by John McCarthy Consulting Ltd. | Mar 28, 2024 | News
Revenue recognition and lease accounting rules are the main changes from January 2026 arising from newly published amendments to FRS 102.
On 27th March the Financial Reporting Council published a 285 page list of the Amendments to FRS 102, FRS 105 and other FRSs. These changes will come into force from 1 January 2026 with early adoption allowed, provided all the changes are adopted simultaneously.
The changes are too extensive to be covered in this short blog but here is a flavour of what’s changing.
An earlier effective date (among changes in other FRS) applies to new disclosures about supplier finance arrangements in Section 7 of FRS 102 ‘Statement of Cash Flows’ for periods beginning on or after 1 January 2025, with early application permitted.
Where an entity adopts these amendments early:
- In the UK it shall disclose that fact (regardless of entity size), while,
- Small entities in the Republic of Ireland, are encouraged to disclose that fact.
Revenue Recognition -the main change is the use of the 5 step model from (IFRS 15) which will impact businesses that have contracts that bundle goods and services with variable consideration, warranties, customer options or significant financing components. It’s unlikely that this will impact most SMEs that much. No restatement of comparatives is required on transition.
Lease accounting – lessors will see little change, but for lessees there are major changes. Right of use assets (RoU) (as defined) are to be capitalised on the balance sheet as a RoU asset with a corresponding liability.
There are exemptions for certain:
- short term leases (defined as a lease that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease; and
- low value assets – defined more in terms of what they are not than what they are. The FRS gives a list of what are not on the list including cars, buses, trucks, tractors, land and buildings.
Such leases will still be treated as operating leases, taking the lease expense to profit or loss and a finance charge on the lease liability.
Like the transition rules on revenue recognition no restatement of comparatives is required on transition to the new leasing provisions.
The main impact of the leasing changes will be that EBITDA measures will change because the operating lease expense is replaced by depreciation on the asset and interest occurring on the unwinding of the corresponding lease liability as the lease is paid. For some businesses this may have a negative impact on debt covenants involving EBITDA measures.
The Financial Reporting Council will issue updated Staff Factsheets and the actual Standards themselves later in 2024. It’s hoped that by having an implementation period of 21 months before the effective date rather than the original promise of ‘at least 12 months’, the extended period will provide a bit more breathing space for users.
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by John McCarthy Consulting Ltd. | Dec 6, 2021 | Blog, News
Continuing our soccer theme from last week, we look at a similar story about the topic of how intangible assets (football players) are treated.
Derby County Football Club (DCFC) entered Administration in September 2021 and suffered a points deduction at the hands of the English Football League (EFL), as a result. The club is managed by Wayne Rooney and currently features three Irish players Jason Knight, Festy Ebosele and Louie Watson.
In this blog we are concentrating on the financial statements of Derby County Football Club (DCFC) (also called the Rams) and at just one aspect of their somewhat questionable use of accounting rules. The Directors’ unusual treatment of the amortisation of their intangible assets (i.e., football players) which has led directly to the club being fined €100,000 by the EFL in June 2021.
Examining the accounting rules on the topic (Financial Reporting Council Standard FRS 102) we see that specifically FRS 102.18.23 states that the residual value of an intangible asset must be ‘Nil’, unless, either:
- A third party has committed to purchase the asset at the end of its useful life, or
- There is an active market for the asset from which the residual value can be determined, and which is probable that such a market will be in existence at the end of the asset’s useful life.
The last available filed accounts for the year to 30 June 2018 show the accounting policy wording for intangible assets costs/amortisation as: “The costs associated with acquiring players’ registrations, inclusive of EFL levies, or expanding their contracts, including agent fees, are capitalised and amortised over the period of the respective players’ contracts after consideration of their residual values.”
It is these last six words that drew the ire of the football regulator. With so much uncertainty surrounding the residual value of a player at the end of their contract/football career, many factors point to a ‘Nil’ residual value. Not least of these, is the possibility that a player may use the Bosman ruling (based on a 1995 legal case entitling a player to ask for a free transfer) which can cause the players transfer value to be lower than expected.
The net effect of the above accounting policy of course, is that the negative impact of amortisation on the club’s profits is reduced and according to one football analyst DCFC have by far the lowest amortisation percentage in their division for 2016/17.
In the Administrators’ latest statement filed at UK Companies House on 17 November, the value of the company’s intangible assets according to the latest 30 June 2018 accounts (the latest available at Companies house), are shown at almost £43 million, but appear on the Administrator’s Statement of Affairs as ‘uncertain’. Let’s hope the future for the club is brighter.
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by John McCarthy Consulting Ltd. | Nov 29, 2021 | Blog, News
Who says accountancy is boring? I am no PSG or Barcelona fan, but you must admit, that even at age 34, Messi is probably one of the best players in the world today. My pub quiz question for you – is a football player like Messi an accounting asset or not?
The accounting profession has long debated the question – what is an ‘asset’?
FRS 102.2.27 states that an item is an ‘asset’ if:
- it is probable that any future economic benefit associated with the item will flow to or from the entity; and
- the item has a cost or value that can be measured reliably.
This was a much easier question to answer, in the manufacturing/industrial revolution when an asset was more often a tangible asset that was certain to generate future cash flows that could reliably be measured.
However, we now live in the era of ‘knowledge resources’, be that professional knowledge (in the knowledge economy) or personal skill and talent which is the focus of this blog i.e. ‘soccer intelligence’ – the skill to know how to make the best use of a football. This is the era of ‘intangible’ assets’. More on this debate and soccer related finance is contained in the latest Deloitte Football Money League Report 2021.
Based on the above principles, FRS 102.18.4 states that an intangible asset shall be recognised by an entity if, and only if:
- it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
- the cost or value of the asset can be measured reliably.
After 21 years with Barcelona, in August 2021, Messi signed a two-year contract with PSG. Messi cost PSG nothing, as it was a free transfer.
Unfortunately for Barcelona, using the same intangible asset standards in IFRS, used by most European clubs, (FRS 102 has similar rules), the club was never allowed to show Messi as an intangible asset on their balance sheet, as he joined them as a 13-year-old with no established cost. The fact that he generated much subsequent revenue for them could never justify him being on their balance sheet under IFRS/FRS 102 principles.
Meanwhile PSG are permitted to exploit the intangible asset measurement rules to place Messi on balance sheet by measuring the expected future economic benefits that will flow to PSG. The next financial statements for PSG for the year ended 30 June 2022 will make interesting reading. Meantime according to the Football Benchmark Report 2021 the KPMG estimate of Messi’s current value is €180 million.
The same happened in 1992 when David Beckham, then aged 17, was recruited by Manchester United and no one could estimate his future ‘value’. Developing superstar status quickly, Manchester United could not recognize his value in the club’s balance sheet and thus could not report this value to the Stock Exchange. Once he moved to LA Galaxy in 2007 (then aged 32) he was recognised in the Los Angeles’ club’s financials at the amount paid to acquire him – a staggering $250 million.
For more on football player valuations see the KPMG Football Benchmark Report 2021 and the Deloitte Annual Review of Football Finance 2021.
For our latest Audit Quality Control Manual (October 2021) (implementing the latest Irish Audit & Accounting Supervisory Authority standards including ISQC1 on audit quality control) click here. View the Table of Contents here.
We also have an up to date Anti-Money Laundering Procedures Manual (September 2021) – View the Table of Contents click here.
by John McCarthy Consulting Ltd. | Oct 22, 2021 | Blog, News
What’s the difference in treatment of investment property between FRS 105 and FRS 102?
Too many accountants rely on the computer software to produce the correct result, which can go badly wrong. You can’t beat reading the standards themselves. In this case, the March 2018 version (as amended) of FRS 105 and more particularly Section 12 of FRS 105 which deals with Property, plant and equipment and Investment Property.
Investment property assets are normally carried at revaluation under Irish GAAP i.e. FRS 102, but it’s dangerous to assume that FRS 105 allows the same treatment. For the purposes of this blog, I am ignoring the FRS 102 options for investment property, which allow for cost/fair value models, in certain circumstances. Instead I want to focus on the fact that FRS 105 removes most FRS 102 options.
Where the company owning the property is a ‘micro-entity’ (as defined in the Companies Act, 2014 with turnover €700k, gross assets €350k, and less than 10 employees), it is not allowed apply the alternative accounting rules/fair value accounting rules under FRS 105, because the Companies Act, 2014 does not permit the use of these options.
Therefore, investment property must be carried at cost under FRS 105.12.3 and the knock-on effect of this is that the investment property must also be depreciated under FRS 105.12.15 because that is a requirement of the cost model.
The bottom line is that if you have ‘small’ (as defined in the Companies Act, 2014) company clients who wish to report investment property assets at revaluation or at fair value, then they must adopt FRS 102 Section 1A (as amended) or else the full version of FRS 102 (March 2018) (as amended).
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by John McCarthy Consulting Ltd. | Sep 13, 2021 | Blog, News
In response to the continuing impact of Covid 19 the Financial Reporting Council (FRC) has extended the accounting requirements for special conditions for reporting rent and lease concessions/reductions under FRS 102 and 105 well into next year. The change will enable businesses to present a clearer picture of their performance in year-end accounts.
Many entities have struggled to pay rent and meet lease payment commitments for their rental properties. This has led to negotiations between tenants and landlords in the form of rent concessions (deductions in rent or waivers) or rent deferrals (an agreement to pay rent or lease payments until a later date).
According to the FRC, the prolonged duration of the pandemic has made it necessary to extend the existing reporting time for a further 12 months to 30 June 2022 to help ensure consistency and accuracy in financial reporting and in such a way that best reflects their substance. The disclosure of the reality of rent concessions for businesses, will achieve a true and fair presentation by recognising the reduction in full for the period concerned.
The concession means that if a business doesn’t have to pay rent for a given month, no expense will be recognised for that month. Prior to the advent of Covid-19, a rent reduction would have been recognised over the life of the lease.
The main conditions of the proposals contained in FRED 78 are:
- Entities must recognise changes that reduce lease payments in the period to 30 June 2022, and meet the other specified conditions, on a systematic basis over the periods that the change is intended to compensate, rather than spreading the impact of the change, over future lease periods.
- The amendments are effective for accounting periods beginning on or after 1 January 2021, with earlier application permitted.
The net impact will be that if the business doesn’t have to pay rent for a given month, no expense will be recognised for that month thus allowing companies to report a more accurate picture of their cash management, performance, and rent-related support measures, reflecting the businesses’ economic reality.
There are rumours that the FRC may seek to extend the reporting period again, at least until the end of the pandemic, especially if there are further lockdowns, during winter, potentially leaving the retail sector in the same position as before.
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