recognised in profit and loss in most instances
• Requiring additional deferred tax to be recognised, for example on revaluations of property, plant and equipment and consideration of the timing difference plus approach
• Presuming that the useful life of goodwill and intangible assets is five years where no reliable estimate can be made
• Only permitting merger accounting for group restructurings
• Reduced disclosure framework for ‘qualifying entities’
• Prior period errors restated when ‘material’ rather than fundamental – this may result in more prior period adjustments
• Finance lease classification no longer contains  the 90% rebuttable presumption (although still and indicator). – risks and rewards assessment required
• Borrowing costs – accounting policy choice as to whether to capitalise borrowing costs or not however must be consistent across each class of ‘qualifying assets’
• Foreign currency translation – replacement of SSAP 20 approach with FRS 23 basis. Functional and presentational currency concepts will impact entities significantly operating in foreign currencies.

Some additional disclosures required include:

• Cash flow statement in all entities regardless of size unless they qualify for reduced disclosures
• Key judgments and estimate disclosures
• Statement of compliance
• Basic and complex financial instruments
• Key management compensation to be shown in notes
• Statement of changes in equity and income/ retained earnings is now a primary statement and no longer a note to the financial statements.

What do I need to do next?
Firstly if you would like to discuss any of the issues raised in more detail please contact your usual BDO adviser who will put you in contact with our Technical Group. Our transition team will be on hand to assist with the changeover.

Consideration should be given to the timeline to implement the transition of your company’s financial statements to the new reporting framework i.e. what is your date of transition?

For example if an entity’s reporting date is 31 December then the first set of financial statements to be reported will be to 31 December 2015. The transition date in this case will be 1 January 2014. These financial statements will include a comparative balance sheet at 31 December 2014.

For further information please contact:

Gavin Smyth
Audit Director
BDO
Beaux Lane House
Mercer Street Lower
Dublin 2
t: 01 470 0183 
e: gsmyth@bdo.ie