This could be particularly the case with an asset such as goodwill where a subsidiary has been significantly affected by the effects of the pandemic. Otherwise the net assets of the subsidiary would not have reduced you see. 2) Ordinance 2018 which comes into effect on 1 February 2019 ("the 2018 Amendment Ordinance"). If the holding company put the trade back into the subsidiary tomorrow what would the subsidiary be worth then? FRS and apply the requirements of FRS 103 to the acquisition of any such subsidiary. Qualifying criteria for the companies incorporated under the Hong Kong Companies Ordinance . It is the notionally adjusted goodwill figure which is then aggregated with the other net assets of the CGU. If it was worth £400k just over a year ago why would it be worth less now? Perfectly valid and well worded question. On that basis theoretically the balance sheet at completion would have been the same as at the year-end date. This article has summarised some of the main considerations that need to be looked at when dealing with asset impairment, including goodwill. FRS 102 reporters that are required to comply with those requirements should refer to the strategic report section of the IFRS for the UK illustrative financial statements. contents. Investment properties (Section 16). to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the CGU. As the global financial crisis has worsened, the number of companies to 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. accounting and reporting by charities: the statement of recommended practice (sorp) – scope and application However, under either Section 12 of FRS 102 or IAS 39, net investment hedging in respect of a shareholding in a subsidiary company is only permitted at consolidation. Gains and losses on remeasurement are recognised in the Statement of comprehensive income for the period. The carrying amount of Charnley’s assets are as follows: An independent surveyor has suggested a selling price of £1.6m could be achieved for the building. 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. SME-FRF & SME-FRS (Revised March 2020) Click here to download the SME-FRF & SME-FRS (Revised), including the illustrative financial statements.. The objective of FRS … 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. That’s a rather useless link unless you’re one of the suckers subscribing for ICAEW membership. FRS 101 was introduced into the UK and Ireland to help parent companies and subsidiaries from having to comply with the very extensive disclosure required under full IFRS but at the same 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. FRS 102 acknowledges at paragraph 27.24 that goodwill does not generate independent cash inflows and therefore it must be tested for impairment as part of a cash-generating unit (CGU). 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… 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. This will also trigger an impairment review of the parent entity’s investment in the relevant subsidiary in the parent’s separate financial statements. 40% of the machinery was destroyed in the fire therefore 40% of the carrying amount should be written off immediately (i.e. the higher of fair value less costs of disposal and value in use). Long term contracts (Section 23). To ask the question slightly differently: If my client wanted to buy the same company as of today's date, when the balance sheet totalled £100, with no trade or customer list, what is its market value - you are implying that it is still worth £400k? Each of these individual entities would be classed as a CGU because they generate their own revenue. Section 35 – Transition to FRS 102 – For individual entity financial statements the investment can be measured at cost or fair value. Goodwill of £100,000 is written off in full leaving £110,000 to allocate. While the agreement clearly states that they solely acquired the shares, is this a kind of 'substance over form' style justification to keep the investment unimpaired? https://www.icaew.com/en/technical/financial-reporting/financial-reporti... Depreciation of buy-to-let residential property, HMRC rejects calls to relax tax return deadline, PKF Littlejohn pick up Boohoo audit from PwC. Recoverable amount is £2.5m so a further impairment loss of £210,000 is needed. The justification is that it was worth £400,000 when someone decided to pay that for it, and nothing has changed. 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’. 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. Hyperinflation (Section 31). 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. But something surely has changed. 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. The monetary asset (cash at bank) is also not affected by the impairment because this will be realised at full value. Topco Ltd owns 80% of Subco Ltd and the group has an accounting reference date of 31 March each year. charities sorp (frs 102) page iii. OK - so this goes back then to my original point. In three years time, if the trade lists etc were to be sold, who would be the seller of same ? So the assets were "stripped out" by the vendor not the purchaser? 33 A parent of an investment entity shall consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity. The subsidiary company had an established trade that would enable it to generate turnover and profits prior to sale, and as of now it doesn't have a business - its status would be classed as non-trading. Top 10 tips for impairment testing December 2008 The last 12 months have been marked by increasing volatility in global markets. Investments in subsidiaries, joint ventures and associates accounted for in an entity’s separate financial statements in accordance with IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39), or using the equity method in accordance with IAS 28, should be assessed for impairment in accordance with the requirements of those Standards. IAS 21 — Determination of functional currency of investment holding company; ... members expressed their view that IAS 36 Impairment of Assets would be the most appropriate standard on which to base impairment of investments in associates in the separate financial statements of the investor. 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. 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. In the current climate it is likely that impairment losses will be more prevalent than before and it is important that a sound understanding of the requirements is obtained in order to ensure impairment losses (and any subsequent reversals, where permitted) are done correctly. I am currently preparing the parent company's accounts to 31 December 2016. 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. My client acquired the 100% shareholding in another company in March 2016. FRS 102 does clarify that where an entity’s share of losses in an associate exceed their investment, the deficit does not need to be recognised on the consolidated balance sheet unless there is a constructive obligation to meet the liabilities. Surely in the absence of some agreement one could just as easily say the sub retains the goodwill inherent in the list and is licensing the parent to use said list for no consideration, meantime. The following does not necessarily apply to a qualifying entity that takes advantage of reduced disclosures as set out in Section 1 Scope of FRS 102, nor to a small entity applying Section 1A Small Entities. My argument against this is that the agreement clearly states it solely acquired the 100% shareholding - the valuation of how this was arrived at, or what was 'behind' the acquisition is incidental. Gains and losses on remeasurement are recognised in the Statement of comprehensive income for the period. Is there justification to write this off over 4 years? Under FRS 102 property is classified as Investment property (Section 16) or Property, Plant and Equipment (Section 17). This would help smooth out the effect on the P&L instead of taking a one-year hit; 2. In these challenging times where businesses are facing tremendous disruption due to the Coronavirus, there will invariably be some assets that are showing indicators of impairment, hence may need to be written down to recoverable amount by way of an impairment loss in the entity’s financial statements. There should be no further impairment to the machinery because these have already been written down to their recoverable amount. When a company buys more than 50 percent of another company’s stock, the investee company is called a subsidiary. 40% of the machinery was destroyed but the remaining 60% can be sold. the SME-FRF and SME-FRS takes into account all relevant subsequent amendments to the new CO, up to and including the Companies (Amendment) (No. FRS 102, Section 27 also includes requirements for inventory and goodwill. Recently awarded the accolade […], Financial Reporting for Unlisted Companies in the UK and Republic of Ireland, Purchase this book. FRS 102 will require interest to be accounted for on such a loan. The impairment loss is calculated as follows: The impairment loss of £80,000 is allocated against the total notional goodwill of £150,000 with the corresponding debit being recognised in group profit or loss. 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. 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. There were no intangible assets such as goodwill previously reflected on the subsidiary's balance sheet, as it was all internally generated. Accounts and Audit of Limited Liability Partnerships, Purchase this book. The goodwill and other net assets in the consolidated financial 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. There was no consideration paid the other way. FRS 102 is based on the principles found in IFRS Standards, specifically IFRS for SMEs. That list is now being used solely for the benefit of the parent, with the turnover and profits going through the parent company's accounts. The investment is an investment in an equity However, FRS 102, paras 27.29 to 27.31 restrict the amount of the impairment loss that can be reversed. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective. Therefore, I don't see how the market value of £400k can be justified. An intercompany loan is outside IFRS 9’s scope (and within IAS 27’s scope) only if it meets the definition of an equity instrument for the subsidiary (for example, it is a capital contribution). These are being prepared under FRS 102 1A. Probably too late to be of any use to you, but maybe of some use to others. Impairment of assets (Section 27). Obviously there are the intangible assets such as goodwill, the customer list etc., which were not recognised on the balance sheet, that would effectively have passed to the purchaser on acquisition. 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. Therefore, in the draft accounts I have written down the value of the investment to £100 (being the share capital), giving a write-off of £399,900 to the P&L. FRS 102.5.2(a)) Statement of Income and Retained Earnings (as permitted by FRS 102.6.4 in certain circumstances). Specialised activities (Section 35) PwC – UK GAAP (FRS 102) illustrative financial statements for 2018 year ends 1001 Aa condition of the acquisition, all the debtors/creditors monies were all settled and the directors loan was fully repaid, leaving the net assets total being £100 at 30 April 2016. Currently, the investment in a subsidiary, either domestic or foreign, must be tested for impairment every tax period. Examples of source references used are: 4.14 Paragraph 4.14 of FRS 102 The consideration was £400,000. You said that the assets were "stripped out" but did not mention any consideration passing the other way. Under these standards, introduced in early 2013, many small to medium sized businesses will be preparing their financial statements under a fundamentally set of rules as the current UK GAAP framework will be withdrawn when the new […], Outstanding Contribution to the Accountancy Profession award, Reform of Companies House and Register of Companies, Brexit Implications on Financial Reporting, Emphasis of Matter and Material Uncertainties Related to Going Concern paragraphs in the auditor’s report, first to the goodwill allocated to the CGU; then. This states that an entity cannot reduce the carrying amount of any asset in a CGU below the highest of: FRS 102, para 27.23 then says that any excess amount of the impairment loss which cannot be allocated to an asset because of the above restriction must be allocated to the other assets of the unit pro rata on the basis of the carrying amount of those other assets. However, FRS 102, paras 27.29 to 27.31 restrict the amount of the impairment loss that can be reversed. It has been suggested that the parent should somehow introduce goodwill onto its balance sheet to reflect what it has acquired from the subsidiary (substance over form?). Goodwill is dealt with in FRS 102, Section 19 Business Combinations and Goodwill. 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. 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. 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. An entity is required to first assess whether an asset (including goodwill) is showing indicators of impairment and, if it is, calculate recoverable amount. ‘Recoverable amount’ is defined in the Glossary to FRS 102 as: Where recoverable amount is lower than carrying amount, the asset is written down to recoverable amount by way of an impairment loss which is recognised in profit or loss. The aggregate amount is then compared to recoverable amount to determine the value of any write-down. objective evidence of an impairment is it recognised. The Government has proposed a new bill, which will come into force retroactively as from January 1st, 2013, which will disallow the deduction of Impairment losses of investments in subsidiaries, once passed by the Parliament. In most cases the value of a subsequent impairment reversal will be less than the original impairment loss because of this restriction. However, the standard board is considering changing the requirement before 2015. Ripples from the credit crunch are being felt in territories and markets across the world as growth slows. Impairment review only required to be performed if indicators of an impairment exists. £340,000) which leaves a carrying amount for the machinery of £510,000 (£850k – £340k). Sorry, I assumed you were saying that the assets had been stripped out by the holding company after the acquisition. This article examines some of the main concepts of goodwill impairment and impairment of non-current assets under UK GAAP. Impairment: Investment in subsidiaries A goodwill impairment on consolidation indicates a decrease in value since acquisition. Why do you want to impair the investment in the holding company? 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. If you enjoyed this article, subscribe to receive more just like it. FRS 102 will have to provide a formal Statement of Compliance with FRS 102 in their financial statements, probably in their accounting policy note. 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). Where market value cannot be reliably determined, such investments are stated at historic cost less impairment.”. 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. Under old GAAP investment in subsidiaries, associates and joint ventures in the individual financial statements could only be carried at cost less impairment. A ‘cash-generating unit’ is defined in the Glossary to FRS 102 as: Examples of CGUs include an individual hotel in a chain; individual branches of a retailer and individual restaurants in a chain of restaurants. (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). FRS 11 Impairment of Fixed Assets and Goodwill. In addition, source references for the illustrative disclosures have been included in the right hand margin of the financial statements. 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, para 27.31). 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. FRS 102 requires What are the key points? The principles and practice of accounting for members’ interests, retirement benefits and groups are also addressed in detail. Impairment of financial assets ... Investment property & deferred tax – Fair value movements are to be recognised within the income statement, eliminating the need for a revaluation ... interest free loan from a parent to a subsidiary. 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. So has the holding company suffered a loss by acquiring £400,000 of goodwill without paying for it? No mention of transfer of business etc. A company incorporated under the Hong Kong Companies Ordinance qualifies for reporting under the SME-FRF & SME-FRS if it satisfies the … The entity holds an initial investment in a subsidiary (investee). 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. Note;FRS quoted references are superseded, I have a question relating to the valuation of an investment in a subsidiary, Explore our AccountingWEB Live Shows and Episodes, View our 2020 Accounting Excellence Firm Awards Finalists, MyWorkpapers Lite for growing accountancy firms. How to Account for Write-Offs of Investment in Subsidiaries. The finance director has calculated a recoverable amount for the CGU (being the subsidiary) of £2.5 million. There is also an option in FRS 102 not to fair value investment properties on the grounds of ‘undue cost or effort’. 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