The Transition from SSAPs/FRSs to IASs/IFRSs By: Dr. Ciaran Connolly, Phd, BSSc, MBA, FCA. Professional 2 AFA Eaminer. Introduction The International Accounting Standards Board (IASB) publishes its Standards in a series of pronouncements called International Financial Reporting Standards (IFRSs). It has also adopted the body of Standards issued by the Board of the International Accounting Standards Committee (IASC). Those pronouncements continue to be designated International Accounting Standards (IASs). The IASB also publishes a series of Interpretations of International Accounting Standards (Standings Interpretations Committee (SICs)) developed by the International Financial Reporting Interpretations Committee (IFRIC) and approved by the IASB. The IASB has a conceptual framework underlying its financial reporting standards and interpretations, namely, the Framework for the Preparation and Presentation of Financial Statements. The Framework sets out the concepts that underlie the preparation and presentation of financial statements for eternal users. The Framework assists the IASB: In the development of future IFRSs and in its review of eisting Standards; and In promoting the harmonisation of regulations, financial reporting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs. In addition, the Framework may assist: National standard-setting bodies in developing national standards; Preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS; Auditors in forming an opinion as to whether financial statements conform with IFRSs; and Users of financial statements in interpreting the information contained in financial statements prepared in conformity with IFRSs. The Framework is not an IFRS and does not define standards for any particular measurement or disclosure issue. In a limited number of cases there may be a conflict between the Framework and a requirement within an IFRSs. In those cases where there is a conflict, the requirements of the IFRS prevail over those of the Framework. Presentation of Financial Statements IAS 1 Presentation of financial statements prescribes the basis for presentation of generalpurpose financial statements, to ensure comparability both with the entity s financial statements of previous periods and with the financial statements of other entities. A complete set of financial statements comprises an income statement (previously a profit and loss account); a balance sheet; a statement of changes in equity (previously a statement of total recognised gains and losses); a cash flow statement; and notes, comprising a summary of significant accounting policies and other eplanatory notes. IAS 1 focuses on the structure and content of the income statement and balance sheet, recommending formats for these statements and requiring that they should be accompanied by a statement of changes in equity and a cash flow statement. Page 1 of 27
Financial statements should present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires faithful representation of the effects of transactions, events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and epenses set out in the Framework. The application of IFRSs (i.e. Standards and Interpretations), with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. An entity should make an eplicit and unreserved statement of compliance with IFRSs in the notes to the financial statements. Such a statement is only made on compliance with all the requirements of IFRSs. A departure from IFRSs is acceptable only in the etremely rare circumstances in which compliance with IFRSs conflicts with providing information useful to users in making economic decisions. IAS 1 specifies the disclosures required when an entity departs from a requirement of an IFRS. IAS 1 specifies the following about the preparation and presentation of financial statements: Financial statements are prepared on a going concern basis unless management intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so; Financial statements, ecept for cash flow information, are prepared using the accrual basis of accounting; The presentation and classification of items in the financial statements are usually retained from one period to the net; Each material class of similar items is presented separately. Dissimilar items are presented separately unless they are immaterial. Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements; Assets and liabilities, and income and epenses, are not offset unless required or permitted by an IFRS; and Comparative information is disclosed for all amounts reported in the financial statements, unless an IFRS requires or permits otherwise. IAS 1 specifies the minimum line item disclosures on the face of, or in the notes to, the income statement, the balance sheet and the statement of changes in equity. Page 2 of 27
Income Statement IAS 1 permits the function of ependiture or the nature of ependiture method, depending upon which [one] most fairly presents the elements of the enterprise s performance. 1. By function format Revenue Cost of sales Gross profit Other operating income Distribution costs Administrative epenses Other epenses Finance costs Share of profit of associates Profit before ta Income ta epense Net profit for period Attributable to: Equity holders of the parent Minority interest m () () () () () () 2. By nature format m m Revenue Other operating income Changes in inventories of finished goods and work in progress () Work performed by the enterprise and capitalised Raw materials and consumables used () Staff costs () Depreciation and amortisation epense () Impairment of property, plant and equipment () Other operating epenses () Finance costs () Share of profit of associates () Profit before ta Income ta epense () Net profit for period Attributable to: Equity holders of the parent Minority interest The definition and disclosure of discontinued operations is dealt with in IFRS 5 Non-current assets held for sale and discontinued operations. While the definition is similar to FRS 3 Page 3 of 27
Reporting financial performance, discontinued operations are disclosed at the foot of the income statement. Continuing Operations: Revenue Cost of sales Gross profit Other operating income Distribution costs Administrative epenses Other epenses Finance costs Share of profit of associates Profit before ta Income ta epense Net profit for period for continuing operations Discontinued Operations: Net profit for period for discontinued operations* Net profit for period Attributable to: Equity holders of the parent Minority interest *The required analysis should be given in the notes. m () () () () () () Alternatively, profit from discontinued operations may be analysed in a separate column on the face of the income statement. Other significant changes to the income statement include: Dividends paid are no longer included in the income statement: they are an appropriation and therefore should be taken through reserves. Furthermore, proposed dividends cannot be accrued until approved by shareholders at the Annual General Meeting (IAS 10 Events after the balance sheet date); Etraordinary items are banned and it is a decision for the company to highlight/separately disclose 'eceptional' items. IAS 1 does not contain an equivalent to the FRS 3 paragraph 20 items, merely requiring separate disclosure of significant items of income and ependiture. Page 4 of 27
Balance Sheet IAS 1 requires assets and liabilities to be presented on the basis of a current/non-current distinction (ecept where presentation in the order of liquidity provides more relevant and reliable information). m m ASSETS Non current assets Property, plant and equipment Goodwill Other Intangible assets Investments in associates Available-for-sale-investments Current assets Inventories Trade receivables Other current assets Cash and cash equivalents Total assets X EQUITY AND LIABILITIES Capital and reserves Equity attributable to equity holders of the parent Issued share capital Reserves Retained earnings Minority interest Non current liabilities Long term borrowings Deferred ta Long term provisions Current liabilities Overdraft Trade and other payables Short-term borrowings Current portion of long-term borrowings Ta payable Total equity and liabilities X Page 5 of 27
Statement of Changes in Equity IAS 1 recommends that a statement of changes in equity should accompany the income statement and balance sheet. Either of the following formats may be used. 1. Statement of changes in equity Attributable to equity holders of the parent: Share Other Translation Retained Total Minority Total capital reserves reserves earnings interests Opening balance Loss on property revaluation Valuation gain taken to equity Foreign echange differences Net income recognised directly in equity Profit for period Total recognised income and epenses for period Dividends Issue of share capital Closing balance 2. Statement of recognised income and epenses Loss on property revaluation Valuation gain taken to equity Foreign echange differences Net income recognised directly in equity Profit for period Total recognised income and epenses for period 2005 2004 Attributable to: Equity holders of parent Minority interest If this second format is adopted, the notes to the financial statements must include a reconciliation of opening and closing balances of share capital, reserves and accumulated profit. Page 6 of 27
Cash Flow Statement Cash is vital to the success of any business. Ultimately profit is of little value if it cannot be translated into cash. IAS 7 Cash flow statements requires the cash flows to be classified into three separate sections: 1. Cash flows from operating activities IAS 7 permits two methods of calculating operating cash flows the direct and the indirect methods. Both methods lead to the same figure. The use of the direct method is encouraged where the necessary information is not too costly to obtain, as it discloses information not available elsewhere in the financial statements. However, IAS 7 does not require the direct method to be used. The direct method identifies the actual cash receipts from customers and the actual cash payments to suppliers and employees. For eample: Cash received from customers - Cash payments to suppliers - Cash paid to and on behalf of employees - Other cash payments = cash generated from operations + Interest received - Interest paid - Ta paid - Dividends paid = Net cash inflow from operating activities The indirect method starts with operating profit (as stated in the income statement) and adjusts for non-cash items to arrive at the net cash flow from operating activities. For eample: Operating profit + Depreciation charges - Profit on disposal of equipment - Increase in inventories - Increase in receivables + Increase in payables = cash generated from operations + Interest received - Interest paid - Ta paid - Dividends paid = Net cash inflow from operating activities Under both methods, cash flows from interest and dividends received/paid should be disclosed separately. Each should be classified consistently from period to period as operating, investing or financing. If dividends paid are included as part of cash flows from operating activities, users can assess the entity's ability to pay dividends out of operating cash flows; if included as part of cash flows from financing activities, then it indicates the cost of obtaining financial resources. Ta cash flows should be separately disclosed and classified as operating activities, unless specifically identified with financing or investing activities. Page 7 of 27
2. Cash flows from investing activities Under this heading are included purchases and sales of long-term assets and the purchase and sales of investments not qualifying as cash equivalents. Interest and dividends received may be classified under this heading but they may also be included under operating activities or financing. The specimen provided in IAS 7 includes them as investing. Only one figure for cash should be provided for subsidiaries acquired or disposed, with disclosure by note of the assets and liabilities acquired/disposed. For eample: Cash receipts from the sales of property, plant and equipment Cash paid to acquire property, plant and equipment Cash paid/received for shares and debentures in other entities Loans received/repaid Dividends received [Interest received] 3. Cash flows from financing activities Proceeds from share issue Cash paid to acquire/redeem own shares Cash proceeds from issuing debentures and loans Capital repayments of finance leases [Dividends paid] And finally: Sum of sections 1, 2 and 3 represents the net increase/decrease in cash equivalents + cash and cash equivalents at the start of the year = cash and cash equivalents at the end of the year Page 8 of 27
SSAP/FRS - IAS/IFRS Comparison SSAP/FRS IAS/IFRS Key Points/Differences IAS 20 Accounting for government grants and disclosure of government assistance SIC 10 Government assistance no specific relation to operating activities SSAP 4 Accounting for government grants SSAP 5 Accounting for value added ta SSAP 9 Stocks and longterm contracts IAS 2 Inventories IAS 16 Property, plant and equipment IAS 18 Revenue IAS 2 Inventories IAS 11 Construction contracts IAS 18 Revenue The accounting requirements of IAS 20 and SSAP 4 are similar, although the disclosure aspects are different. Both standards allow grants related to assets to be either deducted from the cost of the asset or recognised as deferred income. The former treatment is not, however, permitted by company legislation (although companies and groups that prepare accounts under the EU Regulation from 2005 will not be constrained by company legislation). There is no singular equivalent standard; instead the effect is included in these three IASs. Each contains elements consistent with SSAP 5. There is no singular equivalent standard; instead the effect is included in these three IASs. There are no significant differences between IAS 2 and SSAP 9. The revised IAS 2 eliminates the option of using the LIFO method of measuring the cost of inventory. The disclosure requirements of IAS 2 are arguably more etensive than SSAP 9 The accounting requirements of IAS 11 and SSAP 9 are also similar, although there is no 'less than'/greater than' one year distinction in IAS 11 when defining a long-term contract. However, the accounting treatment does not really change. There is arguably less disclosure in IAS 11, e.g. IAS 11 analysis of balances is less detailed. Page 9 of 27
IAS 38 Intangible assets SSAP 13 Accounting for research and development There is no separate international standard on research and development; IAS 38 covers all intangible assets. While IAS 38 uses the term 'research activity, this equates to pure and applied research in SSAP 13. SSAP 19 Accounting for investment properties IAS 40 Investment property Under IAS 38 if ependiture passes the 'development' test, it must be capitalised. The choice has been removed. IAS 40 allows an entity to choose either fair value or depreciated cost as an accounting policy for measuring investment property. Where fair value is used, the property should be revalued annually and depreciation should not be charged (even in the final 20 years). Gains and losses from changes in fair value are recognised in the income statement. SSAP 19 requires investment property to be measured at open market value; gains and losses are recognised in the STRGL (ecept for permanent deficits below cost, or their reversals, which are recognised in the income statement). IAS 40 has been revised to allow property held under an operating lease to be accounted for as an investment property where certain conditions are met. Under SSAP 19 an investment property held under an operating lease is reported as a single asset at market value, and the rental payments are epensed over the lease term. IAS 40 requires that if such a property is to be accounted for as an investment property it must be accounted for as a finance lease. Accordingly, the present value of the minimum lease payments is recognised as a separate liability at the inception of the lease. The minimum lease payments are accounted for partly as a finance charge and partly as a reduction of the outstanding liability. Page 10 of 27
IAS 21 The effects of changes in foreign echange rates IAS 29 Financial reporting in hyperinflationary economies IAS 39 Financial instruments: recognition and measurement SSAP 20 Foreign currency translation IAS 21 requires the income statement of a foreign subsidiary to be translated at the rate ruling on the date of the transaction (or an average rate of echange for the period) in all circumstances. Depending upon the nature of the relationship, SSAP 20 allows the closing rate to be used. IAS 21 requires goodwill to be treated as an asset of the foreign operation and translated at the closing rate. SSAP 20 does not address this issue. IAS 21 requires that when a foreign subsidiary is disposed of echange differences previously recognised in equity are recycled to the income statement in the same period as the gain or loss arising on sale. FRS 3 does not permit this. Unlike SSAP 20, IAS 21 does not deal with hedges of a net investment. This is dealt with in IAS 39 Financial Instruments: Recognition and Measurement. IAS 29 applies to the financial statements of an entity whose functional currency is the currency of a hyperinflationary economy. It requires the financial statements to be stated in terms of the measuring unit current at the balance sheet date (i.e. adjusted for the effect of inflation). When translating the financial statements of a subsidiary that operates in an area of hyperinflation, IAS 21 requires the method in IAS 29; it does not permit the alternative method in UITF 9 Accounting for operations in hyperinflationary economies of using a relatively stable currency as the functional currency. FRS 23 The effects of changes in foreign echange rates and FRS 24 Financial reports in hyperinflationary economies effectively implement IAS 21 and IAS 29 respectively in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. Page 11 of 27
IAS 17 Leases SIC 15 Operating leases incentives SIC 27 Evaluating the substance of transactions involving the legal form of a lease IFRIC 4 Determining whether an arrangement contains a lease SSAP 21 Accounting for leases and hire purchase contracts There is little difference between SSAP 21 and IAS 17. However, major changes are epected in the coming years. SSAP 21 contains the rebuttable presumption that substantially all risks and rewards of ownership are transferred at inception if the present value of the minimum lease payments are less than or equal to the fair value of the leased asset. IAS 17 does not contain such a rebuttable presumption. IAS 17 requires the land and buildings elements of a lease to be considered separately. The lease of the land will generally be an operating lease unless title passes to the lessee at the end of the lease. The lease of the building is classified as finance or operating by applying the lease classification criteria. To assist this, minimum lease payments are allocated between the land and the building in proportion to the relative fair values of the leasehold interests in the land and building components. SSAP 21 does not require property leases to be separated into land and building components. It is therefore likely that some long-term property leases that are accounted for as operating leases under SSAP 21 will be classified partly as operating leases (land) and partly as finance leases (building) under IAS 17. IAS 17 requires that lessors recognise income from finance leases using the net investment method (i.e. a before-ta method); SSAP 21 requires the net cash investment method (i.e. an after-ta method). Although the total income over the lease term is the same under both methods, where the effect of ta cash flows is significant the net cash investment method would typically allow income to be recognised earlier in the lease. Interpretations of both standards require lessees and lessors to recognise the benefit and cost of operating lease incentives as a reduction of rental epense or income. SIC-15 requires the incentive to be allocated over the whole of the lease term. UITF 28 Operating lease incentives requires the incentive to be allocated over the shorter of the lease term and a period ending on a date from which it is epected the prevailing market rental will be payable. IAS 17 s disclosures are more etensive for lessees and lessors. In particular, Page 12 of 27
IAS 17 requires lessees to disclose the total of future minimum lease payments; SSAP 21 requires disclosure only of details of the payments that the lessee is committed to make in the net year. Page 13 of 27
IAS 14 Segment reporting SSAP 25 Segmental reporting SSAP 25 applies to all large companies, whereas IAS 14 applies to all listed companies (and those who decide to disclose the information voluntarily). IAS 14 and SSAP 25 differ as regards how reportable segments are defined. IAS 14 also identifies primary and secondary segments, requiring more disclosures about the former than the latter. Under IAS 14, business and geographical segments are usually the organisational units for which information is reported to the board and chief eecutive; under SSAP 25 segments are determined by reference to the risks, returns etc. of different classes of business and geographical areas. The disclosures required by IAS 14 are generally more etensive, particularly for primary segments. SSAP 25 provides for the same analysis as IAS 14, but also specifies that any segment that has significantly different risks, returns or epectations should be separately identified. Statement of principles for financial reporting Framework for the Preparation and Presentation of Financial Statements IAS 18 Revenue Under IAS 14 there is no eemption from disclosure on grounds that it would be damaging to the company. IAS 14 requires segmental capital ependiture, depreciation, details of associates and assets and liabilities in addition to that required by SSAP 25. IAS 18 requires greater disclosure of revenue recognition policies and amounts. Page 14 of 27
IAS 7 Cash flow IAS 7 does not contain any eemptions from preparation. statements FRS 1 (Revised 1996) Cash Flow Statements IAS 7 is similar to the original FRS 1 before it was revised in 1996. It requires cash flows to be reported under three headings (operating, investing and financing) whereas FRS 1 (Revised) has eight. IAS 7 s cash flow statement is a statement of changes in cash and cash equivalents, including short-term liquid investments. FRS 1 s statement is a statement of changes in cash only; cash flows relating to management of liquid resources are reported separately. FRS 2 Accounting for subsidiary undertakings IAS 27 Consolidated and separate financial statements IFRS 3 Business combinations SIC 12 Consolidation special purpose entities IAS 7 concentrates on cash and cash equivalents rather than cash, and it does not require a reconciliation to movement in net debt. Also, IAS 7 permits the direct and indirect methods and does not require reconciliation to operating profit. There are no separate headings for returns on investments and serving of finance, taation, capital ependiture and financial investments, acquisitions and disposals and equity dividends paid. FRS 2 definition of control focuses on ability to control while IAS 27 focuses on power to control. Under FRS 2 there is eclusion from consolidation on grounds of severe long-term restrictions as such restrictions are likely to restrict the ability to control. Under IAS 27, minority interests are disclosed as a separate component of equity; under FRS 2, minority interests are disclosed below shareholders funds. The treatment of quasi subsidiaries under SIC 12 is broadly similar to FRS 5. Page 15 of 27
IAS 1 Presentation of Financial Statements IAS 8 Accounting policies, changes in accounting estimates and errors IFRS 5 Non-current assets held for sale and discontinued operations SIC 29 Disclosure service concession arrangements FRS 3 Reporting financial performance Dividends paid are no longer included in the income statement: they are an appropriation and therefore should be taken through reserves. Furthermore, proposed dividends cannot be accrued until approved by shareholders at the Annual General Meeting (see IAS 10 Events after the balance sheet date); Etraordinary items are banned and it is a decision for the company to highlight/separately disclose 'eceptional' items. IAS 1 does not contain an equivalent to the FRS 3 paragraph 20 items, merely requiring separate disclosure of significant items of income and ependiture. FRS 3 requires presentation of the Statement of Total Recognised Gains and Losses (STRGL) and reconciliation of movements in shareholders funds. Under IAS 1, this may be combined into a single statement of changes in equity. IAS 8 eliminates the distinction between fundamental errors and other material errors. All material errors should be corrected by restating the financial statements as if the error had never occurred. Under FRS 3, restatement is required only for fundamental errors. The comparative amounts for the prior period(s) presented in which the error occurred are restated; or if the error occurred before the earliest period presented, the opening balances of assets, liabilities and equity for the earliest prior period presented are restated. FRS 3 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. Furthermore, discontinued operations are disclosed at the foot of the income statement under IFRS 5. While there is no equivalent requirement in IAS 1 to disclose the effects of acquisitions, IAS 1 does require etensive disclosure in the notes. Page 16 of 27
FRS 4 Capital instruments IAS 32 Financial instruments: disclosure and presentation IAS 39 Financial instruments: recognition and measurement Under IAS 32 split accounting is required for hybrid instruments, e.g. proceeds of a convertible bond issue must be split between the financial liability and equity instrument. IAS 32 also requires additional specific disclosures about credit risk and hedging. IAS 32 does not contain a non-equity classification. Thus most, but not all, preference shares currently classified as non-equity will be classified as debt under IAS 32. FRS 5 Reporting the substance of transactions FRS 6 Acquisitions and mergers IAS 39 Financial instruments: recognition and measurement IAS 18 Revenue recognition IFRS 3 Business combinations FRS 25 Financial instruments: disclosure and presentation effectively implements IAS 32 in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. There is no international standard on the recognition and derecognition of nonfinancial assets and liabilities which would replace the material given in the FRS 5 application notes on sale and repurchase agreements and PFI. An international interpretation SIC 27 Evaluating the substance of transactions involving the legal form of a lease develops a number of concepts similar to those in FRS 5. The international interpretation SIC 29 Disclosure - service concession arrangements does not deal with the recognition and derecognition of assets and liabilities. The specific requirements of IAS 18 are similar to those of Application Note G to FRS 5. IFRS 3 marks the death of merger accounting. Page 17 of 27
IFRS 3 Business combinations IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds FRS 7 Fair values in acquisition accounting FRS 8 Related party disclosures IAS 24 Related party disclosures Under IFRS 3, any adjustment to the cost of the combination, that is contingent on future events, is included in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably. Costs epected to be incurred to restructure an acquired entity s (or the acquirer s) activities must be treated as post-combination epenses, unless the acquired entity has a pre-eisting liability for restructuring its activities. This is consistent with the requirements of FRS 7. While FRS 7 provides some specific fair value measurement guidance, IFRS 3 is very brief on how to measure fair values. FRS 7 only requires separable intangible assets to be fair valued. FRS 8 eempts parent company s individual financial statements from disclosures when consolidated financial statements are presented. There is no equivalent eemption in IAS 24. Otherwise, IAS 24 disclosures are generally less rigorous that FRS 8. FRS 8 requires the names of transacting related parties to be disclosed. IAS 24 requires transactions to be disclosed by type of related party; it does not require names to be disclosed. However, IAS 24 etends the definition of key management beyond just directors. FRS 8 eempts subsidiaries that are 90% or more owned from disclosing transactions with other group entities or investees, provided that the consolidated financial statements in which the subsidiary is included are publicly available. The eemption is only available to 100% subsidiaries in IAS 24. Page 18 of 27
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 FRS 9 Associates and joint ventures Equivalent international material is largely set out in IAS 28 and IAS 31. The definition of an associate in IAS 28 requires the investor to have the potential to participate in the financial and operating policy decisions, whereas FRS 9 requires participation and the eertion of significant influence. In consolidated financial statements, IAS 28 and FRS 9 both require use of the equity method of accounting for associates. Unlike FRS 9, IAS 28 does not prescribe how the investor s share of its associate s profits should be presented in the income statement. There is limited guidance in IAS 1. Under IAS 28, when investments are shown at cost, dividends made from postacquisition profits are treated as a reduction in the cost of the investment in the associate. In the entity accounts, the associate can be accounted for using the equity method, cost or revalued amounts. IAS 28 suspends equity accounting for losses when the balance sheet carrying value is nil. Further losses should only be accrued if the investor has a legal or constructive obligation. FRS 9 requires an interest in net liabilities to be recognised unless there is evidence of the investor s irreversible withdrawal from its investee as its associate. IAS 31 has a broader definition of the types of operation that may be a joint venture. Proportional consolidation is the preferred method under IAS 31, with equity accounting a permitted alternative. However, proportional consolidation is not allowed in the UK where the joint venture is set up through a legal entity. The IAS 31 equity method does not require the additional gross disclosures on the face of the income statement and balance sheet. Page 19 of 27
IFRS 3 Business There is a close link between IAS 38 and IFRS 3. combinations IAS 36 Impairment of assets IAS 38 Intangible assets IFRIC 3 Emission rights FRS 10 Goodwill and intangible assets IFRS 3 stipulates that goodwill should no longer be amortised (on both old and new acquisitions), with an impairment review being required annually. IAS 38 provides eamples of intangibles, other than goodwill, that companies should consider in an acquisition (trade dress, customer lists, competition agreements, secret recipes etc.). Their eistence will reduce the goodwill figure, and as they must be amortised the etent of the impairment review. Under FRS 10, goodwill is usually amortised over its estimated UEL. IFRS 3 requires annual impairment reviews and prohibits amortisation. IFRS 3 requires the immediate recognition of negative goodwill as a gain in the income statement, whereas under FRS 10 negative goodwill is capitalised and shown as a separate line item within goodwill. FRS 11 Impairment of Fied Assets and Goodwill IFRS 3 Business combinations IAS 36 Impairment of assets IAS 38 Intangible assets The international material on start-up costs, included in IAS 38, is similar to UITF 24. IAS 36 is arguably much tougher/more detailed than FRS 11. FRS 11 requires the impairment of revalued assets to be taken to the profit and loss account if clearly caused by the consumption of economic benefits. Under IAS 36, an impairment of a revalued asset may always be reported as a reversal of the revaluation, with only the ecess being taken to the income statement. FRS 11 allocates impairment losses to goodwill, then intangibles and then tangible fied assets. IAS 36 allocates impairment losses in ecess of goodwill pro rata to intangible and tangible fied assets. Page 20 of 27
FRS 12 Provisions, contingent liabilities and contingent assets IAS 37 Provisions, contingent liabilities and contingent assets IFRIC 1 Changes in eisting decommissioning, restoration and similar liabilities IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds There are no significant differences between IAS 37 and FRS 12. FRS 13 Derivatives and other financial instruments: disclosures IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions IAS 32 Financial instruments: disclosure and presentation IAS 39 Financial instruments: recognition and measurement IFRIC 2 Members shares in co-operative entities and similar instruments IAS 30 applies only to banks and similar financial institutions. It specifies accounting policies to be disclosed, items to be shown in the income statement and balance sheet, and other financial instrument disclosures. IAS 30 is currently under review by IASB for amendment. IAS 32 is similar to FRS 13, although, generally, disclosures under IAS 32 will be more etensive. The main differences relate to: Classification of redeemable preference shares as debt and the related dividend as interest; Split of hybrid instruments (convertible debt) between debt and equity. FRS 25 Financial instruments: disclosure and presentation and FRS 26 Financial instruments: recognition and measurement largely implement IAS 32 and IAS 39 respectively in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. Page 21 of 27
IAS 33 Earnings per The two standards are very similar. share FRS 14 Earnings per share IAS 33 requires that basic and diluted earnings per share be disclosed on the face of the income statement both for net profit or loss for the period and also for profit or loss from continuing operations. Basic and diluted earnings per share for discontinued operations (if reported) may be reported either on the face of the statement or in a note. Additional per share amounts can only be disclosed by way of note. FRS 22 Earnings per share effectively implements IAS 33 in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. Page 22 of 27
IAS 16 Property, plant and equipment IAS 23 Borrowing costs FRS 15 Tangible fied assets IAS 16 favours the use of the 'cost' model, although the valuation model is permitted. Where a policy of revaluation is adopted, IAS 16 has fewer details relating to the basis of valuation than FRS 15. IAS 16 does not require an 'epert valuer', and valuations need only be conducted 'regularly', rather than every 5 years as stated in FRS 15. Where an asset is acquired in echange for another, IAS 16 requires the cost of the asset acquired to be measured at fair value. The effect is to report a gain or loss on disposal of the asset given up. Eceptions are where the echange transaction lacks commercial substance or cannot be reliably measured; in such cases the cost is measured at the carrying amount of the asset given up. There is no equivalent requirement in FRS 15, although the same principle is reflected in UITF Abstract 31. IAS 16 and FRS 15 both require residual values to be reviewed at each balance sheet date. IAS 16 bases residual values on prices at the balance sheet date. If the residual value equals or eceeds the asset s carrying value, the depreciation charge is reduced to zero. FRS 15 generally requires residual values to be based on prices at the date of acquisition or latest valuation; thus increases in residual values are generally reflected in disposal profits rather than in lower depreciation. IAS 16 allows revaluation losses to be charged to equity to the etent of an eisting previous revaluation surplus and the income statement thereafter. FRS 15 requires revaluation losses to be netted against previous reserve surpluses unless caused by consumption of economic benefits when they are taken to the profit and loss account. Capitalisation of borrowing costs is optional under IAS 23 and FRS 15, although IAS 23 favours non-capitalisation. FRS 15 requires a consistent policy for tangible fied assets and allows different treatment for investments and intangibles. IAS 23 requires consistent treatment for all qualifying assets. There are also differences regarding the calculation of borrowing costs eligible for capitalisation. IAS 23 admits certain echange differences to the definition of borrowing costs, and where borrowings specifically relate to ependiture on an Page 23 of 27
asset, IAS 23 takes the actual borrowing costs less any investment income received from the temporary reinvestment of unutilised borrowings; FRS 15 takes interest on the borrowings that has been spent on the asset to date. Page 24 of 27
FRS 16 Current ta IAS 12 Income taes SIC 25 Income taes - changes in the ta status of an enterprise or its shareholders FRS 17 Retirement benefits FRS 18 Accounting policies FRS 19 Deferred ta IAS 19 Employment benefits IAS 26 Accounting and reporting by retirement benefit plans IAS 1 Presentation of financial statements IAS 8 Accounting policies, changes in accounting estimates and errors IAS 12 Income taes SIC 21 Recovery of revalued nondepreciable assets SIC 25 Income taes - changes in the ta status of an enterprise or its shareholders. Broadly, there are no differences between FRS 16 and IAS 12 with respect to 'current ta'. Under IAS 12 separate presentation of current ta on the face of the balance sheet is required. The ta epense relating to discontinued items must also be disclosed. Under FRS 17 actuarial gains and losses are accounted for in the STRGL. Under IAS 19 actuarial gains and losses may be taken to the income statement immediately or amortised over a period up to the average remaining work life of employees corridor approach. IAS 19 permits actuarial gains and losses below a threshold (the corridor) to remain unrecognised. Those above the threshold should be spread over the average remaining service lives of employees. Equivalent, though less detailed, material is included in IAS 1 and IAS 8. FRS 18 does not require disclosure of impending changes of accounting policies. IAS 12 requires deferred ta to be provided on temporary differences rather than timing differences and could result in larger deferred ta liabilities than the UK standard. Deferred ta is required on all revaluation gains (rather than only when there is an agreement to sell a revalued asset) and on the unremitted earnings of subsidiaries, associates and joint ventures (rather than only to the etent that distribution of earnings has been agreed). FRS 19 requires full provision of deferred ta, as does IAS 12. IAS 12 does not allow deferred ta assets and liabilities to be discounted. FRS 19 permits but does not require discounting. Page 25 of 27
FRS 20 Share-based Payment IFRS 2 Share-based Payment FRS 20 is identical to IFRS 2, apart from the delayed implementation for unlisted entities and the eemption for entities applying the FRSSE. FRS 21 Events after the Balance Sheet Date IAS 10 Events after the balance sheet date FRS 21 replaced SSAP 17. Apart from the eemption for entities applying the FRSSE, FRS 21 is identical to IAS 10 and therefore has the effect of implementing that IAS in the UK and Republic of Ireland. Dividends to holders of equity instruments declared after the balance sheet date are not recognised as liabilities as there is no legal or constructive obligation until approved at the AGM. FRS 22 Earnings per share FRS 23 The effects of changes in foreign echange rates FRS 24 Financial reports in hyperinflationary economies FRS 25 Financial instruments: disclosure and presentation FRS 26 Financial instruments: recognition and measurement FRS 27 Life insurance IAS 33 Earnings per share IAS 21 The effects of changes in foreign echange rates IAS 29 Financial reporting in hyperinflationary economies IAS 32 Financial instruments: disclosure and presentation IAS 39 Financial instruments: recognition and measurement IFRS 4 Insurance Contracts Dividends declared by subsidiaries after the balance sheet date are not recognised by the parent as income of the previous period. FRS 22 effectively implements IAS 33 in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. FRS 23 effectively implements IAS 21 in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. FRS 24 Financial reports in hyperinflationary economies effectively implements IAS 29 in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. FRS 25 effectively implements IAS 32 in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. FRS 26 Financial instruments: recognition and measurement largely implements IAS 39 in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. FRS 27 largely implements IFRS 4 in the Britain and Ireland for entities not preparing their financial statements in accordance with IFRSs. Page 26 of 27
Notes: 1. IAS 41 Agriculture There appear to be no plans to revise the IASB s standard on accounting for agricultural products, which requires biological assets to be reported at fair value. IAS 41 sets out accounting requirements for the following when they relate to agricultural activity: biological assets (i.e. living animals or plants), agricultural produce at the point of harvest and government grants. IAS 41 requires biological assets up to the point of harvest to be measured at fair value less estimated point-of-sale costs, with changes in that value being recorded in profit or loss for the period in which it arises. There is no equivalent UK standard. 2. First-time application of international financial reporting standards This was issued in June 2003, and has no ASB equivalent Conclusion The IASB continues to work on a number of projects including: Business combinations phase II; Consolidation, including special purpose entities; Reporting comprehensive income (performance reporting); and Revenue recognition, liabilities and equity. Page 27 of 27