accounting and reporting by charities: the statement of recommended practice (sorp) – scope and application FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland deals with impairment of assets in Section 27 Impairment of Assets. It is the notionally adjusted goodwill figure which is then aggregated with the other net assets of the CGU. HMRC, Sage and Automatic Invoice Scanning... ACCA removed dishonest Luton based Accountant. Top 10 tips for impairment testing December 2008 The last 12 months have been marked by increasing volatility in global markets. Investment in a subsidiary accounted for at cost: Partial disposal In a similar fact pattern, an entity prepares separate financial statements and elects to account for its investments in subsidiaries at cost as per IAS 27. Recently awarded the accolade […], Financial Reporting for Unlisted Companies in the UK and Republic of Ireland, Purchase this book. Under old GAAP investment in subsidiaries, associates and joint ventures in the individual financial statements could only be carried at cost less impairment. FRS 102, para 27.21 requires an impairment loss to be allocated to a CGU in the following order: Be careful of the restriction in FRS 102, para 27.22. Guys, Entity X has a 100% shareholding in Entity Y which is booked as in investment (share in subsidiaries) at a cost of EUR 1M. The entity holds an initial investment in a subsidiary (investee). My view is that, as the subsidiary company has no trade or assets, the market value can now be reliably valued as being worthless. With the exception of goodwill (see earlier), impairment losses on other assets can be reversed when the circumstances giving rise to the original impairment loss cease to apply. Section 11.8 defines the financial instruments which are within the scope of section 11 as basic instruments. 3.2 Recognising an impairment loss for cash generating units 48 3.3 Considerations for foreign operations 50 3.4 Reversing an impairment loss 51 3.4.1 Indicators for reversing an impairment loss 51 3.4.2 Reversing impairment losses for individual assets (other than goodwill) 52 3.4.3 Reversing impairment losses for cash generating units 53 E. In addition, source references for the illustrative disclosures have been included in the right hand margin of the financial statements. This article has summarised some of the main considerations that need to be looked at when dealing with asset impairment, including goodwill. Gains and losses on remeasurement are recognised in the Statement of comprehensive income for the period. Maybe I should change my name to the Confused Accountant.. Rather, IAS 27 applies to such investments. There should be no further impairment to the machinery because these have already been written down to their recoverable amount. No mention of transfer of business etc. Therefore, I don't see how the market value of £400k can be justified. Section 35 – Transition to FRS 102 – For individual entity financial statements the investment can be measured at cost or fair value. There is no doubt that the customer list is worth a value (quite possibly the £400k given the uplift in turnover and profit achieved post-acquisition), but effectively this won't be reflected as an intangible on the parent's balance sheet - if I am interpreting this correctly, you are saying it is merely a means to justify the value of the investment in the subsidiary, even though the subsidiary itself now longer owns or uses the customer list itself. On that basis theoretically the balance sheet at completion would have been the same as at the year-end date. The justification is that it was worth £400,000 when someone decided to pay that for it, and nothing has changed. Other IFRIC members disagreed. Having obtained control of the subsidiary, I guess my client simply decided to put all the trade through the one company, with a view to striking off the subsidiary in the future. On the basis that a company now has no trade (because subsequent to the sale the trade has been hived up to the parent) and no assets, it is simply an empty shell - it doesn't generate any turnover. FRS 102 states that “Investments in unlisted Company shares, whose market value can be reliably determined, are remeasured to market value at each balance sheet date. This has been treated as an investment in a subsidiary in the draft accounts at cost. However, FRS 102, paras 27.29 to 27.31 restrict the amount of the impairment loss that can be reversed. Due to the coronavirus, management have decided that they will have to restructure the group and announced this restructuring exercise immediately prior to the reporting date. These are being prepared under FRS 102 1A. Where a parent does not wholly-own a subsidiary, FRS 102, para 27.26 requires the goodwill to be grossed up to include goodwill attributable to the non-controlling interest (NCI) before conducting the impairment review. The finance director has calculated recoverable amount of Subco’s net assets to be £950,000. Other operating income – An operating lessor (landlord) for an investment property would previously have recognised a lease incentive over the period to when market rent becomes receivable. The consideration was £400,000. In addition, the impairment loss cannot be set against the building because its fair value is greater than its carrying amount (£1.6m as suggested by the independent surveyor) so the restriction in FRS 102, para 27.22(a) applies. But something surely has changed. For inventory, FRS 102, para 27.4 limits the impairment reversal to the amount of the original impairment loss to prevent inventory being valued in excess of cost. Accounts and Audit of Limited Liability Partnerships, Fourth Edition offers comprehensive guidance on how to apply UK GAAP to limited liability partnerships, clearly explaining the new requirements resulting from the implementation of FRS 102. As per the terms of the agreement yes. So the assets were "stripped out" by the vendor not the purchaser? FRS and apply the requirements of FRS 103 to the acquisition of any such subsidiary. (the reason being given for this is that the consideration for the acquisition is being paid over 4 years, with the final payment possibly being adjusted dependent on future performance). My client acquired the 100% shareholding in another company in March 2016. IFRS for SMEs is intended to apply to general-purpose financial statements by entities that are classed as ‘small and medium-sized’ or ‘private’ and ‘non-publicly accountable’. The price the investing company pays that exceeds the fair market value of the subsidiary’s net assets is … If it was worth £400k just over a year ago why would it be worth less now? Long term contracts (Section 23). So, for example, the amount attributable to licences is £53,000 ((250 / (250 + 220 + 48)) x 110). It is the notionally adjusted goodwill figure which is then aggregated with the other net assets of the CGU. FRS 102 requires Impairment: Investment in subsidiaries A goodwill impairment on consolidation indicates a decrease in value since acquisition. HMRC say that the accounting treatment of investment properties does not determine, for tax purposes, whether the property is an investment property or whether a disposal of a property is a capital or a revenue disposal. My understanding is that the original value of the investment prior to impairment or revaluation is simply the price the purchaser was prepared to pay to the vendor to get his hands on the customer list. There was no consideration paid the other way. Subsequent to this, the subsidiary company prepared accounts to 30 April 2016, which showed all assets/liabilities had been stripped out, leaving solely the £100 issued share capital. I do not believe that a balance sheet was drawn up at the acquisition date (or if it was it has not been made available), but reading the agreement it states that all loans/indebtedness were to be settled by the completion date, with the typical clauses covering anything which comes 'out of the woodwork' post-completion. an impairment test and identifies impairment of certain PPE, then following disclosures become significant and should be disclosed in the financial statements: • Amount of impairment losses recognised in the statement of profit and loss during the period including the line item in which the impairment losses are included. Most companies reporting under FRS 102 will not meet the above criteria so they will not be required to comply with non-financial reporting requirements of section 414CB. Co-authored, and published by Bloomsbury Professional, the book entitled Financial Reporting for Unlisted Companies in the UK and Republic of Ireland deals with the biggest overhaul of accounting rules in the last 40 years. In Appendix B, paragraphs B85C and B85E are amended. Ignore all previous answers which are not addressing the issue/red herrings. However, the standard board is considering changing the requirement before 2015. 10 Disclosure requirements of FRS 102 10.16 Impairment of assets (FRS 102 Section 27) Section 27 is applied typically to assets such as inventories, property, plant and equipment, intangible assets and investments in subsidiaries, joint ventures and associates. I am currently preparing the parent company's accounts to 31 December 2016. the higher of fair value less costs of disposal and value in use). FRS 102 Factsheet 4 7 December 2018 Disclosures Key FRS 102 Various disclosures are required about financial instruments. At year-end the auditors look at the net assets of Entity Y and see they are only EUR 0.5M, and request that the investment that Entity X has in Entity Y is impaired by EUR 0.5M down to EUR 0.5M (its net asset value). Section 35.10 allows a first time adopter to deem the cost to be the carrying amount at the date of transition as determined under previous GAAP. Topco Ltd owns 80% of Subco Ltd and the group has an accounting reference date of 31 March each year. Perfectly valid and well worded question. Hyperinflation (Section 31). Following the acquisition, the subsidiary's trade and customer list has basically been 'hived' up to the parent, therefore the subsidiary has been left with no trade or assets. Gains and losses on remeasurement are recognised in the Statement of comprehensive income for the period. In a group context, a subsidiary would normally be designated as a CGU. In three years time, if the trade lists etc were to be sold, who would be the seller of same ? In most cases the value of a subsequent impairment reversal will be less than the original impairment loss because of this restriction. to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the CGU. 5.1-1 FRS 102, Section 27 also includes requirements for inventory and goodwill. There were no intangible assets such as goodwill previously reflected on the subsidiary's balance sheet, as it was all internally generated. What are the key points? 40% of the machinery was destroyed but the remaining 60% can be sold. Consideration also needs to be given as to whether recoverable amount was estimated for an individually-impaired asset (FRS 102, para 27.30) or whether it was estimated for a CGU (FRS 102… Irrespective of who is using the customer list, who owns it? Section 35 – Transition to FRS 102 – Ability to show the deemed cost equal to the revalued value such that these assets are not considered to be revalued assets and instead that is deemed to be the cost of the asset. fair value less costs to sell (if determinable). Sorry if I've missed something obvious in my thinking :). Goodwill of £100,000 is written off in full leaving £110,000 to allocate. Effectively, for fixed assets, a previously recognised impairment loss can only be reversed to the extent that it brings the asset back up to the value it would have been stated at (net of depreciation/amortisation) had no impairment loss originally been recognised, so do be careful of this restriction to avoid overstating assets and impairment reversals. One of its subsidiaries, Charnley Clothing Ltd, suffered a fire during the lockdown and management have decided to close the store permanently and redeploy staff to other stores. 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