igaap 2005 in your pocket

igaap 2005 in your pocket A summary of international financial reporting from a UK perspective July 2005

Contents Deloitte guidance 1 Abbreviations used in this publication 2 Current international standards 3 Appendix I Comparable UK and international standards 60 Appendix II Effective dates of FRS 23, 24, 25 and 26 64 Appendix III Draft IFRS guidance as at 30 April 2005 65 Appendix IV Planned IASB projects 66

Deloitte guidance igaap 2005 In your pocket This guide is one in the series of igaap publications that with other resources from Deloitte assists users in understanding international financial reporting in the UK. These include: Current publications: igaap 2005 Financial statements for UK listed groups (model accounts) igaap 2005 Financial instruments: IAS 32 and 39 explained Forthcoming publications: igaap 2005 IFRS reporting in the UK (detailed manual) igaap and IAS Plus Newsletter UK and global editions of the quarterly newsletter of latest developments plus occasional special editions, usually on issue of an IFRS. Free download available from our website www.iasplus.com, or by direct email through a Deloitte contact. Further information and up-to-date news on IASB developments, together with reference and training materials for download, are available from our comprehensive IAS Plus website www.iasplus.com. 1

Abbreviations used in this publication ASB UITF FRS FRSSE SSAP SORP STRGL IASB IFRS IAS SIC IFRIC SORIE EU GAAP UK Accounting Standards Board Urgent Issues Task Force (of ASB) Financial Reporting Standard Financial Reporting Standard for Smaller Entities Statement of Standard Accounting Practice Statement of Recommended Practice Statement of Total Recognised Gains and Losses International Accounting Standards Board International Financial Reporting Standard International Accounting Standard Standing Interpretations Committee (of IASB) International Financial Reporting Interpretations Committee (of IASB) Statement of Recognised Income and Expense European Union Generally Accepted Accounting Practice 2

Current international standards International standards and interpretations in issue as at 30 April 2005 The first table sets out at a glance the comparable UK and international standards. The following pages summarise information on the old IAS and new IFRS and SIC and IFRIC interpretations in issue as at 30 April 2005 under the following headings: Effective date generally an accounting period to which a standard applies. a brief description of the standard s purpose. summary of principles and requirements. Related SIC and IFRIC that interpret a standard. After each standard, there is an indication of the main differences between IFRS and UK GAAP, based on UK standards in issue at 30 April 2005. IFRSs may be issued in the future that will be available for early adoption but they will not be mandatory in 2005 IFRS financial statements. Comparable UK and international standards Old UK standards New UK standards IFRS IFRS 1 First-time adoption of international financial reporting standards. FRS 1 Cash flow statements FRS 2 Accounting for subsidiary undertakings IAS 7 Cash flow statements. IAS 27 Consolidated and separate financial statements. SIC 12 Consolidation Special purpose entities. 3

Old UK standards New UK standards IFRS FRS 3 Reporting financial performance IFRS 5 Non-current assets held for sale and discontinued operations. IAS 1 Presentation of financial statements. IAS 8 Accounting policies, changes in accounting estimates and errors. SIC 29 Disclosure Service concession arrangements. FRS 4 Capital FRS 25 (IAS 32) Financial IAS 32 Financial instruments instruments: disclosure instruments: disclosure and and presentation presentation. FRS 5 (Application Note G) Reporting the substance of transactions FRS 6 Acquisitions and mergers FRS 7 Fair values in acquisition accounting FRS 8 Related party disclosures FRS 9 Associates and joint ventures FRS 10 Goodwill and intangible assets IAS 18 Revenue. IFRS 3 Business combinations. IFRS 3 Business combinations. IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds. IAS 24 Related party disclosures. IAS 28 Investments in associates. IAS 31 Interests in joint ventures. SIC 13 Jointly controlled entities Non-monetary contributions by venturers. IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds. IAS 38 Intangible assets. IFRIC 3 Emission rights. 4

Old UK standards New UK standards IFRS FRS 11 Impairment of fixed assets and goodwill FRS 12 Provisions, contingent liabilities and contingent assets IAS 36 Impairment of assets. IAS 37 Provisions, contingent liabilities and contingent assets. IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities. IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds. FRS 13 Derivatives FRS 25 (IAS 32) IAS 30 Disclosures in and other financial Financial instruments: the financial statements of instruments: disclosures disclosure and banks and similar financial presentation institutions. IAS 32 Financial instruments: disclosure and presentation. IFRIC 2 Members shares in Co-operative entities and similar instruments. FRS 14 Earnings FRS 22 (IAS 33) IAS 33 Earnings per share. per share Earnings per share FRS 15 Tangible fixed assets FRS 16 Current tax FRS 17 Retirement benefits FRS 18 Accounting policies IAS 16 Property, plant and equipment. IAS 23 Borrowing costs. IAS 12 Income taxes. SIC 25 Income taxes Changes in the tax status of an entity or its shareholders. IAS 19 Employee benefits. IAS 8 Accounting policies, changes in accounting estimates and errors. 5

Old UK standards New UK standards IFRS FRS 19 Deferred tax SSAP 4 Accounting for government grants IAS 12 Income taxes. SIC 21 Income taxes Recovery of revalued non-depreciable assets. SIC 25 Income taxes Changes in the tax status of an entity or its shareholders. IAS 20 Accounting for government grants and disclosure of government assistance. SIC 10 Government assistance No specific relation to operating activities. SSAP 5 Accounting for value added tax SSAP 9 Stocks and long-term contracts SSAP 13 Accounting for research and development IAS 2 Inventories. IAS 11 Construction contracts. IAS 18 Revenue. IAS 38 Intangible assets. SSAP 17 Accounting FRS 21 (IAS 10) Events IAS 10 Events after the for post balance sheet after the balance sheet balance sheet date. events date SSAP 19 Accounting for investment properties IAS 40 Investment property. SSAP 20 Foreign FRS 23 (IAS 21) The IAS 21 The effects of currency translation effects of changes in changes in foreign foreign exchange rates exchange rates. SSAP 21 Accounting for leases and hire purchase contracts IAS 17 Leases. SIC 27 Evaluating the substance of transactions involving the legal form of a lease. IFRIC 4 Determining whether an arrangement contains a lease. 6

Old UK standards New UK standards IFRS SSAP 24 Accounting for pension costs SSAP 25 Segmental reporting UITF 4 Presentation of long-term debtors in current assets IAS 19 Employee benefits. IAS 14 Segment reporting. IAS 1 Presentation of financial statements. UITF 5 Transfers from current assets to fixed assets UITF 6 Accounting for post-retirement benefits other than pensions IAS 19 Employee benefits. UITF 9 Accounting for FRS 24 (IAS 29) Financial IAS 29 Financial reporting in operations in reporting in hyperinflationary hyperinflationary hyperinflationary economies. economies economies UITF 11 Capital FRS 26 (IAS 39) IAS 39 Financial instruments: issuer Financial instruments: instruments: recognition call options recognition and and measurement. measurement UITF 15 Disclosure of substantial acquisitions UITF 17 Employee FRS 20 (IFRS 2) IFRS 2 Share-based share schemes Share-based payment payment. UITF 18 Pension costs following the 1997 tax changes in respect of dividend income UITF 19 Tax on gains and losses on foreign currency borrowings that hedge an investment in a foreign enterprise IAS 12 Income taxes. 7

Old UK standards New UK standards IFRS UITF 21 Accounting issues arising from the proposed introduction of the Euro SIC 7 Introduction of the Euro. UITF 22 The acquisition of a Lloyd s business UITF 23 Application of the transitional rules in FRS 15 UITF 24 Accounting for start-up costs IAS 38 Intangible assets. UITF 25 National Insurance contributions on share option gains UITF 26 Barter transactions for advertising SIC 31 Revenue Barter transactions involving advertising services. UITF 27 Revision to estimates of the useful economic life of goodwill and intangible assets UITF 28 Operating lease incentives UITF 29 Website development costs SIC 15 Operating leases Incentives. SIC 32 Intangible assets Web site costs. UITF 30 Date of award FRS 20 (IFRS 2) IFRS 2 Share-based to employees of shares Share-based payment payment. or rights to shares UITF 31 Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or associate UITF 32 Employee benefit trusts and other intermediate payment arrangements SIC 13 Jointly controlled entities Non-monetary contributions by venturers. SIC 12 Consolidation Special purpose entities. 8

Old UK standards New UK standards IFRS UITF 33 Obligations in capital instruments UITF 34 Pre-contract costs IAS 32 Financial instruments: disclosure and presentation. IAS 11 Construction contracts. UITF 35 Death-in-service and incapacity benefits UITF 36 Contracts for sales of capacity UITF 37 Purchases and sales of own shares UITF 38 Accounting for ESOP trusts IAS 32 Financial instruments: disclosure and presentation. IAS 32 Financial instruments: disclosure and presentation. SORP Accounting for FRS 27 Life assurance IFRS 4 Insurance contracts. insurance business SORP Financial reports of pension schemes SORP Accounting for oil and gas exploration, development, production and decommissioning activities SORPs issued by the British Bankers Association ASB Statement: Interim reports IAS 26 Accounting and reporting by retirement benefit plans. IFRS 6 Exploration for and evaluation of mineral resources. IAS 30 Disclosures in the financial statements of banks and similar institutions. IAS 34 Interim financial reporting IAS 41 Agriculture. 9

Summary of international standards IFRS 1 First-time adoption of international financial reporting standards Effective date Periods beginning on or after 1 January 2004. Related SIC and IFRIC Requirements for, and form of, first IFRS financial statements. Defines first-time adoption of and transition to IFRS. Specifies a general principle that IFRS effective at the date of adoption be applied retrospectively but details some voluntary and mandatory exemptions from specific standards. Sets out disclosure requirements, in particular reconciliations between previous GAAP and IFRS. None. Main differences Not applicable. IFRS 2 Share-based payment Effective date Periods beginning on or after 1 January 2005. To reflect a charge in the income statement for share-based payment transactions with employees and non-employees. Sets out fair value measurement principles and other requirements for share-based payment transactions. For equity-settled transactions with non-employees, requires recognition of an expense with measurement normally based on the fair value of goods or services received. For equity-settled transactions with employees, requires recognition of an expense based on fair value of equity instrument at date of grant. Depending on the form of the payment s settlement (i.e. cash or equity), requires either a liability or an increase in equity to be recorded. 10

Requires spreading of the fair value charge over the period of vesting or as services or goods are received. Related SIC and IFRIC None. Main differences UITF 17 Employee share schemes: Requires the intrinsic value of share options granted (i.e. difference between exercise price and market value at grant date) to be charged to profit and loss over the performance period. IFRS 2 requires fair value measurement. The ASB issued FRS 20 (IFRS 2) Share-based payment with the following impact: Implements IFRS 2 in the UK for entities not preparing their financial statements in accordance with IFRS. Entities applying the FRSSE are exempt. Effective for periods beginning on or after: 1 January 2005 for listed entities; and 1 January 2006 for unlisted entities, with earlier adoption encouraged. IFRS 3 Business combinations Effective date Business combinations first accounted for in periods beginning on or after 31 March 2004. Establishes the basis of determining and allocating purchase cost to underlying assets and liabilities acquired in all business combinations. Scopes out certain business combinations, such as common control transactions. All business combinations are accounted for using the purchase method, thereby requiring an acquirer to be determined for every business combination. Identifiable assets, liabilities and contingent liabilities are measured at their fair values, including identifiable intangible assets. 11

Prohibits amortisation of goodwill and instead requires annual impairment tests in accordance with IAS 36. Requires negative goodwill to be recognised immediately as a gain in the income statement. Related SIC and IFRIC None. Main differences FRS 6 Acquisitions and mergers: Merger accounting is required where five criteria are met. This is not permitted under IFRS. Group reconstructions, in which there is no change in shareholders or their respective rights, are merger accounted for. Common control transactions (defined differently to group reconstructions) are scoped out of IFRS 3. FRS 7 Fair values in acquisition accounting: Provides some specific fair value measurement guidance. IFRS 3 is very brief on how to measure fair values. Only requires separable intangible assets to be fair valued. FRS 10 Goodwill and intangible assets: Goodwill is often amortised over its estimated useful economic life. The IFRS requires annual impairment reviews and prohibits amortisation. Negative goodwill is capitalised and shown as a separate line item within goodwill. IFRS 3 requires immediate recognition as a gain in the income statement. 12

IFRS 4 Insurance contracts Effective date Periods beginning on or after 1 January 2005. Related SIC and IFRIC Recognition and measurement of insurance contracts by an entity issuing such contracts. Does not provide guidance for policyholders. Applies to all insurance contracts issued by an insurer, but not to its other assets and liabilities. Prohibits provisions for possible claims under contracts that are not in existence at the reporting date. Requires an adequacy test of recognised insurance liabilities and an impairment test for reinsurance assets. Prohibits offsetting of insurance liabilities and reinsurance assets. None. Main differences Companies Act 1985: Schedule 9A contains special provisions about form and content of financial statements of insurance companies. SORP Accounting for insurance business: Accounting for insurance business including investments and clarification of application of certain provisions of the Companies Act. The ASB issued FRS 27 Life assurance with the following impact: Requires appropriate measurement of, and disclosures relating to, liabilities and assets of life assurance businesses and disclosures relating to the financial strength of entities carrying on life assurance business. Requires separate presentation of fund for future appropriations. Requires capital statement setting out total available capital. Effective for periods ending on or after 23 December 2005. Earlier adoption is encouraged. Later effective dates for certain entities. 13

IFRS 5 Non-current assets held for sale and discontinued operations Effective date Periods beginning on or after 1 January 2005. Related SIC and IFRIC Accounting for assets and disposal groups held for sale, and presentation and disclosure of discontinued operations. Introduces concept of disposal group, being a group of assets and directly associated liabilities to be disposed of. To be classified as held for sale a non-current asset must, at the balance sheet date, be available for immediate sale in its present condition, the sale must be highly probable and expected to be completed within one year. Specifies that assets or disposal groups classified as held for sale are carried at the lower of carrying amount and fair value less costs to sell, and are not depreciated. Requires separate presentation on the face of the balance sheet. Total assets and total liabilities of a disposal group classified as held for sale are not offset. A disposal group may meet the definition of a discontinued operation. Requires substantial disclosures for discontinued operations. Results of discontinued operations must be presented separately on the face of the income statement below profit after tax from continuing operations. None. Main differences FRS 3 Reporting financial performance: Requires analysis of continuing and discontinued activities. Classification as discontinued requires the disposal to be completed either during the period or before the earlier of the date of approval of the financial statements and three months post year end. This will usually be a later date than under IFRS 5. The classification and measurement of other assets to be sold generally continue as normal. 14

IFRS 6 Exploration for and evaluation of mineral resources Effective date Related SIC and IFRIC Periods beginning on or after 1 January 2006. Earlier adoption is encouraged. Accounting practice and disclosure in relation to exploration for and evaluation of mineral resources, including impairment of exploration and evaluation assets. Permits entity to develop its accounting policy for exploration and evaluation assets under IFRS without specifically considering the requirements of paragraphs 11 and 12 of IAS 8. Generally entities adopting IFRS 6 may continue to use their existing accounting policies. Requires impairment test for exploration and evaluation assets when facts and circumstances suggest that carrying amount may exceed recoverable amount. Requires disclosure of information that identifies and explains amounts recognised arising from exploration for and evaluation of mineral resources. None. Main differences SORP Accounting for oil and gas exploration, development, production and decommissioning activities: Specifies the accounting and presentation for oil and gas exploration and production activities. IAS 1 Presentation of financial statements Effective date Periods beginning on or after 1 January 2005. Basis for presentation of general purpose financial statements including structure and minimum requirements for their content. Specifies contents of a complete set of financial statements, being balance sheet, income statement, statement of changes in equity (or SORIE) and cash flow statement. Specifies minimum items to appear on the face of the balance sheet and income statement and includes general requirements for comparatives. 15

Balance sheet may be presented either separating between current and non-current assets and liabilities, or, in rare circumstances, in order of liquidity. Balance sheet format for banks is addressed in IAS 30. Analysis of expenses in the income statement may be given by nature or by function. If expenses are presented by function, classification by nature must be provided in the notes. Requires disclosure of accounting policies followed, information about key assumptions concerning the future and about estimations where changes in assumptions have a significant risk of causing material adjustment. Related SIC and IFRIC SIC 29 Disclosure Service concession arrangements: Requires disclosure if an entity provides services that provide the public with access to major social and economic infrastructures (soon to be replaced with an accounting IFRIC). Main differences Companies Act 1985: Income statement headings are more detailed than under IAS 1 although the two classifications for expenses under formats 1 and 2 equate those described in IAS 1. Balance sheet formats permitted by the Companies Act are less flexible than under IAS 1. FRS 3 Reporting financial performance: Requires disclosure of the effects of acquisitions. There is no equivalent requirement under IAS 1, but IFRS 3 requires extensive disclosures in the notes. Specifies certain exceptional items which should be shown separately on the face of the profit and loss account after operating profit. IAS 1 does not contain an equivalent to the FRS 3 paragraph 20 items, but requires separate disclosure of significant items of income and expense. Requires presentation of the STRGL and reconciliation of movements in shareholders funds. Under IAS 1, these can be combined into a single statement of changes in equity. 16

FRS 18 Accounting policies: Requires disclosure of significant estimation techniques. The disclosure requirements are less extensive than under IAS 1. IAS 2 Inventories Effective date Periods beginning on or after 1 January 2005. Related SIC and IFRIC Principles for recognition and measurement of inventories. Scopes out WIP under construction contracts, financial instruments and biological assets (up to the point of harvest). Mineral and agricultural products are scoped out if they are measured at net realisable value in accordance with industry practices. Inventories are measured at the lower of cost and net realisable value. Commodity broker-traders are allowed to carry inventories at fair value less costs to sell. Permitted cost formulas are first-in-first-out (FIFO) and weighted average cost. Guidance on determination of costs of inventories, write-downs to net realisable value and their reversals. Requires disclosure of inventories carried at fair value less costs to sell, amounts of any write-down and of any reversal. None. Main differences SSAP 9 Stocks and long-term contracts: Disclosure requirements are more extensive under IAS 2. For example, the amount of any write-down of inventories does not need to be disclosed under SSAP 9. 17

IAS 7 Cash flow statements Effective date Periods beginning on or after 1 January 1994. Related SIC and IFRIC Presentation of information about the historical changes in cash and cash equivalents during the period. Applies to all entities; no exemptions are available. Analyses changes in cash and cash equivalents during a period. Cash equivalents include short-term (up to three months), highly liquid investments that are readily convertible to known amounts of cash. Specifies and defines three headings for the classification of cash flows: operating, investing and financing activities. Operating cash flows can be presented under either the direct (recommended) or indirect method. Requires disclosure of significant non-cash transactions. None. Main differences FRS 1 Cash flow statements: Certain exemptions from the UK standard are available (such as small companies and certain subsidiaries). IAS 7 does not include any exemptions. Analyses changes in cash, being cash and deposits repayable on demand (up to 24 hours). This definition is narrower than under IAS 7 which includes cash equivalents up to three months. Defines eight standard headings under which to classify cash flows and their order. IAS 7 specifies three headings. 18

IAS 8 Accounting policies, changes in accounting estimates and errors Effective date Periods beginning on or after 1 January 2005. Related SIC and IFRIC Selection of accounting policies; accounting and disclosure of changes in accounting policies, accounting estimates and correction of errors. Requires consistency in selection and application of accounting policies. Allows change in an accounting policy only if this is required by another standard or results in providing more reliable and relevant information. Unless a specific standard requires otherwise, changes in accounting policies are applied retrospectively and comparatives are restated as if the new policy had always been applied. Corrections of material prior period errors are accounted for retrospectively with restated comparatives. Provides certain exemptions for retrospective application due to impracticability. Changes in accounting estimates are accounted for prospectively. Specifies disclosure requirements including impending changes of accounting policies as a result of a new standard that has been issued but not yet come into effect. None. Main differences FRS 3 Reporting financial performance: Requires comparatives to be restated in respect of fundamental prior period errors only. IAS 8 requires restatement for material errors. FRS 18 Accounting policies: Does not require disclosure of impending changes of accounting policy. 19

IAS 10 Events after the balance sheet date Effective date Periods beginning on or after 1 January 2005. Disclosure and accounting requirements for events after the balance sheet date. Defines events after the balance sheet date as those occurring between balance sheet date and date of authorisation of financial statements for issue. Identifies two types of events: adjusting and nonadjusting. Requires adjustment for adjusting events, i.e. events that provide evidence of conditions that existed at the balance sheet date. Requires disclosures about material non-adjusting events, i.e. events that are indicative of conditions that arose after the balance sheet date. Disclosures include description of events and estimate of their financial effect. Defines dividends declared after the balance sheet date as a non-adjusting event. (Disclosure of proposed dividends is required by IAS 1.) Requires disclosure of date of authorisation of financial statements for issue and who gave authorisation. Related SIC and IFRIC None. Main differences SSAP 17 Accounting for post balance sheet events: Definition of adjusting events includes events which because of statutory or conventional requirements are reflected in the financial statements. These include proposed dividends, amounts appropriated to reserves and dividends receivable from subsidiaries and associated companies. Under IAS 10 these are treated as non-adjusting events and are not reflected in the financial statements. 20

The ASB issued FRS 21 (IAS 10) Events after the balance sheet date with the following impact: Implements IAS 10 in the UK for entities not preparing their financial statements in accordance with IFRS. Entities applying the FRSSE are exempt. Effective for periods beginning on or after 1 January 2005. IAS 11 Construction contracts Effective date Periods beginning on or after 1 January 1995. Related SIC and IFRIC Accounting for revenues and costs associated with construction contracts. Defines construction contract as a contract specifically negotiated for the construction of an asset or, in some cases, a combination of assets. Defines determination and accounting for contract revenues and contract costs by reference to the stage of completion of the contract where the outcome of the contract can be estimated reliably. Stage, or percentage of completion may be determined as the proportion of incurred costs to the estimated total contract costs, surveys of the work performed to total contract work or as the completion of a physical portion. If the contract outcome cannot be measured reliably, no profit should be recognised. Instead, revenue should be recognised only to the extent that contract costs incurred are expected to be recovered and contract costs should be expensed as incurred. If it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised immediately. Incurred contract costs that relate to future activity are recognised as contract work in progress, provided they are recoverable. None. 21

Main differences SSAP 9 Stocks and long-term contracts: Requires any known inequalities of profitability in the various stages of a contract to be taken into account when calculating the attributable profit. IAS 11 does not include such a requirement. Includes prescriptive balance sheet presentation, such as a distinction between amounts recoverable on contracts and work in progress. The IAS 11 analysis of balances is less detailed. Service contracts may fall within the scope of SSAP 9 but they are outside the scope of IAS 11. Instead, IAS 18 applies to service contracts, with similar accounting. IAS 12 Income taxes Effective date Periods beginning on or after 1 January 1998. Accounting for income taxes, in particular accounting for the current and future tax consequences of: future recovery (settlement) of carrying amounts of assets (liabilities) in an entity s balance sheet; and current period transactions recognised in the financial statements. Requires recognition of current tax liabilities and assets for current and prior period taxes, measured at the rates enacted or substantially enacted by the balance sheet date. Requires recognition of deferred tax liabilities (assets) for future tax consequences of all taxable (deductible) temporary differences with certain exceptions. Defines temporary difference as the difference between the carrying amount of an asset (liability) in the balance sheet and its tax base. Measurement of deferred tax liabilities (assets) should reflect the manner in which the entity expects at the balance sheet date to recover (settle) the carrying amount of the asset (liability). 22

Prohibits discounting of deferred tax liabilities (assets). Permits recognition of deferred tax assets when it is probable that they will be recovered. Sets out criteria for offsetting deferred tax assets and liabilities. Presentation and disclosure requirements for current and deferred income taxes. Current and deferred tax to be taken to the income statement unless the item to which it relates was taken to equity in the current or previous period. Related SIC and IFRIC SIC 21 Income taxes Recovery of revalued non-depreciable assets: Requires measurement of deferred tax liability (asset) arising from revaluation of a non-depreciable asset (e.g. land) based on tax consequences arising from the sale of the asset, rather than from its use. In some jurisdictions this will result in the use of capital gains tax rates rather than corporation tax. SIC 25 Income taxes Changes in the tax status of an entity or its shareholders: Current and deferred tax consequences of such a change should be included in profit or loss for the period, unless the underlying transactions or events have been recognised directly in equity. Main differences Companies Act 1985: Requires amounts for creditors in respect of taxation and social security to be shown separately from other creditors, either on the face of the balance sheet or in the notes. IAS 12 prohibits tax assets and liabilities to be combined with other assets and liabilities and requires that both corporation and deferred tax balances are disclosed separately on the face of the balance sheet. 23

FRS 19 Deferred tax: Requires deferred tax to be recognised on timing differences which are a sub-set of IAS 12 s temporary differences. This will lead to deferred tax being recognised under IAS 12 in respect of items which would not give rise to deferred tax under FRS 19, such as revaluations of non-monetary assets, intangibles attracting no tax deductions, unremitted earnings of subsidiaries, associates and joint ventures and fair value adjustments in business combinations. It may also require recognition of deferred tax at a different tax rate in respect of eliminated intra group transactions. FRS 19 permits but does not require discounting of deferred tax balances; IAS 12 prohibits discounting. IAS 14 Segment reporting Effective date Periods beginning on or after 1 July 1998. Related SIC and IFRIC Principles for reporting financial information by line of business and by geographical area. Applies to entities whose equity or debt securities are publicly traded and to entities in the process of issuing equity or debt securities to the public. An entity should look to its organisational structure and internal reporting system to identify its business and geographical segments. Includes guidance on reportable segments (10% thresholds). Requires identification of either business or geographical segmentation as primary reporting format and the other a secondary. Specifies disclosure requirements for primary and secondary segments. None. 24

Main differences SSAP 25 Segmental reporting: Allows non-disclosure of segments if this was prejudicial. The reason for non-disclosure should be stated. Under IAS 14, this exemption from disclosure does not exist. Specifies disclosures required including turnover, segment result and segment net assets. The disclosures required under IAS 14, particularly for primary segments, are more extensive than under SSAP 25. Exempts subsidiaries that are not public companies, where the parent company complies with SSAP 25. However, disclosures required by the Companies Act apply to all companies. IAS 16 Property, plant and equipment Effective date Periods beginning on or after 1 January 2005. Initial recognition and subsequent accounting for property, plant and equipment. Initial recognition at cost. Subsequent measurement using either the cost or revaluation model for each class of asset. If cost model is applied, cost of an item of property, plant and equipment is recognised if future economic benefit is probable and cost can be measured reliably. If revaluation model is applied, regular revaluation for the entire class of assets is required. Any revaluation surplus to go directly to reserves, except where it reverses a revaluation deficit previously recognised in profit or loss in respect of that asset. Any revaluation deficit to go to profit or loss, except where it reverses an existing revaluation surplus in respect of that asset. Requires for both models depreciation on a systematic basis over the useful economic life (UEL) of the asset. Refers to IAS 36 to determine impairment of an asset or of a cash-generating unit it belongs to. 25

Each part of an item of property, plant and equipment with a cost significant in relation to total cost of the item should be depreciated separately. Defines residual value as the amount that would be receivable currently if the asset was already of the expected age and condition at the end of its useful life. Requires at least annual review of residual value and useful life. Related SIC and IFRIC None. Main differences FRS 15 Tangible fixed assets: Requires annual impairment review for assets with UEL of more than 50 years or where no depreciation is charged on the grounds of materiality. There is no such requirement under IAS 16. Requires residual values to be assessed based on prices prevailing at the date of acquisition. IAS 16 bases residual values on prices at the balance sheet date. This will impact depreciation charges. Requires the use of existing use value (EUV) for revalued assets in most cases. IAS 16 refers to fair value which presumes the use of open market value. This may be much higher than EUV where it reflects an alternative, more profitable use. Requires a full valuation at least every five years, with an interim valuation in year three. IAS 16 does not specify a maximum period between valuations. The frequency in revaluations depends on the changes in fair values of the revalued assets. Some assets may require annual revaluations. Revaluation losses are taken against previous surplus in reserves unless caused by a clear consumption of economic benefits when they are taken to the P&L. IAS 16 allows any revaluation losses to be charged to equity to the extent of an existing previous revaluation surplus and the income statement thereafter. 26

IAS 17 Leases Effective date Periods beginning on or after 1 January 2005. Related SIC and IFRIC Classification of leases, accounting treatment and disclosures by lessees and lessors. Lease is classified as a finance lease if substantially all risks and rewards of ownership are transferred. The standard details five primary and three secondary indicators of a finance lease. Land and buildings should be considered separately to classify a lease. Lessees recognise finance lease assets and liabilities in the balance sheet. No assets are recognised for assets leased in under operating leases. Lessors recognise finance leases as finance lease receivables. Initial direct costs incurred should be included in the receivable. Assets leased out under operating leases are accounted for according to the nature of the asset often as a tangible asset or an investment property. Lease payments paid (received) under operating leases are recognised by lessees (lessors) as expense (income) on a straight-line basis over the lease term. Addresses sale and leaseback transactions. SIC 15 Operating leases Incentives: Lease incentives, such as rent-free periods, should be recognised by both the lessor and the lessee as a reduction of rental income and expense, respectively, over the lease term. SIC 27 Evaluating the substance of transactions in the legal form of a lease: Where a series of transactions involve the legal form of a lease and can only be understood with reference to the series as a whole, then these transactions should be accounted for as a single transaction. 27

IFRIC 4 Determining whether an arrangement contains a lease: Arrangement contains lease if certain criteria are met: arrangement depends on specific asset and arrangement conveys right to control the use of the asset. Effective for periods beginning on or after 1 January 2006. Main differences SSAP 21 Accounting for leases and hire purchase contracts: Contains rebuttable presumption that substantially all risks and rewards of ownership are transferred if at inception of the lease the present value of the minimum lease payments amounts to 90 per cent or more of the fair value of the leased asset. IAS 17 does not contain such a rebuttable presumption. Requires lessors to recognise lease income using the pre-tax net investment method or net cash investment method. IAS 17 does not permit the net cash investment method, which may result in more income being taken earlier. UITF 28 Operating lease incentives: Requires lease incentives to be recognised as a reduction of rental income/expense over the shorter of the lease term and the period until a rent review to market rates is expected. SIC 15 requires lease incentives to be spread over the whole lease term, without reference to any reset of rentals to market rates. IAS 18 Revenue Effective date Periods beginning on or after 1 January 1995. Main principles and accounting treatment for revenues arising from certain types of transactions and events. Wide scope. Applies to goods, services, interest, royalties and dividends, unless specifically covered by another standard, e.g. IAS 17. There is no exemption for financial institutions other than for insurers. Revenue should be measured at the fair value of the consideration received/receivable. 28

Revenue is recognised when all of the respective criteria for goods, services, interest, royalties and dividends are met. Dividends paid from pre-acquisition profits are deducted from the cost of the investment. Revenue on services over a period may be recognised on a percentage of completion basis. Details disclosure requirements including revenue recognition accounting policies. Related SIC and IFRIC SIC 31 Revenue Barter transactions involving advertising services: Revenue from barter transactions involving advertising services should be recognised only if substantial revenue is received for similar services from other parties in nonbarter transactions. Main differences There is no comprehensive UK revenue standard, so it is not possible to identify all differences that may arise on the introduction of IFRS. However the main principles of FRS 5 Application Note G and IAS 18 are the same. IAS 18 applies to service contracts which may fall under SSAP 9, with similar accounting. IAS 19 Employee benefits Effective date Periods beginning on or after 1 January 1999. Accounting and disclosure for employee benefits, including short-term benefits, pensions and other post-employment benefits, other long-term employee benefits and termination benefits. Cost of providing employee benefits should be recognised in the period in which the benefit is earned by an employee. Includes recognition criteria for short-term employee benefits (payable within 12 months). Profit-sharing and bonus payments should only be recognised if there is a legal or constructive obligation to pay and the cost can be measured reliably. 29

Under defined contribution pension plans, an expense equal to the contribution is recognised in the period when the contribution becomes payable for services rendered by employees during the period. Under defined benefit pension plans, an amount is recognised in the balance sheet, reflecting the net of the present value of the defined benefit obligation and the fair value of the plan assets at the balance sheet date, adjusted for actuarial gains or losses and past service costs not yet recognised. Actuarial gains and losses may be recognised using one of two methods: deferral and spreading in income statement of amounts outside a corridor or immediate recognition in the income statement (but see *). Other long-term employee benefits should be recognised and measured the same way as pension benefits under a defined benefit plan. However, the deferral of actuarial gains and losses and past service costs is prohibited. Termination benefits should be recognised when the entity is demonstrably committed to the termination of one or more employees. * In December 2004, the IASB issued the Amendment to IAS 19 Employee benefits Actuarial gains and losses, group plans and disclosures with the following impact: Permits an entity to recognise all actuarial gains and losses in the period in which they occur outside profit or loss in a statement of recognised income and expense. For group plans, requires net defined benefit cost to be recognised in the financial statements of the entity which is legally the sponsoring employer, except where a contractual agreement or stated policy for charging the net defined benefit cost exists. Extends the application of multi-employer plan accounting to entities within a consolidated group that meet specific criteria. Effective for periods beginning on or after 1 January 2006. Earlier adoption is encouraged. Related SIC and IFRIC None. 30

Main differences FRS 17 Retirement benefits: Applies to retirement benefits. The scope of IAS 19 is wider than that of FRS 17. Requires actuarial gains and losses to be recognised in the STRGL in full. IAS 19 permits actuarial gains and losses below a threshold (the corridor ) to remain unrecognised indefinitely; those above the threshold should be spread over the average remaining service life of employees in the scheme. The amendment to IAS 19 permits a similar recognition to FRS 17. Deferred tax relating to a defined benefit asset or liability is shown as a deduction from the defined benefit asset or liability. Under IAS 19, deferred tax balances on defined benefit assets and liabilities are included with other deferred tax balances. Multi-employer exemption permits defined contribution accounting in all companies of the group. The Amendment to IAS 19 would require defined benefit accounting at least in the sponsoring company. IAS 20 Accounting for government grants and disclosure of government assistance Effective date Periods beginning on or after 1 January 1984. Accounting for and disclosure of government grants and other forms of government assistance. Recognition of government grants only when reasonable assurance exists that conditions attached to the grant will be met and the grant will be received. Non-monetary grants usually to be recognised at fair value; permits alternative recognition at a nominal value. For both income- and asset-related grants, requires recognition of income over periods to match with related costs. Income-related grants may be presented either as a credit in the income statement or a deduction of the related expense. 31

Asset-related grants may be presented either as deferred income in the balance sheet or a deduction in the carrying amount of the asset. Specifies repayment of government grant to be accounted for as a change in estimate details different treatments for income- and asset-related grants. Related SIC and IFRIC SIC 10 Government assistance No specific relation to operating activities: Government assistance to entities that is aimed at encouragement or long-term support of business activities either in certain regions or industry sectors should not be credited directly to equity but should be treated as a government grant under IAS 20. Main differences SSAP 4 Accounting for government grants: SSAP 4, like IAS 20 allows grants received in respect of the purchase of fixed assets to be treated either as deferred income or to be deducted from the carrying amount of the asset. The latter option is not available under the Companies Act 1985. IAS 21 The effects of changes in foreign exchange rates Effective date Periods beginning on or after 1 January 2005. Defines functional currency. Accounting treatment of foreign currency transactions and foreign operations. Translation of financial statements into a presentation currency. Translation of foreign currency transactions into functional currency: Specific guidance on determining functional currency. Foreign currency transactions initially recognised at the spot rate at the date of transaction. At subsequent reporting dates, monetary items are translated at closing (balance sheet) rates whereas non-monetary items are retained at historical rates or at the rate ruling at the valuation date, for those carried at fair value. 32

Recognition of exchange differences on monetary items through income statement. Changes in functional currency to be accounted for prospectively. Translation of foreign operations and translation into presentation currency: Assets and liabilities are translated at closing rate. Goodwill and fair value adjustments are translated at closing rate. Income and expenses are translated at the rate ruling at the dates of the transactions in practice, an average rate for a period may be used if there are no significant fluctuations. Resulting exchange differences are recognised as a separate component of equity. On disposal of foreign operation, cumulative exchange differences recorded in equity are recycled in the income statement. Special rules apply to foreign operations and entities operating in hyperinflationary economies (see also IAS 29). Related SIC and IFRIC SIC 7 Introduction of the Euro: The requirements of IAS 21 should be strictly applied when the Euro is first introduced in a member state. Main differences SSAP 20 Foreign currency translation: Defines the local currency of an entity as the currency of the primary economic environment in which it operates. IAS 21 contains detailed and specific guidance on the determination of a functional currency. There may be cases where the functional currency will not be the local currency used for UK GAAP. There are no restrictions in UK company law specifying reporting currency. Similarly, IAS 21 explicitly permits a free choice of presentation currency, which may be different from the functional currency. 33

Allows the translation of the profit and loss account of a foreign entity using either the closing rate or an average rate. IAS 21 requires the translation at actual rates (or an approximation) only. Requires use of the net investment method for foreign operations and takes exchange differences to reserves, as under IAS 21. Under IAS 21 exchange differences are recycled to the income statement on disposal of a foreign operation. This is prohibited under UK GAAP. Requires the use of the temporal method (i.e. translation rules applied to foreign currency transactions, assets and liabilities in the financial statements of an individual company) in certain cases. The temporal method is not permitted under IAS 21. Does not specify whether or not goodwill should be treated as a foreign currency asset and retranslated at each balance sheet date. IAS 21 requires goodwill (and any fair value adjustments) to be retranslated at closing rate. SSAP 20 permits hedge accounting to be adopted in separate entity accounts for exchange differences on foreign net investments and some related borrowings. Under IAS 39 it may be more difficult to qualify for net investment hedge accounting and the mechanics of the accounting are more complex. The ASB issued FRS 23 (IAS 21) The effects of changes in foreign exchange rates with the following impact: Implements IAS 21 in the UK for certain entities not preparing their financial statements in accordance with IFRS. Effective date: see Appendix II. 34

IAS 23 Borrowing costs Effective date Periods beginning on or after 1 January 1995. Accounting treatment for borrowing costs relating to certain qualifying assets. Defines borrowing costs as interest and other costs incurred in connection with the borrowing of funds. Defines qualifying asset as an asset that takes a substantial period of time to get ready for its intended use or sale. All borrowing costs may be expensed when incurred, or borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset may be capitalised. Requires application of a capitalisation rate (i.e. average borrowing rate) where funds are borrowed generally and used for the purpose of obtaining a qualifying asset. Related SIC and IFRIC None. Main differences FRS 15 Tangible fixed assets: Requires consistent capitalisation policy for tangible fixed assets and allows different treatment for inventories and intangibles. In contrast, IAS 23 requires consistent treatment for all qualifying assets, including qualifying assets within inventories and intangible assets. Limits amount of finance costs capitalisable to the finance costs incurred on expenditure to date. Under IAS 23 the amount that may be capitalised is the actual borrowing cost on the total related funds borrowed reduced by any investment income on the temporary investment of those amounts not yet spent. 35