In most cases the value of a subsequent impairment reversal will be less than the original impairment loss because of this restriction. Top 10 tips for impairment testing December 2008 The last 12 months have been marked by increasing volatility in global markets. You said that the assets were "stripped out" but did not mention any consideration passing the other way. 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. There should be no further impairment to the machinery because these have already been written down to their recoverable amount. Ignore all previous answers which are not addressing the issue/red herrings. Section 11.8 defines the financial instruments which are within the scope of section 11 as basic instruments. 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. So, for example, the amount attributable to licences is £53,000 ((250 / (250 + 220 + 48)) x 110). The objective of FRS … 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. 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 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. Section 35 – Transition to FRS 102 – For individual entity financial statements the investment can be measured at cost or fair value. Topco Ltd owns 80% of Subco Ltd and the group has an accounting reference date of 31 March each year. IAS 36 seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. 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. Hyperinflation (Section 31). 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 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). 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’. 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? 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. 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. This important title guides practitioners through their first implementation of FRSs, 100, 101 and 102. 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. 2) Ordinance 2018 which comes into effect on 1 February 2019 ("the 2018 Amendment Ordinance"). As per the terms of the agreement yes. The finance director has calculated recoverable amount of Subco’s net assets to be £950,000. As the global financial crisis has worsened, the number of companies to 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. 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. 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. £340,000) which leaves a carrying amount for the machinery of £510,000 (£850k – £340k). 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. This article examines some of the main concepts of goodwill impairment and impairment of non-current assets under UK GAAP. Under FRS 102 property is classified as Investment property (Section 16) or Property, Plant and Equipment (Section 17). ‘investment in a subsidiary’ are not in IFRS 9’s scope. An entity is required to first assess whether an asset (including goodwill) is showing indicators of impairment and, if it is, calculate recoverable amount. The price the investing company pays that exceeds the fair market value of the subsidiary’s net assets is … The total carrying amount of the CGU after impairment of the machinery is £2,710,000 (see below). 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. The TaxCalc Survival Guide to Self Assessment, Payroll and Covid: Growth and profit opportunities, Formulas to avoid sluggish payroll during COVID-19. FRS 11 (July 1998) (PDF) FRS 11 was effective for accounting periods ending on or after 23 December 1998. However, the standard board is considering changing the requirement before 2015. In a group context, a subsidiary would normally be designated as a CGU. 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. 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. What are the key points? 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. 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). Impairment review only required to be performed if indicators of an impairment exists. IAS 36 - Impairment of Assets (26) IAS 37 - Provisions, Contingent Liabilities and Contingent Assets (18) IAS 38 - Intangible Assets (25) IAS 39 - Financial Instruments: Recognition and Measurement (34) IAS 40 - Investment Property (21) IAS 41 - Agriculture (7) US GAAP Accounting Discussion (12) General Accounting Discussion (21) The investment is an investment in an equity 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. So I checked by asking whether it was a gift whether that was what actually happened. This will also trigger an impairment review of the parent entity’s investment in the relevant subsidiary in the parent’s separate financial statements. charities sorp (frs 102) page iii. 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. 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. 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. 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. A company incorporated under the Hong Kong Companies Ordinance qualifies for reporting under the SME-FRF & SME-FRS if it satisfies the … contents. 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. 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 finance director has calculated a recoverable amount for the CGU (being the subsidiary) of £2.5 million. Long term contracts (Section 23). This has caused some lively debate in our office, where us 'minions' are like-minded that the investment should essentially be written off, but if anyone has other ideas or views it would be helpful to know. Gains and losses on remeasurement are recognised in the Statement of comprehensive income for the period. 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. There is also an option in FRS 102 not to fair value investment properties on the grounds of ‘undue cost or effort’. So the subsidiary GIFTED the entirety of its net assets to the holding company? 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). 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. 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. So the assets were "stripped out" by the vendor not the purchaser? 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. 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. Sorry if I've missed something obvious in my thinking :). So nothing has changed since the acquisition. Gains and losses on remeasurement are recognised in the Statement of comprehensive income for the period. accounting and reporting by charities: the statement of recommended practice (sorp) – scope and application 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? 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. Irrespective of who is using the customer list, who owns it? Qualifying criteria for the companies incorporated under the Hong Kong Companies Ordinance . However under FRS 102, these is a choice to either carry these at cost less impairment, fair value through profit and loss or fair value through OCI where fair value can be measured reliably. 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. the higher of fair value less costs of disposal and value in use). 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. Investment properties (Section 16). What were the net assets of the subsidiary on the acquisition date? FRS 102.5.2(a)) Statement of Income and Retained Earnings (as permitted by FRS 102.6.4 in certain circumstances). 40% of the machinery was destroyed in the fire therefore 40% of the carrying amount should be written off immediately (i.e. FRS 102 requires How to account for grant for electric car ? to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the CGU. 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?). This is allocated first to goodwill and then to the other assets in the CGU on a pro rata basis (FRS 102, para 27.21). The amortised cost basis recognises impairment losses in accordance with IAS 39, FRS 26 or FRS 102 ... AK Ltd has a subsidiary BK Inc, a company resident in the US. Why do you want to impair the investment in the holding company? 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. Where market value cannot be reliably determined, such investments are stated at historic cost less impairment.”. The Ratchford Group is a clothing retailer. 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. Currently, the investment in a subsidiary, either domestic or foreign, must be tested for impairment every tax period. FRS 102 will require interest to be accounted for on such a loan. 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. 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. fair value less costs to sell (if determinable). But something surely has changed. Investment property is measured at fair value at each reporting date with changes in fair value recognised in profit or loss (paragraph 16.7). Other IFRIC members disagreed. It is the notionally adjusted goodwill figure which is then aggregated with the other net assets of the CGU. My client acquired the 100% shareholding in another company in March 2016. Goodwill is dealt with in FRS 102, Section 19 Business Combinations and Goodwill. 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. On that basis theoretically the balance sheet at completion would have been the same as at the year-end date. Category: Accounting and standards, Audit. No mention of transfer of business etc. However, FRS 102, paras 27.29 to 27.31 restrict the amount of the impairment loss that can be reversed. My view is that, as the subsidiary company has no trade or assets, the market value can now be reliably valued as being worthless. 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. Impairment of financial assets ... 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