UK V IFRS Comparison 2005 v5

Comparison between UK GAAP and International Financial Reporting Standards
Contents
1Purpose of this document 1 2Accounting terminology 3 3Overall financial statements presentation 4 1.1General 4 1.2Balance sheet 5 1.3Profit and loss account/income statement 8 1.4Statement of Total Recognised Gains and STRGL/Statement of Changes in Equity SOCE/Statement of Recognised Income and Expense SORIE 12 1.5Cash flow statement 14 1.6Discontinued operations and assets held for sale 17 4Accounting policies General 24 1.7Selection of accounting policies 24 1.8Reporting substance 28 1.9Changes in accounting policy and correction of errors 32 5Assets 35 1.10Tangible fixed assets/Property, plant and equipment 35 1.11Investment property 45 1.12Intangible assets 50 1.13Impairment 59 1.14Stocks/Inventories 64 1.15Long-term contracts/Construction contracts 65
Grant Thornton UK LLP 2007. All rights reserved.
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6Liabilities 68 1.16Leases 68 1.17Provisions, contingent liabilities and contingent assets 74 1.18Taxation 75 7Income and expenditure 84 1.19Revenue 84 1.20Employee benefits (other than share-based payments) 91 1.21Share-based payment 101 8Financial instruments 105 1.22Recognition and measurement of financial assets 105 1.23Presentation, recognition and measurement of financial liabilities and equity 111 1.24Recognition and measurement of derivatives 116 1.25Hedge accounting 120 1.26Disclosures 123 9Group accounts 127 1.27Basic requirements for group accounts 127 1.28Minority interests 133 1.29Quasi-subsidiaries/Special purpose entities 135 1.30Acquisition in stages and disposals 137 1.31Business combinations 139 1.32Fair values in acquisition accounting 143 1.33Treatment of goodwill 151 10Associates and joint ventures 156 1.34Associates 156 1.35Joint ventures and JANEs 162 11Other matters 168 1.36Foreign currency translation 168 1.37Government grants 176 1.38Earnings per share 178 1.39Post-balance sheet events 186 1.40Segment reporting 188 1.41Related party disclosures 191
Introduction
1 Purpose of this document
The European Union Regulation requires the use of EU-adopted international accounting standards in the consolidated accounts of EU companies listed on a regulated market for accounting periods beginning on or after 1 January 2005. Therefore full list groups are already preparing their consolidated financial statements using IFRS. The Alternative Investment Market (AIM) requires the use of IFRS (as adopted by the EU) for consolidated accounts for periods beginning on or after 1 January 2007 where the AIM listed entity is incorporated in the European Economic Area (EEA); some alternatives exist for entities incorporated outside the EEA. For UK AIM companies, and new full list registrants, identifying the areas of difference between UK GAAP and IFRS is crucial. This document highlights the major areas of similarity and difference between current UK GAAP and IFRS. It is not intended to be an exhaustive list of similarities and differences or of IFRS requirements. Their purpose is to help to identify areas of difference between UK GAAP and IFRS, and to aid in gaining an appreciation of the major requirements of IFRS and how these differ from UK practice. Disclosure requirements are not addressed other than in exceptional cases where there are major differences between UK GAAP and IFRS which are central to accounting standards under either GAAP. The term 'IFRS' is used to refer collectively to new IFRSs and to International Accounting Standards (IAS) issued by the IASB's predecessor body and adopted by the IASB, as well as to Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and IFRIC's predecessor body, the Standing Interpretations Committee (SIC). This document compares UK GAAP with IFRS. For companies reporting under the EU IAS Regulation, their financial statements are required to comply with IFRS as adopted by the European Union. From time-to-time these standards may be slightly different from 'full' IFRS, and this may cause problems in describing the reporting framework. These issues are not dealt with in this document. The comparison is based on current standards issued at 1 March 2007 (with the exception of IFRS 8 which whilst issued, is not mandatory until periods commencing on or after 1 January 2009, and has not been considered in this
document). However the following have not been taken into account in the comparison in view of their specialist nature: IFRS 4 Insurance Contracts IFRS 6 Exploration for and Evaluation of Mineral Resources IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 41 Agriculture. In this document, the material on UK GAAP focuses largely on the position for periods commencing on or after 1 January 2006 for non full list entities, as this is the platform from which AIM companies will be transitioning in 2007. The most significant areas of difference at present between UK GAAP and IFRS are in the following areas (although, for any specific company, the key issues may lie in other areas): deferred tax financial instruments business combinations, including intangible assets and goodwill treatment segment reporting. These notes do not address industry-specific UK requirements for banks, other financial institutions, insurance companies, charities, retirement benefit plans or agriculture.
Detailed comparison
2 Accounting terminology
IFRS do not mandate the use of standard terminology or formats. However, the nomenclature on which the IASB (and its predecessor) have standardised is, in many respects, closer to US GAAP than established UK terminology. The following table highlights some of the key differences in terminology. The terminology is not mandated by IFRS however our view is that all UK GAAP wording should be replaced with the appropriate terminology. UNITED KINGDOM Balance Sheet Fixed assets Tangible fixed assets Finance costs Investments Stocks Debtors Long-term contracts Creditors Creditors: amounts falling due within one year IFRS
Non-current assets Property, plant and equipment Borrowing costs Financial assets Inventories Receivables Construction contracts Payables Current liabilities (although current / non current classification refers to a number of criteria rather than only period due) Creditors: amounts falling due after Non-current liabilities (although more than one year current / non current classification refers to a number of criteria rather than only period due) Capital and reserves Equity Called-up share capital Issued capital Profit and loss account (in reserves) Accumulated profits/(losses) Profit and loss account/Income statement Turnover Revenue Profit on ordinary activities Profit before/after tax before/after taxation Tax on profit on ordinary activities Income tax expense Profit/Loss for the financial year Net profit/loss for the period Other terms Merger Uniting of interests Acquisition accounting Purchase method
Overall financial statements presentation
UK statutory formats for the balance sheet and profit and loss account are broadly acceptable under IFRS. However, IFRS specify content rather than exact formats. There are also some important presentational differences. 1.1 General UNITED KINGDOM Form and content is specified by Companies Act 1985 (CA85), accounting standards and UITF abstracts and, for listed companies, the FSA listing rules. IFRS Form and content is specified by IFRS, including IAS still extant and SIC/IFRIC Interpretations. Additional requirements may be specified by local statute, regulators or stock exchanges. Financial statements comprise: balance sheet income statement a statement showing either: all changes in equity; or changes in equity other than those arising from capital transactions with owners and distributions to owners, called a Statement of Recognised Income and Expense (SORIE), IAS 1.96 cash flow statement (no exemptions) accounting policies and explanatory notes, IAS 1.8.
Financial statements comprise: balance sheet profit and loss account statement of total recognised gains and losses (STRGL) cash flow statement (not small companies or 90% subsidiaries) accounting policies and notes.
1.2 Balance sheet UNITED KINGDOM Relevant statute: CA 1985 Standard formats are set out in CA 1985, Schedule 4. Detailed sub-headings may be either on the face of balance sheet or in the notes. IFRS Relevant standard: IAS 1 IAS 1 specifies items that must be presented on the face of the balance sheet, and lists additional information that must be either on the face or in the notes. UK companies which prepare their accounts under IFRS are exempt from most of the Companies Act disclosures. However, some of the Companies Act disclosures continue to apply. IAS 1 requires current and non-current items to be presented as separate classifications on the face of the balance sheet (except where a presentation based on liquidity is reliable and more relevant), IAS 1.51. No subtotals are specified in IAS 1.
Companies have a choice between Format 1, broadly equivalent to current and non-current distinction, and Format 2, with no distinction on the face of the balance sheet for creditors, though Format 2 is rare.
Format 1 specifies sub-totals to be shown on the face of the balance sheet for net current assets and total assets less current liabilities. Tax liabilities need not be shown separately on the face of the balance sheet.
Deferred and current tax liabilities and assets must be shown as separate line items on the face of the balance sheet. Deferred tax assets (liabilities) shall not be classified as current assets (liabilities), IAS 1.70.
UNITED KINGDOM Fixed assets are defined in CA 1985 as those held for continuing use in the company's business, and current assets are defined as any assets not so held. 'Fixed assets' under UK GAAP and 'non-current assets' under IFRS are not equivalent terms.
IFRS IAS 1 defines current assets as those that are: expected to be realised within normal operating cycle, via sale or consumption. Where the normal operating cycle is not clearly identifiable it is assumed to be 12 months, or held primarily for trading; or expected to be realised within 12 months from the balance sheet date, or cash or cash equivalents not restricted in their use, IAS 1.57.
All other assets are non-current. Creditors due within one year are distinguished from those due after more than one year. The definitions of current and non-current liabilities are similar to those for current and non-current assets, IAS 1.60. Current liabilities also include those liabilities where the entity does not have an unconditional right to defer settlement beyond 12 months after the balance sheet date, IAS 1.63.
UNITED KINGDOM In addition to the creditors split, CA 1985 requires debtor balances due after more than one year to be disclosed, and in some cases, separate presentation on the face of the balance sheet is necessary under UITF 4.
IFRS If any asset or liability line item combines amounts expected to be settled or recovered: within 12 months of balance sheet date and more than 12 months after the balance sheet date
the entity shall in addition to giving the current/non-current classification disclose the amount due after more than 12 months, IAS 1.52. No UK GAAP equivalent. Where a non-current asset or a disposal group qualifies as held for sale (under IFRS 5), the assets should be presented separately from other assets and similarly for liabilities (both as separate single lines).
1.3 Profit and loss account/income statement UNITED KINGDOM Relevant statute and standard: CA 1985, FRS 3 Two main statutory formats: nature of expenses function of expenses. IFRS Relevant standards: IAS 1, IFRS 5
Two main expense categorisations: nature of expenses function of expenses.
IAS 1 does not specify exact formats but does specify items that must be on the face of the income statement, and additional information that must be either on the face of the income statement or in the notes.
UNITED KINGDOM Continuing operations (with acquisitions as a separate component) and discontinued operations are analysed from turnover to operating profit and for certain types of exceptional items on the face of the profit and loss account below operating profit. Discontinued operations definition is such that sale or termination must have been completed by three months after balance sheet date.
IFRS Discontinued operations are defined, in IFRS 5, more broadly and disclosures are much more extensive, including narrative and balance sheet amounts. The discontinued operations definition, IFRS 5.32 is such that the operation is either "held for sale", defined in IFRS 5.6-12, or has been disposed of. This could include operations where there are plans to sell but disposal is not completed until some months after the balance sheet date. The discontinued operations results are disclosed via a single post-tax amount on the face of the income statement. A more detailed analysis of this figure should be given either on the face of the income statement or in the notes. Disclosure exemptions exist for newly acquired subsidiaries meeting the held for sale criteria on acquisition, IFRS 5.32(c).
Acquisitions are distinguished as a separate component of continuing operations.
Separate disclosure in the income statement of amounts in respect of acquisitions is not mandated by IFRS. Exceptional items are not formally defined in IFRS, and there is no equivalent to the FRS 3 below operating profit exceptional items. Also, if an operating profit line is presented then all items of an operating nature should be included be included in it, IAS 1.BC13.
Exceptional items are material items that need to be disclosed by virtue of their size or incidence if the financial statements are to give a true and fair view.
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UNITED KINGDOM Two types of exceptional item are distinguished in FRS 3: those on the face of the profit and loss account below operating profit those under normal headings, separately disclosed in the notes, or exceptionally, on the face of profit and loss account under the statutory heading to which it relates.
IFRS Where items of income and expense are material, the amount and nature of those items must be disclosed either on the face of the income statement or in the notes, IAS 1.86. Additional line items, headings and sub-totals are presented where necessary for an understanding of performance, IAS 1.69.
Extraordinary items are defined so that, in practice, none exists under UK GAAP.
Extraordinary items are prohibited anywhere within the financial statements, IAS 1.85. However, under IFRS 5 discontinued/held-for-sale items are presented post-tax. No equivalent requirement in IFRS.
A note of historical cost profits and losses must be presented immediately following the profit and loss account or the STRGL where there is a material difference between reported profits and profits on a purely historic cost basis. Except where FRS 26 is adopted unrealised gains are not normally included in profit and loss account.
For financial instruments (Section 8) and investment property (Section 5), some "unrealised gains", via fair value adjustments, are included in the income statement.
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UNITED KINGDOM Except where FRS 26 is adopted gains and losses previously recognised in the STRGL are not recycled through either the profit and loss account or the STRGL on sale of the revalued item. Old goodwill previously charged to reserves under SSAP 22 is taken to the profit and loss account on disposal of the business to which it relates.
IFRS In IFRS, there are instances where gains or losses transferred to equity are recycled to the income statement on subsequent realisation, eg available for sale financial assets and foreign exchange losses on net investment in subsidiaries.
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1.4 Statement of Total Recognised Gains and STRGL/Statement of Changes in Equity SOCE/Statement of Recognised Income and Expense SORIE
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UNITED KINGDOM Relevant standard: FRS 3 A STRGL must be presented as a primary statement, showing all gains and losses but not capital transactions with owners or distributions to owners. The effect of a prior year adjustment is usually shown on one line. The financial statements must also present: a reconciliation of shareholders' funds either as a primary statement or as a note a statement of movements in reserves (usually in the notes) for which comparatives are not required.
IFRS Relevant standard: IAS 1 Either: present a SORIE (broadly equivalent to STRGL under UK GAAP) as a primary statement, and present capital movements and distributions in the notes, or present a SOCE, which combines recognised income and expenses with capital movements and distributions in a statement of changes in equity.
Certain items must be split between the minority's and parent's interests. The effects of prior year adjustments must be shown for each component of equity. The SORIE approach must be used if the IAS 19 approach of recognising actuarial gains and losses outside of profit or loss is taken (see Section 7.) Full comparatives are required for reserve movements, whether presented in a statement of changes in equity or in the notes. The amounts of total gains and losses attributable to equity holders of the parent and to minority interests should be disclosed separately, IAS 1.96(c).
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1.5 Cash flow statement UNITED KINGDOM Relevant standard: FRS 1 Exemption from FRS 1 for: small companies 90% subsidiaries provided group accounts are publicly available. 'Cash' movement in cash flow statement includes cash equivalents, ie short-term highly liquid investments readily convertible into known amounts of cash and with an insignificant risk of changes in value, IAS 7.6 and IAS 7.7. Standard categories are: operating investing financing. IFRS Relevant standard: IAS 7 No exemptions under IFRS.
Cash is defined narrowly and excludes cash equivalents.
Standard categories are: operating activities dividends from joint ventures and associates returns on investments and servicing of finance taxation capital expenditure and financial investment acquisitions and disposals equity dividends paid management of liquid resources financing.
Interest and dividends are classified consistently from year to year under the most appropriate heading, IAS 7.31-34). Interest and/or dividends may be classed within operating activities. Taxation cash flows are disclosed separately under 'operating' unless they can be attributed specifically to investing or financing cash flows, IAS 7.14(f), IAS 7.35 and IAS 7.36.
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UNITED KINGDOM FRS 1 allows either direct or indirect method but in any case requires that the cash flow statement or notes provide a reconciliation of operating profit to the cash flow from operating activities.
IFRS IAS 7.18 allows the cash flows from operating activities to be disclosed via either the direct method, ie shows major classes of gross cash receipts and payments or the indirect method. The indirect method adjusts profit, often taken to be post-tax profit or loss for the period, for non cash movements and IAS 7.20 states there are two alternative presentations for indirect method. The reconciliation (of the profit or loss to the cash flows from operating activities) may be presented in a note or on the face of the cash flow statement. However, the illustrative example in the appendix to IAS 7 shows the reconciliation on the face of the cash flow statement, and is considered to the preferable position for this reconciliation.
FRS 1 has no equivalent permission for cash flows relating to customers to be shown net. FRS 1.9 allows cash flows to be shown net only in the case of financing transactions that are in substance the same transaction and are due to short maturities and high turnover.
In some circumstances IAS 7 allows cash flows to be reported on a net basis, IAS 7.22-24, such as rent funds collected on behalf of and paid over to the owners of properties.
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UNITED KINGDOM Material effects on the amounts reported under each of the standard headings reflecting the cash flows of a subsidiary undertaking acquired or disposed of in the period should be disclosed. Acquisitions and disposals heading includes amounts paid to acquire business /proceeds from sale of business.
IFRS IAS 7.39 requires cash flows relating to the purchase or disposal of a business to be included in investing activities (with separate disclosure). IFRS 5.33(c) requires disclosure of the amount of the cash flows attributable to a discontinued operation to be disclosed for each of the standard headings. IFRS do not mandate separate disclosure of the impact of acquisitions on cash flows.
A reconciliation of cash flow to movement in net debt, and analysis of changes in net debt, reconciled to the balance sheet, should be provided. The cash flows relating to foreign branches and subsidiaries are translated under FRS 1 using the same basis as the profit and loss account for that branch or subsidiary (which could be closing or average rate).
Components of cash and cash equivalents must be disclosed and reconciled to the balance sheet. There is no equivalent to the UK net debt disclosures. IAS 7.25-28 require cash flows of foreign subsidiaries or branches to be translated using rates at the time of the cash flow or approximations using weighted averages.
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1.6 Discontinued operations and assets held for sale UNITED KINGDOM Relevant standard: FRS 3 Definition of discontinued operations Operations are classified as discontinued only where all of the following conditions are met: the sale or termination is completed within the accounting period or by the earlier of three months post-year end and the date of approval of the accounts if a termination, the former activities have ceased permanently the sale or termination has a material effect on the nature and focus of operations and represents a material reduction in operating facilities due to withdrawal from a market or a material reduction in turnover from continuing markets assets, liabilities, results and activities are clearly distinguishable physically, operationally and for reporting purposes. IFRS Relevant standard: IFRS 5
An operation is classified as discontinued, via IFRS 5.31-32: at the date the operation meets the criteria to be classified as held for sale; or when the entity has disposed of the operation.
To be classed as discontinued, the operation must also relate to a separate major line of business or geographical area of operations or be a subsidiary acquired exclusively with a view to resale.
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UNITED KINGDOM Definition of held for sale No direct equivalent to held-for-sale classification in UK GAAP.
IFRS An asset or disposal group is held for sale when its carrying amount will be recovered principally through a sale transaction rather than continued use, IFRS 5.6. For an asset to be held for sale, sale must be highly probable and the asset must be available for sale in its present condition subject only to terms that are usual and customary for sales of such assets, IFRS 5.7. The implementation guidance issued with IFRS 5 also provides useful illustrations. Non-current assets to be abandoned are not classed as held for sale. Such assets, or disposal groups, may qualify as a discontinued operation, IFRS 5.13.
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UNITED KINGDOM
IFRS For an asset to be held for sale, the asset or disposal group must be available for immediate sale and sale must be highly probable which means, IFRS 5.8: management are committed to a plan to sell an active programme to locate a buyer and complete the plan has been initiated the asset is actively marketed and at a reasonable price the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, the one year limit is extended if conditions in IFRS 5 App B apply.
The above criteria must be met at the balance sheet date for an asset or disposal group to be classified as held for sale. Disclosure requirements In UK GAAP, discontinued operations disclosures are made when the definition of a discontinued operation is met. In practice, the key timing issue is that an operation is only discontinued if the sale or termination is completed within three months of the year end or the date of approval of the financial statements, if earlier.
In IFRS assets and disposal groups are treated as held for sale when at the balance sheet date they meet the criteria (see above) for being held for sale. A discontinued operation is one which is held for sale or has been disposed of, IFRS 5.32. However, where the criteria are met between the balance sheet date and the date that the accounts are signed certain disclosures are required, IFRS 5.12.
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UNITED KINGDOM Presentation in performance statements
IFRS
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UNITED KINGDOM The profit and loss account from turnover to operating profit and below-operating-profit exceptional items must be analysed between continuing and discontinued operations. The analysis of turnover, operating profit and below-operating-profit exceptional items must be shown on the face of the profit and loss account. Other lines between turnover and operating profit may be analysed on the face of the profit and loss account or in the notes.
IFRS The key disclosures required for discontinued operations are (IFRS 5.33): on the face of the income statement a single amount comprising the total of: the post-tax profit or loss of discontinued operations, and the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group constituting the discontinued operation an analysis of the above single amount (on the face or in the notes) into: revenue, expenses and pre-tax profit or loss of discontinued operations the related income tax expense of the above the gain or loss recognised on the measurement to fair value less costs to sell or on disposal of the assets or disposal group constituting the discontinued operation and the related income tax expense of the above net cash flows attributable to operating, investing and financing activities of discontinued operations.
(Note: disclosure exemptions apply for disposal groups that are newly acquired subsidiaries meeting the definition of held-for-sale see IFRS 5.33.) Other disclosures in the period of
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UNITED KINGDOM Comparatives are restated to re-classify the results of operations discontinued in the current year, FRS 3.30.
IFRS Income statement and cash flow comparatives are restated so that discontinued operations include all operations that have been discontinued by the balance sheet date, IFRS 5.34.
Balance sheet presentation No UK GAAP equivalent. Balance sheet items relating to discontinued operations are included in their normal categories.
Where a non-current asset or a disposal group qualifies as held for sale, the asset or assets constituting that disposal group, should be presented separately from other assets. Similarly liabilities that form part of a disposal group should be presented separately from other liabilities. The main classes of assets and liabilities within the held for sale balances should be separately disclosed, either on the face of the balance sheet or in the notes (there is an exemption from this additional disclosure in cases where the disposal group is a newly acquired subsidiary held for sale), IFRS 5.38-39. In the balance sheet, assets and liabilities of a disposal group held for sale are presented separately and not offset on the face of the balance sheet., IFRS 5.38. The balance sheet comparatives are not restated, IFRS 5.40.
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UNITED KINGDOM Measurement In UK GAAP no "special" rules exist for the measurement of assets held for sale (other than under FRS 2 for subsidiaries held exclusively for resale). However, impairment under FRS 11 may be relevant.
IFRS IFRS 5 contains measurement rules and disclosures for non-current assets, or disposal groups, which are held for sale. Certain types of non-current assets are scoped out of IFRS 5 where they are dealt with by other standards, IFRS 5.5. IFRS 5 does not apply to those scoped out assets either individually or as part of a disposal group. Where the held for sale criteria are met, non-current assets, or disposal groups, are measured at the lower of carrying amount, before classification as held for sale, and fair value less costs to sell, IFRS 5.15. IFRS 5.16-24 includes rules on the reversal and allocation of impairment losses. No depreciation, or amortisation, is charged on non-current assets held for sale, IFRS 5.25. IFRS 5.26-29 deal with situations where assets or disposal groups previously classed as held for sale no longer meet the necessary criteria.
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UNITED KINGDOM IFRS Subsidiaries held exclusively for resale Under FRS 2.11 and FRS 2.25, Subsidiaries held exclusively for subsidiaries held exclusively for resale that meet the conditions for resale are excluded from held for sale are also discontinued consolidation and are accounted for operations. Hence, the balance as current assets at the lower of sheet items are presented as a cost or net realisable value. single line of assets and single line of liabilities, with the non-current assets being stated at fair value (which is the carrying value at time of business combination) less costs to sell, IFRS 5.16.
4 Accounting policies General
1.7 Selection of accounting policies UNITED KINGDOM Relevant standard: FRS 18, and FRS 21 for going concern Adopt accounting policies consistent with accounting standards, UITF Abstracts and CA 1985 that enable the financial statements to give a true and fair view, FRS 18.14. SORPs also apply in certain businesses, FRS 18.58. IFRS Relevant standard: IAS 8, IAS 1 and IAS 10 for going concern Select and apply accounting policies so that the financial statements comply with all requirements of each applicable IFRS/IAS, SIC/IFRIC Interpretation and any implementation guidance, IAS 8.7.
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UNITED KINGDOM State in the financial statements that applicable accounting standards have been followed, CA 1985. Give particulars of, and reasons for, any material departures, FRS 18.15, FRS 18.62 & CA 1985 section 226 (5).
IFRS State that the financial statements comply with IFRS via an explicit statement of compliance, IAS 1.14. Financial statements should not be described as complying with IFRS unless they comply in full with all requirements of each applicable IFRS, IAS 1.14. UK companies preparing their financial statements under IFRS must use EU adopted IFRS, and therefore the accounting policies should state that the financial statements "have been prepared in accordance with IFRS as adopted by the EU".
Select the most appropriate policy where a choice exists in standards or where an issue is not addressed specifically by standards, FRS 18.17.
No 'most appropriate' requirement where choice exists in standards. Under IAS 1.113, disclose in the summary of significant accounting policies, or other notes, the judgements that management have made in the process of applying the accounting policies.
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UNITED KINGDOM A true and fair override of CA 1985 and accounting standards is required if and only if compliance is incompatible with giving a true and fair view. Accounting standards and UITF Abstracts are overridden only on true and fair grounds in exceptional circumstances, FRS 18.15 and CA 1985 section 226A.
IFRS IFRS are overridden only in extremely rare cases where compliance would be so misleading that it would conflict with the objective of the financial statements set out in the Framework and thus where departure is needed to achieve a fair presentation, IAS 1.17. Where compliance with IFRS would be misleading but where the relevant regulatory framework prohibits overriding IFRS, disclosures must be given of the adjustments necessary to achieve a fair presentation, IAS 1.21.
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UNITED KINGDOM Objectives and constraints in selecting accounting policies are not confined to situations where no specific standard exists. Objectives are, FRS 18.30:
IFRS Where no specific requirement exists, management use judgment to develop policies to ensure financial statements provide information that is: relevant to decision-making needs of users; and reliable, ie gives a faithful representation, reflects economic substance and is neutral, prudent and complete, IAS 8.10.
relevance reliability comparability understandability.
Constraints are, FRS 18.31:
In the absence of a specific balancing different objectives requirement, management balancing cost of providing considers, in the following order: information against likely benefits to users. IFRS and Interpretations dealing with similar issues, IAS 8.11 the definitions, recognition and measurement concepts in the Framework, IAS 8.11 pronouncements of other standard-setters (that use a similar conceptual framework to the IASB) and accepted industry practice, but not so as to override the previous two sources of guidance, IAS 8.12. Going concern basis should be used unless management intends to liquidate or cease trading, or has no realistic alternative but to do so, even if management did not determine this until after the balance sheet date, IAS 1.23 and IAS 10.14.
Same as IFRS.
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UNITED KINGDOM FRS 18 identifies general principles regarding: accrual basis of accounting, FRS 18.26 comparability, FRS 18.39-40 understandability, FRS 18.41.
IFRS IAS 1 identifies general principles regarding: accrual basis of accounting, IAS 1.25 consistency of presentation, IAS 8.13, IAS 1.27 materiality and aggregation, IAS 1.29 offsetting, IAS 1.32. IAS 32 contains more stringent offset rules for financial assets and financial liabilities.
FRS 5 and CA 1985 address offsetting. FRS 25 contains requirements for offsetting financial assets and financial liabilities, these are the same as those in IAS 32.
1.8 Reporting substance UNITED KINGDOM Relevant standard: FRS 5 IFRS Relevant standard: no IFRS directly addresses substance. However reporting substance is prevalent throughout IFRS and is embodied in the Framework. In comparison to FRS 5, relevant material is contained in IAS 1, IAS 8, IAS 32, IAS 39, SIC-12 and SIC-27. IAS 8.10 requires that where there is no specific requirement in IFRS, management should develop accounting policies that, inter alia, reflect the economic substance of events and transactions and not merely the legal form.
FRS 5 contains a general requirement to report transactions in accordance with their substance.
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UNITED KINGDOM Substance is usually considered by reference to identification, recognition and derecognition of assets and liabilities. Assets are derecognised when all significant access to benefits and exposure to risks have been transferred to others. An entity adopting FRS 26 will apply the de-recognition rules in that standard to financial assets and liabilities. This is mandatory for periods commencing on or after 1 January 2007 and amends FRS 26 to include IAS 39's derecognition rules. Earlier adoption of the amendment to FRS 26 is permitted. FRS 5.29 requires that assets and liabilities should not be offset. Debit and credit balances should be combined into a single item only where they do not constitute separate assets and liabilities, and provided extensive conditions in FRS 5 are met. FRS 5.29 allows offset between balances where they are with another party and the entity has the ability to offset beyond reasonable doubt. FRS 25 applies the offset rules of IAS 32 for financial assets and financial liabilities. CA 1985 requires that assets should not be offset against liabilities and income should not be offset against expenses.
IFRS No detailed general consideration in IFRS, but the Framework includes a brief general discussion of substance. Specific IFRS address derecognition for individual types of asset or liability, eg IAS 18 addresses the issue indirectly, (see Section 7) but there is no general derecognition standard. IAS 39 contains detailed rules on derecognition of financial assets, which involves a five-step process, although this also involves the consideration of substance over form.
IAS 1.32 states that assets and liabilities, income and expenses should not be offset except where required or permitted by another IFRS or Interpretation. Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function are presented separately unless they are immaterial. IAS 32.42-50 and IAS 32.AG38-39 contain detailed rules re offsetting in relation to financial assets and financial liabilities.
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UNITED KINGDOM FRS 5 requires a linked presentation for certain non-recourse financial arrangements. An entity applying FRS 26 (as amended for periods commencing on or after 1 January 2007) will need to apply the recognition and de-recognition provisions of that standard and not those of FRS 5 . This means that a linked presentation for factored debts will not be available for an entity applying FRS 26. For periods commencing prior to 1 January 2007, the derecognition rules amendment to FRS 26 is not mandatory.
IFRS Linked presentation is not permitted under IFRS. IAS 1, IAS 32 and IAS 39 are expressed in terms of assets and liabilities and do not provide scope for linked presentation. IAS 39 has detailed derecognition rules for financial assets involving a five-step process.
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UNITED KINGDOM FRS 5 has application notes covering: consignment stock sale and repurchase agreements revenue recognition.
IFRS IAS 18 addresses consignment stock, sale and repurchase arrangements and revenue recognition (see also Section 7) from the "seller's" perspective. From the "buyer's" perspective, there is no specific guidance on consignment stock other than the general requirement to consider substance over form, IAS 8.10, and the IAS 39.14 requirement to recognise a financial liability when the entity becomes "party to the contractual provisions of the instrument". Therefore overall, the accounting is likely to be similar to FRS 5, but management will need to consider, from a buyer's point of view, whether in substance an entity has the risks and rewards of the associated stock and liabilities (eg consider implications of price changes, at which point in time interest charges commence, etc). IAS 39 covers financial instruments. Its derecognition rules are relevant for debt factoring arrangements, securitisation of assets and loan transfers.
FRS 5 has application notes covering: factoring of debts securitised assets loan transfers.
These Application Notes are deleted for entities that apply FRS 26 (as amended to include the IAS 39 derecognition rules which are mandatory for periods commencing on or after 1 January 2007 where an entity applies FRS 26).
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UNITED KINGDOM FRS 5 has an application note covering PFI and similar contracts.
IFRS IFRIC 12 sets out the accounting to be adopted by an operator in a PFI arrangement. An entity, and PFI arrangement, within the scope of IFRIC 12 might recognise either a financial asset, for any guaranteed future payments, or an intangible asset for the right to charge others for the use of any infrastructure. Given the specialist nature of PFI contracts this document does not consider in detail the differences between the UK and IFRS positions. IFRIC 12 is effective for accounting periods beginning on or after 1 January 2008.
1.9 Changes in accounting policy and correction of errors UNITED KINGDOM Relevant standards: FRS 3, FRS 18 Unless an individual standard specifies otherwise, a change in accounting policy is accounted for by means of a prior year adjustment, dictated by FRS 3.7 and transitional provisions in other standards. IFRS Relevant standard: IAS 8 Unless an individual standard specifies otherwise, a change in accounting policy is applied retrospectively, IAS 8.19 and IAS 8.22, except to the extent that it is impracticable to determine either the period-specific or cumulative effects of the change in which case the policy is applied from the earliest date practicable, IAS 8.23-27. IAS 8.5 contains a definition of impracticable and IAS 8.50-53 contains further guidance.
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UNITED KINGDOM A prior year adjustment is recognised in the STRGL and adjusted against the opening reserve balance for the current year. Comparative figures are restated, FRS 3.29 and FRS 3.60-63.
IFRS Unless an individual standard specifies otherwise, or the impracticability criteria apply, a change in accounting policy is accounted for by adjusting the relevant opening equity balance and prior period comparative amounts, IAS 8.22. A change in accounting policy should be made if the change will result in the financial statements providing reliable and more relevant information about transactions, events and conditions, IAS 8.14. The initial application of a policy to revalue assets under IAS 16, property, plant and equipment, or IAS 38, intangibles, is a change of accounting policy but is not accounted for under IAS 8's change of accounting policy rules. Instead IAS 16 and IAS 38 have more specific rules which avoid retrospective application. IAS 8.30 requires disclosure of standards issued but not yet effective, together with reasonably estimable effect.
Accounting policies should be reviewed regularly to ensure that they remain the most appropriate. A change in policy is made only where a new policy is judged more appropriate, FRS 18.45.
Technically, a change of accounting policy from a cost model to a revaluation model for fixed assets is accounted for as a change of accounting policy with the prior year comparatives restated. FRS 15 offers no special exemptions to obtaining valuations at previous balance sheet dates.
No direct equivalent.
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UNITED KINGDOM No direct equivalent.
IFRS IAS 8.8 notes that accounting policies within IFRS need not be applied when the effect of applying them is immaterial. However, IAS8.8 further states that it is inappropriate to make, or leave uncorrected, immaterial departures from IFRSs to achieve a particular presentation of an entity's financial position, performance or cash flows. Material error There is no concept of fundamental error in IAS 8. Omissions or misstatements of items are material if they could individually or collectively influence the economic decisions of users of the financial statements, IAS 8.5. Material errors are corrected in the same way as for accounting policy changes, IAS 8.42, ie retrospective restatement unless impracticability criteria apply.
Fundamental error A fundamental error is an error that destroys the truth and fairness and thus the validity of the prior periods financial statements, FRS 3.63.
Where a fundamental error relating to a previous period is discovered, it is corrected by prior year adjustment, FRS 3.7.
Other items relating to prior periods Other items relating to prior Changes in estimates are periods, including changes in accounted for prospectively, estimation techniques, are IAS 8.36-37. accounted for prospectively, FRS 18.54.
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Assets
1.10 Tangible fixed assets/Property, plant and equipment UNITED KINGDOM Relevant standard: FRS 15 Overview Basic requirements: carry at cost less depreciation or at revalued amount less subsequent depreciation where assets are revalued the existing use basis of valuation is normally used may adopt an accounting policy of capitalising finance costs on assets under construction depreciate over useful economic life, residual values at prices at time of acquisition or most recent revaluation impairment review automatically required if asset depreciated over greater than 50 years or if not depreciated renewals accounting allowed for large infrastructure assets no equivalent to IFRS 5 for assets qualifying as held for sale. IFRS Relevant standards: IAS 16, IAS 23
Basic requirements: carry at cost less depreciation or at revalued amount less subsequent depreciation. IAS 16 less specific on revaluation basis and frequency than FRS 15 where assets are revalued they are revalued to the asset's fair value, which can be higher than FRS 15's existing use basis may adopt an accounting policy of capitalising borrowing costs on assets under construction (note that an exposure draft has been issued which amends IAS 23 to require capitalisation of borrowing costs, subject to meeting certain conditions.) depreciate over useful life with residual values at current prices treatment of losses on revalued assets may be treated differently no similar automatic requirement for impairment review where depreciation period exceeds 50 years renewals accounting not allowed where fixed assets classed as "held for sale" under IFRS 5, the held for sale measurement rules apply, eg no depreciation (see section 3).
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UNITED KINGDOM Initial recognition FRS 15.6 initial recognition at cost FRS 15.9-11 include details of the types of costs which can be included.
IFRS Initial recognition at cost, IAS 16.16-22 contain detailed rules on qualifying costs. This list is very similar to FRS 15, although in addition to those in FRS 15, IAS 16's list of included and excluded items is slightly more extensive and should be reviewed in case detail reveals any differences in specific circumstances. IAS 16.23 notes that cost is the cash price equivalent at the date of initial recognition and so extended credit terms would need to be taken into account. IAS 16.16(c) requires cost on initial recognition to include an estimate of the costs of dismantling and site restoration. This applies when the entity has an obligation as a consequence of using the item for a purpose other than production of inventory. IFRIC 1 may also need to be considered. Where the obligation arises from production of inventory then it is dealt with under IAS 2 and so will not be carried as an asset beyond time of sale of stock (IAS 16.18).
FRS 15 does not specifically define cost and so does not cover the issue of extended credit terms.
FRS 15.10 specifically requires that the estimated cost of dismantling the asset and site restoration is capitalised if it qualifies under FRS 12 as a provision. FRS 15 does not specifically discuss the situation where the obligation arises from inventory production.
FRS 15.17 requires fixed assets gifted or donated to be initially recognised at their current value at the date they are received.
IAS 16 does not include any equivalent rules on donations.
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UNITED KINGDOM Asset exchanges FRS 15 does not deal with exchanges of assets but such scenarios are likely to be covered by FRS 5, which requires substance over form.
IFRS IAS 16.24-26 deal with assets received in an exchange, and whether new assets are recognised at their fair value or the carrying amount of the asset given up. The emphasis is on substance over form.
Subsequent expenditure FRS 15.34 requires that subsequent expenditure to ensure that the tangible fixed asset maintains its previously assessed standard of performance should be recognised in the profit and loss account as it is incurred. FRS 15.36 requires that subsequent expenditure is capitalised if it relates to improvement, replacement of a separately depreciated component or relates to a major inspection or overhaul.
IAS 16.13 requires subsequent expenditure on components to be added to cost, and the replaced element derecognised. Day-to-day servicing costs are expensed. Costs of major periodic inspections should be capitalised, IAS 16.14 and previous inspection costs de-recognised, which may require estimations where the necessary information is not available.
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UNITED KINGDOM Revaluations Revaluations are permitted, as an alternative to cost, but are not required. Revaluations, must be done on a class-by-class basis, FRS 15.42 and FRS 15.61: underlying principle is value to the business model valuation normally at existing use value, FRS 15.53. Specialised properties should be valued at depreciated replacement cost and properties which are surplus to requirements at open market value less selling costs. FRS 15.59 applies similar principles to non-property related fixed assets valuations are normally on a five-yearly cycle, with interim valuations in year three and in other years where there is an indication of a material change, FRS 15.45 qualified valuers are required, and there must be some independent input into full valuations, FRS 15.48-49. FRS 15 also indicates the features of full and interim valuations, FRS 15.47 and FRS 15.49.
IFRS Revaluations are permitted, as an alternative to the cost model, but are not required. Revaluations must be done on a class-by-class basis, IAS 16.29: revalue to fair value, usually market value, if fair value can be measured reliably, IAS 16.31 revaluations must be sufficiently regular that carrying value does not differ materially from fair value at the balance sheet date, IAS 16.31, IAS 16.34 IAS 16.32 clarifies that a property valuation is usually determined from market based evidence by appraisal and is normally undertaken by professionally qualified valuers valuation requirements are generally less detailed than FRS 15.
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UNITED KINGDOM Revaluation gains should be recognised in the profit and loss account only to the extent, after adjusting for subsequent depreciation, that they reverse revaluation losses on the same asset that were previously recognised in the profit and loss account. All other revaluation gains should be recognised in the statement of total recognised gains and losses, FRS 15.63. Revaluation losses caused by clear consumption of benefits, eg physical damage or deterioration in quality of service provided by the asset, must be recognised in the profit and loss account for the year, FRS 15.65. Other losses, eg a general slump in the property market, are usually recognised in the STRGL, including a net loss below depreciated historical cost where recoverable amount exceeds revalued amount, FRS 15.65. FRS 15 is not specific on amortisation of revaluation surpluses to retained earnings but IAS 16 treatment is similar to common practice in UK and is consistent with CA 85 requirements on realised profits.
IFRS Revaluation increases are credited direct to equity via revaluation surplus. The increase is recognised in profit or loss to the extent that it reverses a previous revaluation decrease of the same asset previously recognised in profit or loss, IAS 16.39.
Revaluation losses are recognised in equity to the extent of any remaining credit balance in the revaluation reserve in respect of that asset. Other losses are an expense in the income statement, IAS 16.40. Therefore unlike FRS 15, a loss in excess of the existing credit balance in the revaluation reserve on that asset is always charged to the income statement.
Some of the revaluation surplus may be transferred to retained earnings as an asset is used. Any remaining surplus is transferred to retained earnings on derecognition of the asset. Transfers to retained earnings are not reflected in the income statement, IAS 16.42. Essentially this is the same as UK practice although UK practice is not set out in a standard.
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UNITED KINGDOM Depreciation Depreciate all assets, other than freehold land, except where depreciation is immaterial in aggregate due to very long lives or high residual values.
IFRS Depreciation is recognised as long as the asset's residual value does not exceed its carrying amount, in which case the depreciation charge is nil. Land is generally not depreciated, IAS 16.50-59. Estimates of residual values are reviewed annually and so are at "current" values taking into account inflation, IAS 16.6. This could result in a higher residual amount and so a lower depreciation charge than FRS 15.
Residual values are based on prices prevailing at the date of the acquisition or revaluation of the asset and do not take account of expected future price changes, FRS 15.2, although they are required to be reviewed annually where material, FRS 15.95. FRS 15 requires depreciation over an asset's useful economic life, although FRS 15.77 requires the depreciation method used to reflect as fairly as possible the pattern in which the asset's economic benefits are consumed by the entity and so in most cases will be similar to useful life under IAS 16. No equivalent to IFRS 5 in terms of cessation of depreciation where held for sale. Component depreciation explicitly required by FRS 15.83.
IAS 16 requires depreciation over useful life which may be less than its economic life, IAS 16.57.
Depreciation ceases in accordance with IFRS 5, if the asset qualifies as held for sale, see section 3. Each component of an item of property, plant and equipment with a cost that is significant in relation to the total cost of that item shall be depreciated separately, IAS 16.43.
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UNITED KINGDOM FRS 15.97-98 allow renewals accounting in certain specific circumstances, primarily for large infrastructure assets with asset management plans which are independently assessed by qualified experts. Under renewals accounting depreciation is based on estimates of annual expenditure required to maintain operating capacity. An annual impairment test is required where assets other than freehold land are not depreciated or where an asset's remaining life exceeds 50 years, FRS 15.89.
IFRS IAS 16 does not address renewals accounting and does not allow any alternative to the principle that depreciation expense is determined by reference to the asset's depreciable amount.
No requirement for annual impairment reviews. IAS 36 contains rules on impairment and may require an impairment review if an indication of impairment exists.
Borrowing costs FRS 15 covers only tangible fixed assets.
IAS 23 applies to property, plant and equipment, intangible assets and inventory. IAS 23.11 allows capitalisation of borrowing costs as an alternative to the preferred method of expensing all borrowing costs. This choice is a matter of accounting policy and so if adopted should be applied consistently. Note that at time of writing, an exposure draft has been issued, which is likely to mean that in the future (estimated from 2009), IAS 23 will be amended to mandate capitalisation of borrowing costs.
FRS 15.19 allows a choice of policy of either expensing or capitalising borrowing costs. This is a matter of accounting policy and so, once selected, the policy should be applied consistently.
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UNITED KINGDOM FRS 15 includes a number of constraints on what borrowing costs can be capitalised, including that costs must be directly attributable, FRS 15.21. FRS 15 only allows capitalisation once actual borrowing costs have been incurred and actions to bring the asset into working condition for its intended use must be in progress, FRS 15.25. Capitalisation must be suspended during extended delays in construction, FRS 15.27, and cease when the asset is ready for use, FRS 15.30. Under FRS 15.23-24, capitalisation of overdraft borrowing costs or other general borrowing costs are allowed using the weighted average method. FRS 15.19 clarifies that finance costs capitalised cannot exceed the overall borrowing costs, and therefore notional allocations where an entity does not have borrowings are not allowed.
IFRS IAS 23 includes a number of constraints on capitalisation, including that costs must be directly attributable, IAS 23.13.
IAS 23 allows capitalisation once actual borrowing costs have been incurred and activities in preparing the asset for use are in progress, IAS 23.20-22.
Capitalisation must be suspended during extended delays in construction, IAS 23.23-24 and cease once the asset is ready for use, IAS 23.25-26. IAS 23 allows capitalisation of overdraft borrowing costs, IAS 23.5, capitalisation of other ancillary costs, IAS 23.5, and capitalisation of an allocation of an entity's overall borrowings using the weighted average method although these cannot exceed the overall borrowing costs incurred by the entity, IAS 23.17. Therefore notional allocations where an entity does not have borrowings are not allowed. If an asset's book value after capitalisation exceeds its recoverable amount or net realisable value then a write down is necessary, IAS 23.19. This is carried out in accordance with the relevant standard, being IAS 2 or IAS 36.
FRS 15.32 states that if the amount recognised when a tangible fixed asset is acquired or constructed exceeds its recoverable amount, it should be written down to its recoverable amount.
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UNITED KINGDOM
IFRS First-time adoption of IFRS
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UNITED KINGDOM Not applicable.
IFRS Where depreciation methods and rates under previous GAAP are acceptable under IFRS, changes in estimated useful life etc are accounted for prospectively, IFRS 1.31-32, also see IFRS 1.IG7. If methods of depreciation are adjusted because previous GAAP treatment did not comply with IFRS, then the opening balance sheet on transition needs to be adjusted for the cumulative effect. An entity may elect, for each asset individually, to use fair value at the date of transition as deemed cost, IFRS 1.16. If under previous GAAP an entity had revalued an asset, at or before the date of transition, and that valuation was broadly comparable to fair value then that revaluation could be used as deemed cost, IFRS 1.17. If previous GAAP revaluations do not satisfy the criteria in IFRS 1.17, or IFRS 1.19 for privatisations etc, then the opening balance sheet on transition can reflect one of: cost (or deemed cost) less depreciation under IAS 16, or deemed cost being fair value at date of transition under IFRS 1.16, or revalued amount, if entity adopts IAS 16 revaluation model IFRS 1.IG11.
Previous valuations done on a basis different from fair value, eg
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1.11 Investment property UNITED KINGDOM Relevant standard: SSAP 19 Definition SSAP 19 defines investment property as being held for investment potential, with rental income being negotiated at arms length. Investment property excludes owner occupied property or property let to another group company (for the purpose of individual and group accounts). IFRS Relevant standard: IAS 40
IAS 40.5 defines investment property as held to earn rentals or for capital appreciation or both. This definition is supplemented by IAS 40.7-15. The basic definition covers property owned or held under a finance lease, see below for property held under an operating lease. IAS 40.7 and IAS 40.9(c) excludes owner occupied property from being investment property. Property let between group companies can be investment property in the letting company's separate financial statements but not the consolidated financial statements which contain both parties, IAS 40.15.
Property under construction cannot be investment property under SSAP 19. Land held for an undetermined use is not referred to in the SSAP 19 definition or investment property.
Property under construction for future use as an investment property is accounted for under IAS 16 until complete, although IAS 40 applies on redevelopments of property previously identified as investment property, IAS 40.9. Land held for a currently undetermined use is classed as investment property, IAS 40.8.
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UNITED KINGDOM SSAP 19 does not provide guidance on mixed-use property.
IFRS IAS 40.10 deals with situations where a property comprises a mix of parts for investment and others, eg admin, production or supply. If portions can be sold separately then portions can be accounted for separately. IAS 40.11-14 contains guidance where other services are provided to the occupants of the property. For example, where a hotel owning company subcontracts out the management of the hotel.
Accounting treatment Investment properties are revalued to open market value. Annual revaluations are not required but are commonplace where investment properties are substantial. Investment properties are not depreciated except where they are held on leases, see below.
IAS 40 permits two approaches one of which must be adopted for the entire portfolio, IAS 40.30: fair value, with annual remeasurement to fair value and revaluations recognised in profit or loss cost model, ie carry at cost less depreciation, under IAS 16 principles.
Changing from one model to the other is permitted only if it results in more appropriate presentation. This is considered highly unlikely in the case of moving from the fair value model to the cost model, IAS 40.31. Note that if the cost model is adopted, disclosure of fair value is still required, IAS 40.79(e).
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UNITED KINGDOM Leasehold properties may be classified as investment properties. SSAP 19.10 requires that properties held on lease should be depreciated over the maximum period of the term of the lease, where the unexpired term is 20 years or less.
IFRS A property held under an operating lease is not ordinarily recognised as an asset by the lessee, applying IAS 17. However, it may be classified and accounted for as an investment property providing certain criteria are met. The key requirement being that the lease must be accounted for as if it were a finance lease, IAS 40.6. This can be done on a property-by-property basis, in respect of properties held under operating leases, but requires that the fair value model be selected as the accounting policy for all investment property, IAS 40.6.
Gains and losses on investment property revaluations generally go through the STRGL.
Where the fair value approach is adopted, gains and losses on investment property revaluations go through the income statement for the year, IAS 40.35. Where a property is self-constructed, and transferred from inventory to investment property, or in the case of another transfer from inventory to investment property, the resulting movement to fair value is recognised in profit or loss, IAS 40.63-65. However previously owner-occupied properties which are now to be transferred to investment property are revalued under IAS 16 first, ie gains to equity, IAS 40.61.
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UNITED KINGDOM Valuation basis SSAP 19 requires open market value for the valuation basis.
IFRS Fair value is the amount at which the asset could be exchanged between willing, knowledgeable parties in an arm's length transaction. IAS 40.36-52 provide guidance on applying fair value. In most cases fair value will be similar to open market value. However the valuation criteria should be reviewed as they are more prescriptive than SSAP 19. In particular, fair value takes account of existing tenancies, IAS 40.40. IAS 40.32 states an entity is encouraged but not required to determine fair value via an independent professionally qualified valuer.
SSAP 19.6 does not require the valuation to be made by a qualified or independent valuer. However where the investment property is a substantial proportion of a major enterprise then the valuation would normally be carried out by an external valuer every five years and annually by a person holding a recognised professional qualification. SSAP 19 does not contain guidance on an investment property's value at initial recognition value.
IAS 40.20-24 contains guidance on initial cost, linking into IAS 16 where self-constructed. IAS 40 applies similar principles to IAS 16. IAS 40.25-26 covers the initial cost of investment properties held on lease. The initial cost is based on the lower of the fair value of the property and the present value of the minimum lease payments.
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UNITED KINGDOM No guidance in SSAP 19 on assets received in an exchange.
IFRS IAS 40 contains guidance where an asset is received in an exchange; the guidance is similar to that in IAS 16.
Transfers in or out SSAP 19 does not contain detailed guidance on transfers in or out of investment properties. UITF 5 does contain guidance for assets previously held as current assets transferred to investment property. The asset needs to be recorded at the lower of cost and net realisable value at the date of management change of intent. Any write downs are reflected in the profit and loss account.
IAS 40.57 covers transfers in and out of investment property. In particular, IAS 40.57(b) and IAS 40.58. Where an entity decides to redevelop an existing investment property with a view to short term sale, the property is transferred to inventory at fair value. There is no similar requirement if management simply decide to redevelop the property for the long term or to sell an investment property in its existing state.
Held for sale UK GAAP has no special valuation basis for assets held for sale.
See discontinued section (3) on assets held for sale, IFRS 5. This applies only where the cost model is used. Other investment properties are scoped out of IFRS 5.
Disclosure and first-time adoption The IAS 40 disclosures for investment property are more extensive than SSAP 19, see IAS 40.70-79. Not relevant. Where an entity opts for the fair value model, this applies from the date of transition. When the cost model is adopted, the transitional provisions apply, IAS 16 and IFRS 1.
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1.12 Intangible assets (Note: this section does not cover goodwill. Goodwill is covered in Section 9, business combinations.) UNITED KINGDOM Relevant standards: FRS 10, SSAP 13, UITF 24, UITF 29 Basic requirements: carry acquired intangibles at cost less amortisation accounting policy option to capitalise development costs other internally generated intangibles are recognised in very limited cases, where they have a readily ascertainable market value revaluation is permitted only in limited cases non-amortisation is permitted. IFRS Relevant standard: IAS 38, IFRS 3, SIC-32 Basic requirements: carry acquired intangibles at cost less amortisation. The definition of intangibles is such that more intangible assets, particularly on business combinations, are likely to be recognised internally-generated intangibles representing development must be capitalised if the conditions are met; the definitions of the development stage are more extensive than those in SSAP 13 revaluation is permitted only in limited cases non-amortisation is permitted.
Definition and recognition Intangible assets, other than development costs, are recognised only if they are capable of being disposed of separately from a business, FRS 10.2.
Definition of intangible assets does not require separability where the asset arises from contractual or legal rights, IAS 38.12.
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UNITED KINGDOM Under FRS 10 the recognition criteria are such that: the intangible asset definition requires both that the asset is separable and the entity has control of the asset, normally through custody or legal rights the cost, or fair value allocation in a business combination, is reliably measurable, FRS 10.9-10. FRS 10.12 notes that the fair value on acquisition will be difficult to determine in a number of instances, unlike IAS 38 which states that it will normally be determinable.
IFRS The IAS 38 recognition criteria are extensive but will, in some cases, result in recognition of intangibles which were not previously recognised under UK GAAP: to qualify for recognition the intangible must be identifiable, ie either separable or arising from contractual or legal rights, IAS 38.12 to qualify as an asset the entity must have control, IAS 38.13-16 provides guidance on control cost must be measurable reliably, IAS 38.21 must be probable that future economic benefits will flow, IAS 38.21. This condition is always considered met in the case of a purchase of an intangible or if acquired in a business combination, IAS 38.33 and IAS 38.25.
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UNITED KINGDOM Development costs may be capitalised if detailed criteria in SSAP 13 are met. SSAP 13 is generally less specific than IAS 38 in terms of what costs can be capitalised within the development cost although it does contain some guidance in SSAP 13.6-7.
IFRS Intangible assets arising from development and other internally generated intangibles must be capitalised if detailed criteria in IAS 38 are met: the general intangibles recognition criteria must all be met, ie identifiable via separability or via legal or contractual rights, cost ascertainable, probable economic benefits IAS 38 is more prescriptive and defines in more detail than SSAP 13 the research and development phases, IAS 38.54-62. Expenditure must be expensed prior to development phase. Once all criteria are met, then the cost of the development phase must be capitalised the cost capitalised is the cost from the date the recognition criteria are first met. Reinstatement of previously expensed costs is not allowed, IAS 38.71 and IAS 38.65.
IAS 38.66-67 gives further specific guidance on costs which should, and others which cannot, be capitalised. For instance, identified inefficiencies, initial operating losses, training costs are all specifically excluded from capitalisation.
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UNITED KINGDOM For initial measurement of separately purchased intangibles: FRS 10.9 requires they are capitalised at cost see above for the general recognition criteria no automatic assumption that economic benefit criterion will always be met.
IFRS For initial measurement of separately purchased intangibles: see above for the general recognition criteria IAS 38.25 means that the economic benefit criterion is always assumed to be met.
This may give a different result to FRS 10, eg in the case of the purchase of the legal rights to a drug which is awaiting regulatory approval. Under FRS 10, if economic benefits are not expected to be probable then the amount paid would be written off. Under IAS 38 the uncertainty is assumed to be factored into the purchase price and the price paid would be capitalised. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are specifically prohibited from being capitalised as intangible assets (IAS 38.63).
Internally generated intangibles, other than development costs covered by SSAP 13, may not be capitalised unless the asset has a readily ascertainable market value, FRS 10.14. This is defined to exclude all unique assets such as brands.
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UNITED KINGDOM IFRS Acquisition on a business combination FRS 10.10 notes that an intangible For initial measurement and asset acquired as part of a business recognition of intangibles acquired combination should be capitalised via business combinations: separately from goodwill, provided its value on initial recognition can probability of economic benefit be measured reliably. criterion always assumed to be met, IAS 38.33 FRS 10.10 restricts the value IAS 38.33-41 set out specific attributed to intangibles acquired guidance on recognition and on a business combination, unless measurement on business the asset has a readily combinations ascertainable market value, to an IFRS 3 requires an intangible to amount that does not create or be recognised separately if it increase negative goodwill. meets the IAS 38 criteria and its fair value at the time of To be recognised, an intangible acquisition can be measured must be separable. reliably, IFRS 3.37 IAS 38 definition of intangible asset leads to more intangibles. Unlike FRS 10 an intangible includes an asset which is not separable if it arises from legal or contractual rights IAS 38.5 states that where in the measurement of fair value on initial recognition there is a range of possible outcomes, the uncertainty is taken into account in the fair value assessment, rather than demonstrating an inability to measure the fair value. IAS 38.5 includes a rebuttable presumption that the fair value of an intangible can be measured reliably at the time of the business combination. This is supported by IAS 38.38.
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UNITED KINGDOM Far fewer intangibles are typically recognised separately on a business combination under UK GAAP. Many of those listed in IFRS 3 would not qualify for recognition under FRS 10 on grounds of a lack of separability.
IFRS IFRS 3 illustrative examples show a number of intangibles that are recognised provided they can be measured reliably. This may lead to recognition of more intangibles than was the case under UK GAAP. For example this could lead to the following being recognised: franchises royalty agreements lease agreements customer lists and customer relationships (under certain circumstances) order or production backlog.
IFRS 3 contains a extensive list, in its Illustrative Examples, which is a useful aide memoir. This area may pose significant practical problems. Acquired brands are often recognised as individual intangibles separately from goodwill, rather than being disaggregated into underlying components (as the components are not usually separable). IAS 38 requires a greater degree of disaggregation of acquired intangibles, except where the individual components are not reliably measurable or the components have similar useful lives, IAS 38.37.
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UNITED KINGDOM Revaluation A policy of revaluation is permitted only for intangible assets that have a readily ascertainable market value, FRS 10.43. FRS 10 requires revaluation of the whole class and regular revaluations thereafter.
IFRS An entity can choose ongoing measurement via either the cost model or the revaluation model, IAS 38.72. Where the revaluation model is selected, all intangibles in a class must be revalued unless there is no active market for those assets, otherwise those assets would be treated under the cost model. Definition of active market in IAS 38.75 is similar to the "readily ascertainable market value" under FRS 10, but IAS 38 also requires that the market prices are publicly available. This is similar to FRS 10 which requires an active market made up of regular transactions in a homogenous market.
Amortisation Amortisation: 20-year maximum life is a rebuttable presumption life may be longer, or even indefinite, FRS 10.17 annual impairment test where life exceeds 20 years from initial recognition or is indefinite, FRS 10.37.
Amortisation: there is no rebuttable 20-year maximum life presumption life is finite or indefinite; note indefinite does not mean infinite IAS 38.91 annual impairment tests are required for intangible assets not yet available for use or with an indefinite useful life, IAS 38.108.
The IASB has issued useful illustrative examples with IAS 38 which demonstrate the use of indefinite lives.
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UNITED KINGDOM Other matters Computer software is generally regarded as being a tangible asset where it is directly attributable to bringing a computer system into working condition, FRS 10.2. In general, software is treated as a tangible asset. UITF 24 states that start-up costs may not be capitalised unless: similar costs in an ongoing business would be capitalised, or costs meet the criteria for capitalisation under FRS 10, FRS 15 or SSAP 13.
IFRS Computer software is an intangible asset where it is not an integral part of the related hardware, IAS 38.4.
Expenditure on intangible items, including start-up costs may not be capitalised unless, IAS 38.69: it satisfies the criteria in IAS 38, is recognised as part of the goodwill on a business combination, or is included in the cost of an item of property, plant and equipment under IAS 16.
UITF 29 deals with website costs and concludes they should be dealt with under FRS 15 as tangible fixed assets.
Website costs, excluding hardware costs are dealt with via SIC-32. SIC-32 notes hardware-related costs are dealt with via IAS 16. SIC-32 notes an entity's website development costs are dealt with via IAS 38. SIC-32 provides additional interpretation of the IAS 38 recognition criteria of the development phase in the context of website costs. Recognition criteria have some similarity to UITF 29.
No equivalent to IFRS 5.
If intangible assets qualify as "held for sale" then the IFRS 5 measurement and presentation rules apply.
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UNITED KINGDOM Not relevant.
IFRS First-time adoption Intangibles other than those arising on business combinations: generally required to restate at the date of transition if development costs were written off pre-transition, but met the IAS 38 criteria for capitalisation, an asset should be reinstated in the opening balance sheet. The value cannot take account of hindsight, ie capitalisation should commence from the date when the recognition criteria were first met, IFRS 1 IG46-47 development assets in the balance sheet under UK GAAP will need to be similarly assessed under IAS 38 criteria as at the date of transition.
For business combinations, a first-time adopter may elect not to restate combinations which occurred prior to the date of transition, in which case IFRS 1 Appendix B applies. It is assumed below that this election is taken: any previously capitalised intangibles under old GAAP which do not meet the IAS 38 criteria at the date of transition would be added to goodwill, IFRS 1.B2(c) IFRS 1.B2(f) requires intangibles acquired in pre-transition business combinations, not recognised under previous GAAP, to remain in goodwill unless the IAS 38 criteria would
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IFRS have required recognition in the individual balance sheet of the acquiree at the date of acquisition.
1.13 Impairment UNITED KINGDOM Relevant standard: FRS 11 Basic requirements: perform impairment review where indications of impairment exist review at level of individual asset if practicable, if not at level of income-generating unit (IGU), FRS 11.24 write down to recoverable amount if below carrying value recoverable amount is higher of value in use and net realisable value value in use is the future discounted cash flow from asset or IGU. IFRS Relevant standard: IAS 36 Basic requirements: perform impairment review where indications of impairment exist review at level of individual asset if possible, if not at level of cash-generating unit (CGU), IAS 36.66 write down to recoverable amount if below carrying value recoverable amount is higher of value in use and fair value less costs to sell value in use is the future discounted cash flow from asset or CGU.
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UNITED KINGDOM FRS 11 applies to all goodwill and fixed assets, with specific exceptions, see FRS 11.5. Key exclusions include: investment properties costs capitalised under Oil Industry Accounting Committee SORP fixed assets within the scope of FRS 13.
IFRS The list of excluded items is greater but the effect is that IAS 36 has a very similar scope to FRS 11. Financial assets within IAS 39 are dealt with via impairment rules within that standard. IFRS 6 contains special provisions relating to impairment of mineral exploration costs.
Investments in subsidiaries, associates and joint ventures are covered by FRS 11. UK GAAP also has Companies Act rules that apply to losses on permanent diminutions of fixed assets. If adopted, FRS 26 converges UK GAAP with IAS 39 on impairment of financial instruments. An excess of carrying value of net assets over market capitalisation of the entity is not specifically identified as an impairment indicator in FRS 11, FRS 11.10. IAS 36 identifies as an indicator of possible impairment an excess of the carrying value of net assets over market capitalisation of the enterprise. Otherwise indicators are very similar to FRS 11, see IAS 36.12-14.
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UNITED KINGDOM Impairment reviews required: if indicator of impairment exists where goodwill or intangibles amortised over more than 20 years annual review at year end, FRS 10.37 for goodwill and intangibles in first full year after business acquisition, FRS 10.34.
IFRS Impairment reviews required: if an indicator of impairment exists annually for goodwill, IAS 36.10(b) annually for intangible assets with an indefinite life or if not yet available for use, IAS 36.10(a)
The annual impairment review for goodwill and intangibles need not be carried out at the year end, IAS 36.10 and IAS 36.96. FRS 11.18 notes that in many cases the detailed value in use calculation will not be necessary because a simple estimate will be sufficient to demonstrate the value in use is either above the carrying value, therefore no impairment; or below net realisable value, therefore recoverable amount will be based on net realisable value. IAS 36.24 allows an intangible's recoverable amount to be based on a preceding period's assessment, providing certain strict criteria are met. IAS 36.19 confirms a value in use calculation is not necessary if fair value less costs to sell already demonstrates the asset is not impaired. IAS 36.23 notes that, in some cases, estimates and computational short-cuts may provide reasonable approximations. The discount rate for value in use calculations is a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset. A discount rate reflecting only the time value of money can be used if the cash flows are adjusted for the risk, IAS 36.55(b) and IAS 36.32. Appendix A to IAS 36 illustrates this approach.
The discount rate for value in use calculations is a pre-tax rate that is an estimate of what the market would expect on an equally risky investment, FRS 11.41. FRS 11.45 notes a risk free discount rate may be used if the cash flows are adjusted for the risk.
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UNITED KINGDOM The value in use assessment should not include future cash outflows or cost savings from reorganisations for which provision has not yet been made, ie where there is no constructive obligation, or future capital expenditure that would improve or enhance the IGU or asset's performance, FRS 11.38. FRS 11.39 includes an exception to this rule however in the case of a newly acquired IGU. The cash flows used for value in use are based on up-to-date budgets formally approved by management. Beyond the formal budget period, cash flows should assume a steady or declining growth rate. The long-term growth rate can be higher than the long-term average for the country in which the business operates only in exceptional circumstances, FRS 11.36-37.
IFRS IAS 36 rules are similar, IAS 36.44, but contain no exception for a newly acquired CGU.
Cash flows should be based on most recent budgets. Periods beyond budgets can be based on extrapolated cash flows using a steady or declining growth rate, unless an increasing rate can be justified. This growth rate should not exceed the long-term growth rate for the products, industries or country that the entity operates in, unless a higher rate can be justified, IAS 36.35. In general, similar to FRS 11 but does not say that higher long term growth rates would only be used in "exceptional" circumstances and so gives impression of being less restrictive.
Goodwill is assessed within the unit to which it relates, FRS 11.47 and FRS 11.34.
IAS 36.80 notes that goodwill is allocated to those CGUs which are expected to benefit from the synergies of the combination, irrespective of where the other assets in the related acquisition were allocated.
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UNITED KINGDOM Impairment losses in an IGU should be allocated in the following order, FRS 11.48: goodwill intangible assets pro rata to other tangible assets.
IFRS Impairment losses in a CGU should be allocated in the following order, IAS 36.104: goodwill allocated to the CGU pro rata to other assets.
Reversals of impairment allowed on tangible fixed assets so long as they relate to a change in economic conditions, as opposed to the simple passage of time or the occurrence of a forecasted cash outflow, FRS 11.56-58.
IAS 36 contains similar rules on the reversal of impairment of property, plant and equipment tangible fixed assets, IAS 36.114-116. Unlike FRS 11, these rules also apply to impairment reversal for intangible assets. Reversals of impairment losses on intangible assets are recognised under the same circumstances as those for property, plant and equipment, therefore IAS 36 is less restrictive than FRS 11 on intangibles. Reversals of impairment losses on goodwill are prohibited, IAS 36.124.
Reversals of impairment losses on intangible assets and goodwill are allowed only in restricted circumstances, FRS 11.60.
Cash flows subsequently achieved must be monitored for five years following an impairment review where recoverable amount has been based on value in use, FRS 11.54. FRS 11 specifically addresses impairment reviews where a newly acquired business is merged with existing operations.
No requirement for monitoring of subsequent cash flows.
IAS 36 does not specifically address impairment reviews where acquired and existing businesses are merged.
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UNITED KINGDOM Disclosure and first-time adoption
IFRS IAS 36 contains significantly more disclosure requirements, IAS 36.126-137. On transition, IFRS 1 requires capitalised goodwill to be tested for impairment at the date of transition, IFRS 1, Appendix B, B2(g)(iii).
1.14 Stocks/Inventories UNITED KINGDOM Relevant standard: SSAP 9 Basic requirement: carry stocks at the lower of cost and net realisable value costs include all costs incurred in the normal course of business in bringing the product or service to its present location and condition SSAP does not address whether interest can be capitalised, the CA85 allows capitalisation where appropriate. IFRS Relevant standard: IAS 2 Basic requirement: carry inventories at the lower of cost and net realisable value costs include all costs incurred in the normal course of business in bringing the product or service to its present location and condition as an accounting policy choice borrowing costs can be included where appropriate, IAS 23.
The cost-flow assumption, eg FIFO or weighted average, should approximate to the actual cost of stock. LIFO is not normally permitted.
FIFO or weighted average may be used to value stocks. LIFO is not permitted, IAS 2.25.
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1.15 Long-term contracts/Construction contracts UNITED KINGDOM Relevant standard: SSAP 9, FRS 5 Application Note G, UITF 40 Basic requirements: revenue is recognised as contract activity progresses profit attributable to work done is recognised when a profitable outcome is reasonably foreseen, but requires general use of prudence foreseeable losses are recognised in full, regardless of the stage reached. IFRS Relevant standard: IAS 11
Basic requirements: revenue is recognised as contract activity progresses profit attributable to work done is recognised when a profitable outcome can be estimated reliably, IAS 11.22-32 probable losses are recognised as an expense immediately, regardless of the stage reached, IAS 11.36.
Overall, detailed revenue recognition in IAS 11 requires less use of prudence than SSAP 9, placing more pressure on companies to fully assess the likely outcomes of their construction contracts. The definition of a long-term contract encompasses contracts for services, SSAP 9.22. IAS 11 is restricted to construction contracts only, and services in connection with construction contracts IAS 11.5; contracts for non-construction services are covered by IAS 18.
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UNITED KINGDOM SSAP 9 requires assessment on a contract-by-contract basis but provides no detail on combining or segmenting contracts. However, the result is unlikely to be significantly different to that obtained under IAS 11.
IFRS IAS 11 addresses combining and segmenting contracts. Contracts should be combined when they are negotiated as a single package and are closely interrelated, IAS 11.9. Contracts should be segmented where each part was subject to separate negotiation and costs and revenues can be separately identified, IAS 11.8. No minimum duration.
Contracts are normally expected to last over one year. Shorter contracts are treated as long-term when not treating them as long-term would distort turnover and results. FRS 5 AN G.30-32 provide additional guidance on the recognition of turnover derived from long-term contracts, emphasising that the key principle in recognising revenue is the seller's performance of contractual obligations.
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UNITED KINGDOM SSAP 9.29, and SSAP 9 Appendix 1.24 emphasise prudence and note that it is necessary to define the earliest point for each contract before profit can be taken up, with no profit recognised until outcome can be reasonably foreseen.
IFRS IAS 11.22 notes that revenue and costs should be recognised to the stage of completion once the outcome can be measured reliably. IAS 11.23 and IAS 11.24 define when profit can be measured reliably. These definitions are such that "prudence" cannot be used to avoid recognising profit at earlier stages of the contract. IAS 11.33 notes that in early stages of a contract its outcome might not be reliably measurable, in which case IAS 11.32 results in no profit being recognised. IAS 11.11(b) states that revenue should be recognised on contract variations and claims to the extent that they are probable and capable of being reliably measured. Probable is generally taken to mean more than a 50% chance and so less prudent than the SSAP 9 approach. In respect of claims, IAS 11.14 adds that customer negotiations must have reached an advanced stage and the probable amount acceptable to the customer must be reliably measurable. In general the IAS 11 requirements are less prudent than SSAP 9. IAS 11 makes specific reference to fixed-price and cost-plus contracts. IAS 11 also provides more detailed guidance on revenue and cost recognition than SSAP 9.
SSAP 9 Appendix 1.26 requires a conservative estimate of amounts relating to "approved" variations to be made. SSAP 9 Appendix 1.27 requires that claims, eg additional work not directly approved, should only be recognised when negotiations have reached an advanced stage and there is sufficient evidence of acceptability of the claim.
SSAP 9 does not distinguish between fixed-price and cost-plus contracts, but accounting is unlikely to differ significantly from that under IAS 11.
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UNITED KINGDOM SSAP 9 requires assets to be split between debtors and stock, and payments in advance in creditors. Losses provided may be in creditors or other provisions as appropriate.
IFRS IAS 11.42 requires an asset to be shown as "amounts due from customers" (which would have been reflected in stock and debtor balances under SSAP 9). IAS 11.42 requires gross amounts due to customers which encompasses amounts billed in advance and losses, to be shown. IAS 11 includes, as an Appendix, some useful illustrative examples.
Liabilities
1.16 Leases UNITED KINGDOM Relevant standards: SSAP 21, UITF 28 Definitions A finance lease is one that transfers substantially all the risks and rewards of ownership of an asset to the lessee. IFRS Relevant standard: IAS 17, SIC-15, SIC-27. IFRIC-4
A finance lease is one that transfers substantially all the risks and rewards of ownership of an asset to the lessee.
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UNITED KINGDOM A lease is presumed to be a finance lease where the present value of minimum lease payments amounts to substantially all, usually 90% or more of the fair value of the asset at the inception of the lease.
IFRS No '90% test'. Instead, IAS 17 lists factors normally indicating a finance lease, including any of the following, IAS 17.10: transfer of ownership to the lessee by the end of the lease term lessee has the option to purchase the asset on favourable terms such that exercise of the option is reasonably certain at lease inception lease is for major part of asset's life, even if no purchase option exists present value of minimum lease payments at inception amounts to at least substantially all of the fair value of the leased asset leased assets are specialised such that only the lessee can use them without major modification.
There is no direct equivalent in SSAP 21.
IAS 17 also lists other potential indicators of a finance lease including, individually or in combination, IAS 17.11: lessor's losses are borne by the lessee if lessee has the option to cancel gains or losses in the fair value of the residual fall to the lessee lessee has ability to continue lease for secondary term at substantially below-market rent.
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UNITED KINGDOM Accounting treatment Finance leases (lessee): capitalise assets held on finance leases and depreciate over useful life, or lease term if shorter, SSAP 21.36 initial recognition at present value of minimum lease payments, or fair value of the leased asset as an approximation, SSAP 21.33 finance costs charged so as to give constant rate on outstanding obligation, or a reasonable approximation thereto, SSAP 21.24 SSAP 21 does not deal with initial direct costs.
IFRS Finance leases (lessee): capitalise assets held on finance leases and depreciate on same basis as for owned assets. If there is no reasonable certainty that lessee will obtain ownership, depreciate over shorter of lease term and useful life, IAS 17.27 initial recognition at fair value of the leased asset or, if lower, present value of minimum lease payments, as determined at the inception of lease, IAS 17.20 finance costs charged so as to give constant rate on outstanding obligation, IAS 17.20. If not practicable to determine then incremental borrowing rate can be used instead lessee's initial direct costs, costs incurred in connection with specific leasing activities, are added to the asset, IAS 17.24 and IAS 17.20. This could be important, eg in PFI projects.
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UNITED KINGDOM Operating leases (lessee) should be accounted for by charging lease rentals on straight-line basis over lease term, unless another systematic and rational basis is more appropriate. UITF 28 covers operating lease incentives. Where in substance any incentive is a lease incentive, as opposed to say a penalty payment to cancel an old lease or a reimbursement for fixed asset improvement expenditure, then the lease incentive should be recognised on a straight-line basis over the shorter of the lease term and the period until a prevailing market rental will be payable, both from the point of view of the lessor and the lessee. UITF 28.10 notes that a lessor must be careful not to double count the lease incentive asset by also including its effect in the value of the relevant investment property.
IFRS Operating leases (lessee) should be accounted for by charging lease rentals on straight-line basis over lease term unless another systematic basis is representative of the time pattern of the user's benefits. SIC-15 requires incentives to be spread over lease term, market rent review is irrelevant. Typically, this will mean spreading over a longer period for both lessee and lessor.
Lessor accounting is not covered in detail in this document, however the following is worthy of note: A lessor's income under a finance lease is normally calculated using the post-tax net cash investment method. SSAP 21.39 requires the total gross earnings to be allocated to accounting periods to give a constant periodic rate of return on the net cash investment in the lease each period. The cash flows taken into account in the net cash investment in the lease include taxation and interest, SSAP 21.23. A lessor's income under a finance lease is calculated using the pre-tax net investment method. IAS 17.39 requires finance income to be recognised to reflect a constant periodic rate of return on the lessor's net investment.
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UNITED KINGDOM Lease classification Lease classification is determined and initially accounted for on inception of the lease, which is the earlier of when the asset is brought into use or when the rentals accrue, SSAP 21.29.
IFRS Lease classification and initial accounting is determined at the inception of the lease, IAS 17.13, which is the earlier of the lease agreement date and the date of commitment to the principal provisions of the lease. IAS 17 therefore could result in a requirement to determine the initial accounting from an earlier date. This is only likely to be of practical significance when a lease is signed a significant time period before the lease itself takes effect. However, the initial recognition of the lease is not until the commencement of the lease term, IAS 17.4 which is likely to be similar to the SSAP 21 lease inception date.
SSAP 21 does not have a requirement to split land and buildings and consider them separately.
Land normally treated as an operating lease, IAS 17.14. Under IAS 17.15-17, a lease of land and buildings should be split into land and buildings components and considered separately. If they cannot be split reliably then the entire lease is treated as a finance lease, unless it is clear that both elements are operating leases. IAS 17.18 notes that where land and buildings are classified as investment property and carried under the fair value model in IAS 40 then it is not necessary to split the land and buildings elements.
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UNITED KINGDOM SSAP 21 includes basic requirements on sale and leaseback. The treatment of complex leasing arrangements, including a sale and leaseback, must reflect their substance, FRS 5. In substance, a sale and finance leaseback transaction represents borrowings secured on an asset which continues to be held. The asset's carrying value should not be adjusted. SSAP 21.9 notes that where third party guarantees are involved, situations could arise where the lessor considers the lease a finance lease but this is not the case from the lessee's point of view. Not dealt with directly by SSAP 21 but FRS 5 is likely to lead to a similar conclusion.
IFRS IAS 17 is similar in substance to UK GAAP regarding treatment of sale and leaseback, IAS 17.58-63.
Similar per IAS 17.9.
SIC-27 deals with transactions which are in legal terms leases but the substance of the transaction is such that a lease does not exist. This situation sometimes occurs in "tax schemes". SIC-27 demands the use of substance over form in looking at the linked transactions as a whole. IFRIC 4 provides guidance on whether an arrangement contains a lease. This interpretation is geared, for example, to a scenario where a power company has a facility which is used almost exclusively to provide power for one entity.
No UK equivalent although FRS 5 would be key guidance.
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IFRS IAS 17 disclosures are more extensive for lessees than SSAP 21, see IAS 17.31, IAS 17.35, IAS 17.47 and IAS 17.56. In addition leases are subject to the disclosures of IFRS 7.
1.17 Provisions, contingent liabilities and contingent assets UNITED KINGDOM Relevant standard: FRS 12 Basic requirements: recognise a provision when: there is a present obligation, legal or constructive, as a result of a past event transfer of economic benefits is probable, and a reliable estimate can be made measure provisions at the best estimate of the amount required to settle the obligation at the balance sheet date discount provisions where time value of money is material disclose contingent liabilities where obligation exists but transfer of benefit is not probable or where existence of obligation is possible but not probable disclose contingent assets where an inflow of benefits is probable. IFRS Relevant standard: IAS 37 / IFRIC 1 IAS 37 is substantially the same as FRS 12.
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UNITED KINGDOM When a provision is recognised, also recognise an asset only when incurring the obligation giving rise to the provision gives access to future economic benefits.
IFRS IAS 37 contains no equivalent material, but IAS 16 requires the estimated cost of dismantling and removing an asset and restoring the site to be included in the asset's cost to the extent that this is recognised as a provision under IAS 37. Therefore, treatment is unlikely to differ. IFRIC 1 covers changes in estimates etc in respect of decommissioning, restoration and similar liabilities. It clarifies the following: unwinding of discount must be charged against profit and not capitalised as a borrowing cost, IFRIC 1.9 where the cost model is used for an asset, changes in estimates, other than through unwinding of the discount, are normally added to or deducted from the asset's net book value, subject to certain restrictions entries are also shown where the revaluation model is used.
Not specifically covered in FRS 12, other than FRS 12.48 which states that the unwinding of the discount should be charged to finance costs (consistent with IFRIC 1). FRS 12 otherwise does not give specific guidance on changes to an asset's value when decommissioning cost estimates are revised.
1.18 Taxation UNITED KINGDOM Relevant standards: FRS 16, FRS 19 IFRS Relevant standards: IAS 12, SIC-21, SIC-25
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UNITED KINGDOM Current tax Current tax is measured using rates enacted or substantially enacted at the balance sheet date, FRS 16.14. Current tax is included in the profit and loss account except where it relates to gains or losses recognised in the STRGL in the current or previous periods, in which case the tax is included in that statement, FRS 16.5-6. Incoming and outgoing dividends and interest should include withholding tax but exclude any other taxes, eg tax credits, FRS 16.8-9. Deferred tax FRS 19 requires full provision for deferred tax on timing differences where an entity has an obligation to pay more tax or a right to pay less tax in the future as a result of past transactions and events. Deferred tax is not provided on permanent differences. Timing differences arise through the recognition of gains and losses in financial statements in periods different from those in which they are included in tax computations.
IFRS Current tax is measured using rates enacted or substantially enacted at the balance sheet date, IAS 12.46. Current tax is included in the income statement except where it relates to items recognised directly in equity, in which case the tax is recognised directly in equity and included in the SOCE, or the SORIE, IAS 12.58. IAS 12 does not address accounting for withholding tax and tax credits on outgoing or incoming dividends or other distributions.
IAS 12 requires full provision for deferred tax based on a temporary differences approach, subject to limited exceptions. Provision is required even if no obligation to pay more tax has arisen by the balance sheet date.
Temporary differences are differences between the carrying amount of an asset or liability and its tax base. The tax base is the amount attributed to that asset or liability for tax purposes. All timing differences are also temporary differences. However, temporary differences may also include items that would be regarded as permanent differences under UK GAAP.
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UNITED KINGDOM Discounting of deferred tax is permitted as a matter of accounting policy, FRS 19.42. Revaluations Deferred tax is provided on revaluations only where either: an asset is revalued annually with value changes being reported in the profit and loss account, or an entity has entered into a binding agreement to sell an asset, which it has revalued, and does not expect to obtain rollover relief, FRS 19.12-15.
IFRS Discounting of deferred tax is prohibited, IAS 12.53.
Deferred tax is generally provided on revaluations, regardless of whether sale of the assets is intended or rollover relief is available, IAS 12.20.
Rollover relief Deferred tax is not provided on sold non-monetary assets where it is more likely than not that the taxable gain will be rolled over into replacement assets, FRS 19.15.
Deferred tax should always be provided despite the availability of rollover relief.
Expected manner of recovery or settlement Normally, under FRS 19, the The deferred tax provision is expected manner of recovery does required to take into account the not affect the deferred tax expected manner of recovery of provision, other than a small the asset or settlement of the number of cases such as a binding liability, IAS 12.51. For instance, sale agreement being entered into where an asset obtained a would result in deferred tax being different tax deduction based on provided on a revaluation. whether it was sold or used in the business, the tax base would need to reflect how management intended to use the asset.
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UNITED KINGDOM Business combinations Deferred tax is generally not provided on fair value adjustments on acquisition to increase the carrying amount of non-monetary assets. These adjustments are regarded as having been made by the acquired entity at the date of acquisition, and are thus treated in the same way as revaluations, FRS 7.74. No deferred tax is provided under FRS 19, in either the individual accounts or group accounts, on items considered to be permanent differences, eg fixed assets which do not attract capital allowances.
IFRS Deferred tax is provided on fair value adjustments, IAS 12.19.
Some items considered "permanent" differences under FRS 19 are temporary differences under IAS 12, although IAS 12.15(b)(ii) provides exemption from providing deferred tax on some of those differences. However this exemption does not apply where the transaction in which the asset or liability recognised is a business combination, IAS 12.15(b)(i). Consider the example of a company that has a subsidiary with a fixed asset, held at time of business combination, which does not attract capital allowances. In the group accounts, deferred tax on the temporary difference arising would need to be provided. In contrast if the subsidiary company had purchase that asset direct, the subsidiary would be exempt from providing deferred tax on the temporary difference that arises.
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UNITED KINGDOM Goodwill is not addressed specifically in FRS 19, but as amortisation of goodwill on consolidation is normally not tax-deductible, it will constitute a permanent difference. Hence deferred tax will not arise, so long as no tax relief is given on the goodwill amortisation.
IFRS Deferred tax is not recognised on temporary differences arising from the initial recognition of goodwill, IAS 12.21-21B. Therefore appears similar to FRS 19.
Unremitted earnings of subsidiaries, branches, associates, joint ventures Deferred tax is provided on the Deferred tax is provided on the unremitted earnings of overseas unremitted earnings of subsidiaries, associates and joint subsidiaries, associates and joint ventures only where dividends have ventures unless both of the been accrued or there is a binding following are satisfied, IAS 12.39: agreement to distribute past earnings in the future, FRS 19.21. the parent is able to control the timing of remittance, and it is probable that remittance will not take place in the foreseeable future, IAS 12.39. Due to the presence of control, in the context of a subsidiary and branches, deferred tax will not be provided on unremitted earnings where the parent determines that the subsidiary/branch profits will not be remitted, IAS 12.40. In the context of an associate, unless an agreement is in place not to distribute the profits, deferred tax would normally be provided on unremitted earnings, IAS 12.42.
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UNITED KINGDOM Foreign currency items No provision for deferred tax is required on exchange differences arising on consolidation of non-monetary assets translated under the temporal method, as no timing difference arises.
IFRS Provision for deferred tax is required on the temporary difference between the carrying amount, at historic rate, and the tax base, where this is determined at the rate at the balance sheet date, IAS 12.41. For example land and buildings purchased overseas within a branch where the functional currency is the same as that of the entity.
Intra-group transactions Deferred tax is provided on timing differences arising on unrealised intra-group profits that are eliminated on consolidation, measured using the supplying company's tax rate.
Deferred tax is provided on the temporary difference between the carrying amount of the asset and its tax base, usually cost to the receiving company, measured at the purchasing company's tax rate.
Deferred tax on defined benefit pensions A pension scheme surplus or deficit Deferred tax on a defined benefit on a defined benefit pension pension scheme surplus or deficit scheme is shown net of the related is combined with other deferred deferred tax when presented in the tax assets or liabilities, IAS 1.68. balance sheet, FRS 17.49. Deferred tax assets Deferred tax assets, including tax losses, are recognised to the extent that they are regarded as recoverable, ie it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing difference can be deducted. Recognition of deferred tax assets is subject to strict conditions, FRS 19.23.
Deferred tax assets are recognised for the carry forward of tax losses and credits to the extent that it is probable that future taxable profits will be available against which those losses and credits may be utilised. The conditions for recognising assets are less extensive than in FRS 19 and their effect may be less stringent, IAS 12.24 and IAS 12.34.
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UNITED KINGDOM Presentation Deferred tax assets are classified as current assets. Deferred tax liabilities are classified as provisions for liabilities.
IFRS Deferred tax assets and liabilities are classified as non-current and presented as separate line items in the balance sheet, IAS 1.68 and IAS 1.70.
Presentation of the deferred tax charge? Under FRS 19.34-35, the deferred Under IAS 12.61, deferred tax is tax charge is recognised in the charged direct to equity if the item profit and loss account, except it relates to is also charged to where it relates to an item equity. This is therefore similar to recognised directly in the STRGL. FRS 19. Deferred tax assets or liabilities arising on identifying asset and liabilities acquired in a business combination affect goodwill, IAS 12.19. This includes deferred tax assets recognised at the time of acquisition due to unrelieved losses, IFRS 3.37(a). However if the deferred tax asset on unrelieved losses is not recognised until a later date then the benefit is credited to the income statement. At the same time goodwill is reduced to the level that would have been recognised had the deferred tax asset been recognised at the time of the acquisition. This reduction in goodwill is recognised as an expense, IFRS 3.65.
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UNITED KINGDOM Industrial buildings Where previously claimed capital allowances are no longer repayable as a balancing charge, in the case of UK tax law for IBAs where an industrial building is older than 25 years, FRS 19 requires any existing deferred tax provision to be released. Share-based payment FRS 19 does not specifically mention deferred tax on share-based payments. Where a tax deduction is available based on the intrinsic value of the option at the exercise date both a timing and a permanent difference arise. In accordance with FRS 19 deferred tax is provided on the timing difference and no deferred tax is provided on the permanent difference.
IFRS Under IAS 12, the deferred tax provision continues on industrial buildings even when the 25-year limit is reached.
Under IFRS 2, an entity is required to recognise an expense for the cost of providing equity-settled remuneration. No asset or liability is created for such awards. However, there is a tax base in the UK as the company may claim a deduction for the amount assessable on its employees. The tax deduction is based on the option's intrinsic value at the time it is exercised. Therefore the deductible temporary difference leads to a deferred tax asset, IAS 12.68B. IAS 12.68B requires an estimate of the tax base to be calculated using the share price at the balance sheet date. If the amount of the estimated future tax deduction exceeds the expense recognised in the income statement, the deferred tax on the excess is charged to equity, IAS 12.68C.
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UNITED KINGDOM Not applicable.
IFRS Year of transition considerations There are no IFRS 1 exemptions for deferred tax, so full assessment of the deferred tax provision at date of transition will be required under IAS 12 principles. Where deferred tax is provided on revalued assets, the other side of the deferred tax entry would be to retained profits or the revaluation reserve. Deferred tax is required to be recognised on fair value adjustments on business combinations and this will include all past combinations, whether or not they have been restated on first-time adoption. Deferred tax provisions will be necessary for many past business combinations due to the "initial recognition" exemption not applying to business combinations under IAS 12.15. Deferred tax adjustments relating to business combinations are recognised in retained earnings with the exception of those limited items which are specifically allowed under IFRS 1 to be adjusted against goodwill. For example deferred tax on intangibles previously subsumed within goodwill but required by IFRS 1.B2(f) to be recognised separately which should be adjusted against goodwill, IFRS 1.B2(g)(i).
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Income and expenditure
1.19 Revenue UNITED KINGDOM Relevant standard: See below There is no general revenue recognition standard in the UK, though Application Note G to FRS 5 sets out the basic principles of revenue recognition and SSAP 9 and UITF 26 address specific areas. UITF 40 contains details on recognising revenue for service contracts. FRS 5 AN G provides guidance for revenue recognition from the supply of goods or services and specific guidance for: long term contractual performance, in addition to that contained in SSAP 9 separation and linking of contractual arrangements bill and hold arrangements sales with rights of return presentation of turnover as principal or as agent. IFRS Relevant standards: IAS 18, SIC-31 IAS 18 is a general standard on revenue recognition. The term 'revenue' encompasses the gross inflow of economic benefits in the course of ordinary activities when those inflows result in increases in equity, other than increases relating to contributions from equity participants. IAS 18 applies to revenue from: the sale of goods the rendering of services the use by others of enterprise assets yielding interest, royalties and dividends.
AN G does not deal with arrangements resulting from transactions in financial instruments or insurance contracts. UITF 40 provides additional guidance on the revenue recognition of service contracts.
The standard does not deal with construction contracts, leases, dividends from investments accounted for under the equity method, insurance contracts, changes in the fair value of financial instruments under IAS 39, changes in the value of other current assets, extraction of mineral ores, or agriculture.
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UNITED KINGDOM Revenue is measured at the fair value of the right to consideration.
IFRS Revenue is measured at the fair value of the consideration received or receivable, IAS 18.9. Recognition criteria must be applied to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. Where two or more transactions are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole the recognition criteria are applied to all transactions together, IAS 18.13. In an agency relationship the amounts collected on behalf of the principal are not revenue of the agent. Instead revenue is the amount of commission, IAS 18.8.
Where a single contractual arrangement requires a seller to provide a number of different goods or services they may be treated as separate transactions where the commercial substance is that the individual components operate independently of each other, otherwise they should be treated as a single transaction.
Where a seller acts as a principal turnover should be reported gross. Where the seller acts as an agent turnover should represent commission or other amounts received but not amounts payable to the principal.
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UNITED KINGDOM FRS 5's asset derecognition conditions are relevant, as the point at which an asset ceases to be recognised may be a suitable indicator of the point at which revenue should be recognised. FRS 5 AN G contains similar criteria as applied to specific situations.
IFRS Revenue from the sale of goods is recognised when all of the following conditions have been met: the significant risks and rewards of ownership of the goods have transferred to the buyer the selling enterprise retains neither continuing managerial involvement to the degree normally associated with ownership nor effective control of the goods sold the amount of revenue can be measured reliably economic benefits associated with the transaction will probably flow to the enterprise the costs incurred or to be incurred can be measured reliably, IAS 18.14.
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UNITED KINGDOM UITF 40 deals with all service contracts, linking in to FRS 5 AN G and SSAP 9. It requires the following: revenue is recognised at its fair value as the work is performed, where work is performed over a period of time, even if the end result of delivery to the customer is a deliverable such as a report at the end of the process long-term contract accounting is required where the aggregate effect of similar contracts have a material impact if the right to consideration does not arise until the occurrence of a critical event, revenue is not recognised until that event occurs, for instance this applies where the right to consideration is contingent on a specified future event, the outcome of which is outside the control of the seller.
IFRS IAS 18.20 requires that revenue from services is recognised by reference to the stage of completion of the service at the balance sheet date when the outcome can be measured reliably. The outcome can be measured reliably when: the revenue can be measured reliably it is probable that economic benefits will flow to the entity the stage of completion can be measured reliably the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
In general UITF 40 should provide similar results to IAS 18 in most cases.
IAS 18.26 notes that when the outcome of the transaction involving the rendering of services cannot be reliably estimated then revenue shall be recognised only to the extent of the expenses recognised that are recoverable.
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UNITED KINGDOM FRS 5 AN G discusses sales where there are rights of return: turnover should exclude the sales value of estimated returns where a seller is unable to reliably estimate the expected value of returns the maximum potential amount should be excluded from turnover where the risk of return is significant such that substantially all the risks are retained by the seller then turnover should not be recognised.
IFRS IAS 18.16 states that an enterprise retains significant risks of ownership and that a transaction is not a sale when the buyer has the right to rescind the purchase for a reason specified in the sales contract and the enterprise is uncertain about the probability of return. Where an enterprise retains only an insignificant risk of ownership such as a retail sale where a refund is offered to the customer, revenue is recognised at the time of sale provided the seller can reliably estimate future returns and recognises a liability based on previous experience and other relevant factors, IAS 18.17.
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UNITED KINGDOM FRS 5 Application Note G discusses the specific situation of the sale of goods where there is a bill and hold arrangement. The right to consideration is obtained by the seller when all significant risks and benefits of ownership of the asset are transferred to the customer. In order for the seller to recognise income the terms of the contractual arrangement should include the following characteristics: the goods are complete and ready for delivery the seller should not have retained any significant performance obligations the seller should have obtained the right to consideration goods should be identified separately from the seller's other stock bill and hold terms should be in accordance with the commercial objectives of the customer and not the seller.
IFRS IAS 18 contains similar criteria. Revenue is recognised for a bill and hold sale when: it is probable that delivery will be made the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognised the buyer specifically acknowledges the deferred delivery instructions, and the usual payment terms apply, IAS 18.Appendix 1.
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UNITED KINGDOM There are no equivalent requirements in UK GAAP but UK practice is generally similar, particularly following the issue of FRS 21, and its rules on equity dividends declared after the balance sheet date.
IFRS Revenue arising from the use by others of enterprise assets yielding interest, royalties and dividends is recognised when it is probable that the associated economic benefits will flow to the enterprise and the amount can be measured reliably. Such revenue is recognised on one of the following bases: interest on a time proportion basis taking into account the effective yield royalties on an accrual basis according to the substance of the agreement dividends when the shareholder's right to receive payment is established, IAS 18.29-30.
Barter transactions There is no general requirement in UK GAAP regarding exchange of goods or services.
IAS 18.12 deals with barter transactions in general. Where goods or services are exchanged for similar goods or services, this is not regarded as giving rise to revenue. Where the goods and services exchanged are dissimilar, revenue is measured at the fair value of the goods or services received in exchange.
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UNITED KINGDOM UITF 26 deals with barter transactions for advertising services. UITF 26 requires that turnover and costs should not be recognised unless there is persuasive evidence of the cash value at which the advertising could have been sold.
IFRS SIC-31 contains requirements broadly similar to UITF 26. It states that revenue cannot be measured reliably at the fair value of advertising services received in a barter transaction. A seller can measure reliably the fair value of advertising services supplied in a barter transaction only by reference to non-barter transactions. These must be frequent, be for cash or other consideration that is measurable reliably and be with different parties for similar advertising. Non-barter transactions must predominate.
1.20 Employee benefits (other than share-based payments) UNITED KINGDOM Relevant standards: FRS 17, UITF 25 IFRS Relevant standard: IAS 19 (Note: IAS 19 is a long and complex standard and these notes cover only the main points of difference compared to UK GAAP. Reference must be made to IAS 19 for detailed requirements.) FRS 17 covers retirement benefits. Short-term benefits and termination benefits are not addressed specifically in UK GAAP, though FRS 12 is relevant. IAS 19 covers employee benefits, which include: post-employment benefits other long-term benefits short-term employee benefits termination benefits.
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UNITED KINGDOM IFRS Defined benefit retirement benefits An asset or liability representing IAS 19 contains similar the recoverable surplus or deficit requirements to FRS 17 regarding on a defined benefit scheme, net of the measurement of assets and related deferred tax, is recognised liabilities relating to defined in the balance sheet. benefit schemes. However, the method of recognising surpluses and deficits under IFRS is such that the balance sheet amounts may differ considerably from those under UK GAAP. Balance sheet presentation also differs, as any recognised pension surplus or deficit is presented with other assets and liabilities. The related deferred tax is included with other deferred tax balances in the balance sheet.
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UNITED KINGDOM A fair value (market value) approach is used to measure plan assets. Plan assets in the form of quoted securities are valued at their mid-market price, FRS 17.16. FRS 17 has been amended: for accounting periods beginning on or after 6 April 2007 the standard mandates the use of bid price. Plan liabilities are measured at actuarial value using the projected unit method, discounted at a high quality corporate bond rate or equivalent. Triennial full actuarial valuations are required, with annual updates in the intervening years.
IFRS IAS 19 is not specific on which price to use, but use of the terminology of fair value is usually read to mean bid price, which is the standard for valuing financial assets under IAS 39. To measure plan liabilities an entity should use the projected unit credit method, IAS 19.64. An enterprise is required to determine the present value of defined benefit obligations and the fair value of plan assets sufficiently often that amounts recognised do not differ materially from the amounts that would be determined at the balance sheet date, IAS 19.56. IAS 19 encourages, but does not mandate, the involvement of a qualified actuary, IAS 19.57.
Actuarial gains and losses, including changes in the fair value of scheme assets, are recognised immediately, through the STRGL.
Actuarial gains and losses, including changes in the fair value of plan assets, need not be recognised immediately or, in some cases at all.
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UNITED KINGDOM The approach mandated by FRS 17 is closest to the fourth IAS 19 possibility mentioned opposite.
IFRS There are a range of potential treatments of actuarial gains and losses, which are outlined below: Defer, ie do not recognise in performance statements, gains and losses within the 'corridor'; spread recognition in profit or loss of those outside 'corridor' over expected average remaining working lives of participating employees. Spread recognition in profit or loss of gains and losses within and outside the 'corridor' over expected average remaining working lives of participating employees. Recognise gains and losses in profit or loss as under either of the above options but do so on any systematic basis that gives faster recognition, including immediate recognition. Recognise gains and losses immediately outside profit or loss and present in a Statement of Recognised Income and Expense (SORIE).
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UNITED KINGDOM These approaches are not permitted under FRS 17.
IFRS In amplification of the first three approaches above, IAS 19 permits the following approaches if actuarial gains and losses are recognised in profit or loss, ie through the income statement. Where the net cumulative unrecognised gain or loss at the previous year end exceeds 10% of the greater of the gross assets or gross liabilities in the scheme, the '10% corridor', the excess must be recognised in the income statement on a systematic basis. Recognition may be spread forward over the expected average remaining working lives of participating employees, IAS 19.92. Recognition of actuarial gains and losses within the 10% corridor is permitted but not required, IAS 19.93. IAS 19 also permits faster methods of recognising actuarial gains and losses, including immediate recognition both of amounts outside and within the corridor, IAS 19.93.
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UNITED KINGDOM FRS 17 requires immediate recognition in the STRGL of actuarial gains and losses.
IFRS If an entity adopts a policy of recognising immediately actuarial gains and losses, it is permitted to recognise them outside the income statement provided it does so: for all actuarial gains and losses, and for all of its defined benefit plans, IAS 19.93A.
Actuarial gains and losses recognised outside the income statement are recognised in a SORIE (Section 3). The profit and loss account includes: current service costs past service costs, which are recognised over the period until vesting or immediately if already vested interest cost net of the expected return on plan assets gains or losses on settlement or curtailment. The income statement includes, IAS 19.61: current service costs past service costs, which are recognised over the period until vesting or immediately if already vested expected return on any reimbursement right recognised as an asset interest cost expected return on plan assets actuarial gains and losses, to the extent recognised in profit or loss effect of any settlement or curtailment
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UNITED KINGDOM A defined benefit surplus or deficit is presented on the balance sheet, net of deferred tax, as a separate item below other net assets.
IFRS The defined benefit surplus or deficit, determined per IAS 19.54 and IAS 19.58, is presented with other assets and liabilities. Deferred tax relating to the defined benefit surplus or deficit is presented with other deferred tax.
FRS 17's requirements are less detailed prior to the amendment referred to below. An amendment has been issued to FRS 17 which takes effect for periods commencing on or after 6 April 2007, although earlier adoption is encouraged. This amendment aligns the disclosure requirements of FRS 17 to that of IAS 19.
IAS 19 has extensive disclosure requirements.
Group and multi-employer schemes Where a defined benefit scheme IAS 19 has a category called covers several entities, an multi-employer plans, which are individual company accounts for plans with more than one the scheme as though it were a participating entity, where the defined contribution scheme, with contributions and assets are additional disclosures, where that pooled, and the benefits are paid company is unable to identify its without regard to the employing share of the underlying assets and entity concerned. liabilities. This may apply to the individual companies in a group Importantly, multi-employer plans plan as well as other exclude those where all the multi-employer plans, such as participating entities are industry schemes. companies under common control, IAS 19.7. So group plans are dealt with only in IAS 19.34, 34A and 34B.
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UNITED KINGDOM As mentioned above the provisions of FRS 17 relating to multi-employer schemes are often invoked in scenarios where entities within a group participate in a group defined benefit pension scheme. This may result in no individual company within the group carrying the defined benefit liability on its balance sheet.
IFRS If a group defined benefit plan, where the risks are shared between the various group entities, has a contractual arrangement or stated policy that allocates the net defined benefit cost determined by IAS 19 to the participating entities, then each entity recognises the cost thus charged. If there is no such agreement or policy, each entity recognises a cost equal to their contribution payable for the period, except for the entity that is legally the sponsoring employer for the plan. This entity recognises the net defined benefit cost in its individual accounts. In the UK the sponsoring employer is the principal employer as stated in the pension scheme trust deed. The effect is that IAS 19 places a deficit on one of the individual companies' balance sheets, whereas it could be on none of them under FRS 17. The impact in terms of distributable profits will depend on the circumstances of the group. However, in many DB schemes the sponsoring employer may be the parent company, in which case any deficit will affect the potential for dividends being paid from the group. Even if the liability is not in the parent company's balance sheet, the directors will need to consider their fiduciary duties before recommending a dividend.
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UNITED KINGDOM Other employee benefits Short-term benefits are not addressed specifically in UK GAAP but the application of FRS 12 and the accruals concept mean that treatment is unlikely to differ materially from IFRS.
IFRS Short-term benefits are those benefits other than equity compensation and termination benefits which fall due wholly within one year of the end of the period in which the employee renders the relevant services. Short-term benefits are accounted for on an accruals basis, IAS 19.10. An accrual is required for accumulating compensated absences, such as holiday pay where holiday entitlements accumulate, ie they can be carried forward to the next accounting period, IAS 19.11. The expected cost of profit-sharing bonus plans is recognised only when there is a present obligation as a result of past events and a reliable estimate can be made, IAS 19.17.
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UNITED KINGDOM UK GAAP does not provide specific guidance on accounting for other long-term benefits, other than through the application of FRS 12.
IFRS Other long-term benefits are benefits other than termination, post-employment or equity compensation benefits that do not fall due within one year of the end of the period in which the employee renders the relevant services. IAS 19 applies a simplified version of the accounting for post-retirement benefits to other long-term benefits, the main difference being the immediate recognition of any actuarial gains and losses and past service costs, IAS 19.128-9.
Termination benefits are not addressed specifically in UK GAAP but FRS 12 would apply and result in the same treatment as under IFRS.
Termination benefits are employee benefits payable because the employer has decided to terminate employment prior to the normal retirement date or because an employee has accepted voluntary redundancy in exchange for those benefits. Termination benefits are recognised as an expense only when the enterprise is demonstrably committed to either terminate employment or provide termination benefits as a result of an offer made to encourage voluntary redundancy, IAS 19.133-4.
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UNITED KINGDOM Defined contribution plans The charge against profit is the contribution payable to the pension scheme in respect of the accounting period, FRS 17.7.
IFRS Treatment under IFRS is similar, IAS 19.44. Additionally, IAS 19.45 states that where contributions do not fall due wholly within 12 months of the end of the period in which employees render the related services, they should be discounted using the rate specified in IAS 19.78 for discounting defined benefit obligations, ie market yield at balance sheet date on high-quality corporate bonds.
1.21 Share-based payment UNITED KINGDOM Relevant standards: FRS 20, UITF 41 and UITF 44 Accounting treatment Same as IFRS. IFRS Relevant standards: IFRS 2, IFRIC 8 and IFRIC 11
Basic requirements: recognise the fair value of a share-based payment over its vesting period scope covers all employee share schemes and other transactions in which the entity issues a share-based payment as consideration share-based payments include equity-settled, cash-settled and transactions which offer a choice of these, cash or equity-settled.
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UNITED KINGDOM Same as IFRS.
IFRS Company should recognise an expense in the profit and loss account and for: equity-settled transactions an equivalent credit in shareholders' funds cash-settled transactions an equivalent credit to liabilities cash or equity-settled transactions depending on who has the choice, either: an equivalent liability an equivalent credit to shareholders' funds, or a compound financial instrument.
Measurement Same as IFRS.
Measurement of fair value depends on the counterparty to the transaction. Fair value could be measured by reference to either: fair value of goods or services received, or fair value of instrument granted.
If it is the second of these a valuation model will be required. Cost of awards to employees is measured by reference to the fair value of the instruments granted.
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UNITED KINGDOM Same as IFRS via UITF 41.
IFRS Where it appears that no goods or services have been received in exchange for the issue of a share-based payment, IFRIC 8 presumes that goods and services have been received and that their fair value should be measured by reference to the fair value of the share-based payment granted. Similarly where the fair value of the share-based payment granted is in excess of the fair value of the goods and services received, IFRIC 8 presumes that the entity has received, or will receive, unidentifiable goods and services and measures these by reference to the fair value of the share-based payment granted.
Same as IFRS.
No subsequent remeasurement of fair value of equity instruments granted. Value of cash-settled awards, and liability element of awards that may be settled either in cash or equity, is remeasured until settlement.
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IFRS The cumulative expense to be recognised is based on: fair value of the award proportion of any vesting period complete estimate of achievement of any other performance conditions affecting the award of share options, not including market conditions. Market conditions must be included in the estimate of fair value.
Modifications and cancellations Same as IFRS.
IFRS 2 contains detailed rules on: modifications incremental fair value is recognised over remaining vesting period cancellations or settlements the expense that would be recognised over the remaining performance period should be recognised immediately unless a new award is provided as a replacement, in which case the rules on modifications should be followed.
Disclosure Same as IFRS.
IFRS 2 contains detailed disclosure requirements including, but not limited to: model and assumptions used in valuing share-based payments, if applicable all movements in the number of options outstanding.
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Financial instruments
1.22 Recognition and measurement of financial assets UNITED KINGDOM Relevant statute: CA 1985 Prior to FRS 26, no UK standard addressed recognition and measurement of investments or other financial assets. FRS 26 currently applies to certain UK companies, namely full-list companies and those adopting the CA 85 Schedule 4 fair value rules. For accounting periods beginning on or after 1 January 2007 and where a company applies FRS 26 the requirements are the same as those in IAS 39, therefore the comparison here focuses on pre-FRS 26 UK GAAP. Prior to accounting periods beginning on or after 1 January 2007 FRS 26 did not include the equivalent derecognition paragraphs of IAS 39. IFRS Relevant standard: IAS 39 IAS 39 addresses recognition and measurement of financial instruments, including financial assets. Financial assets comprise, IAS 32.11: cash rights to receive cash or another financial asset, ie receivables and loans made to others a contract to exchange financial instruments on potentially favourable terms equity instruments in another entity a non-derivative contract to receive a variable number of the entity's own equity instruments a certain type of derivative as specified in IAS 32 in respect of an entity's own equity instruments.
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UNITED KINGDOM No direct equivalent in UK GAAP.
IFRS IAS 39 has highly detailed requirements concerning derivatives, complex instruments, such as embedded derivatives, and hedging arrangements. Derivatives such as interest swaps, forward contracts and currency options are carried at fair value. This can create substantial profit fluctuation compared to UK GAAP which did not recognise derivative assets (see below). Contracts relating to "own use" sale or purchase requirements of commodities are exempt from the requirements of IAS 39.
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UNITED KINGDOM IFRS Categorisation of financial assets No direct equivalent in UK GAAP. Divide financial assets into four categories, IAS 39.9: financial assets at fair value through profit or loss, see below for further details loans and receivables, see below for further details held to maturity. Defined narrowly with strict conditions, covers only assets with fixed or determinable payments and fixed maturity that the enterprise has the positive intent and ability to hold to maturity, other than loans and receivables originated by the enterprise available-for-sale financial assets all financial assets not falling under another category. Any financial asset, other than one that is held for trading, may be designated into this category on initial recognition.
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UNITED KINGDOM No direct equivalent in UK GAAP.
IFRS Financial assets at fair value through profit or loss include: assets held for trading. Includes all derivatives as well as other instruments acquired for the purpose of generating profit from short-term fluctuations in price or dealer's margin financial assets designated irrevocably into this category on initial recognition, although such designation is restricted by IAS 39.9. This restriction is often referred to as the "fair value option". Note that the fair value option may not be applied to unquoted investments whose fair value cannot be measured reliably.
No direct equivalent in UK GAAP.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: held-for-trading assets those designated on initial recognition as at fair value through profit or loss or as available-for-sale those where the holder may not recover substantially all its investment, other than due to credit deterioration, which are classified as available-for-sale, IAS 39.9.
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UNITED KINGDOM IFRS Measurement on initial recognition Initial recognition is at cost, Whether carried at fair value or including incremental acquisition amortised cost, all financial assets expenses, under Companies Act are measured on initial recognition 1985. at the fair value of the consideration given or received, including transaction costs. For assets or liabilities at fair value through profit or loss, transaction costs are recognised in the income statement on initial recognition of the asset or liability, IAS 39.43. This creates a difference to UK GAAP on financial assets advanced at non-arm's length terms. Subsequent measurement Under CA 1985: carry fixed asset investments at cost less provision for diminution in value, or at revalued amount carry current assets at lower of cost and net realisable value, or at current cost only realised profits go to the profit and loss account, hence gains on remeasurement generally go through the STRGL.
Subsequent treatment, IAS 39.46: remeasure financial assets at fair value through profit or loss at fair value with gains and losses going to the income statement, unless cash flow hedge accounting applies carry held-to-maturity financial assets and loans and receivables at amortised cost remeasure available-for-sale financial assets to fair value and take gains or losses through the SOCE or SORIE, until the point of sale, when the cumulative gain or loss in equity is recycled to the income statement.
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UNITED KINGDOM Derecognition FRS 5 contains general derecognition requirements, which are not restricted to financial instruments. Application notes in FRS 5 apply these to specific situations. These include guidance related to financial instruments, covering debt factoring, securitisations and loan transfers. When FRS 26 is adopted its derecognition provisions replace those of FRS 5 for financial instruments, for accounting periods beginning on or after 1 January 2007. Impairment FRS 11 applies to investments only in subsidiaries, associates and joint ventures. CA 1985 requires other fixed asset investments to be written down if there is a permanent diminution in value. Current assets must be written down if their net realisable value is below cost.
IFRS IAS 39 addresses derecognition specifically in relation to financial instruments. Assets are derecognised when the enterprise loses control of the contractual rights that comprise the financial assets. Substantial detailed differences exist between derecognition under IFRS and under pre-FRS 26 UK GAAP. IAS 39's derecognition principles operate via a five-step process, which focuses on the transfer of risks and rewards. Unlike FRS 5, a linked presentation is not available, IAS 39.15-37.
If there is objective evidence that a financial asset is impaired, its recoverable amount must be determined and any impairment loss recognised. Where such evidence exists, impairment reviews are relevant to assets carried at amortised cost or assets categorised as available-for-sale, as although carried at fair value, the gains or losses are included in equity. IAS 39 has different rules to FRS 11 in respect of reversal of impairment, IAS 39.58-70.
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1.23 Presentation, recognition and measurement of financial liabilities and equity UNITED KINGDOM Relevant standards: FRS 4, UITF 33, FRS 25 IFRS Relevant standards: IAS 32, IAS 39
Classification as liabilities or equity Same as IFRS. Any financial instrument that requires the issuer to deliver cash, another financial asset or to exchange instruments on potentially unfavourable terms is classed as a financial liability. An instrument with these characteristics is classed as a liability regardless of its legal nature, eg it may be legally a share, eg preference shares with a commitment to pay dividends or redeemable shares would normally be classed as liabilities, IAS 32.15-25. Same as IFRS. An equity instrument is any contract that entitles the holder to a residual interest in the assets of the entity after deducting all of its liabilities, IAS 32.11.
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IFRS Redeemable preference shares are generally accounted for as liabilities where they provide for mandatory redemption for a fixed or determinable amount or give the holder the right to require the issuer to redeem. Similarly, non-redeemable preference shares will often be classed as liabilities, depending on other characteristics, IAS 32.15-25 and AG25-29. Derivatives in respect of own shares require detailed consideration, see IAS 32.15-27.
No equivalent under UK GAAP (pre-FRS 26). Again the analysis of financial instruments below assumes that FRS 26 is not adopted. Where FRS 26 is adopted its provisions are the same as IAS 39.
Under IAS 39, financial liabilities divide into two main categories: at fair value through profit or loss, which includes: held-for-trading financial liabilities, including all derivative financial liabilities other financial liabilities designated irrevocably on initial recognition as at fair value through profit or loss, this designation is available in restricted circumstances explained in IAS 39.9 other financial liabilities.
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IFRS 'Split accounting' is applied to compound instruments, such as convertible debt, that contain both a liability and an equity element. For convertible debt, the debt element is accounted for as a liability and the option to convert to equity is treated as an equity instrument, so long as this option is for a fixed number of shares, IAS 32.28-32. A repayment of convertible debt is also similarly split between debt and equity elements.
Offsetting Same as IFRS.
A financial asset is offset against a financial liability when and only when an enterprise: has a legally enforceable right to set off the recognised amounts, and intends either to settle on a net basis or realise the asset and settle the liability simultaneously.
IAS 32 requires a positive intention to settle net rather than just a legal right, IAS 32.42-50.
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UNITED KINGDOM Initial measurement Financial liabilities are recorded initially at the fair value of proceeds received from their issue, net of issue costs. Liability components of compound instruments are initially recorded at the fair value of the liability, which may be different from the fair value of the proceeds received, net of issue costs.
IFRS Financial liabilities are recorded initially at the fair value of the liability. Fair value is normally its initial transaction price unless fair value is evidenced by comparison to other observable current market transactions, IAS 39.43. This can create a difference to UK GAAP. For example an interest free government loan would need to be split between the "grant" element and the remainder which would be accounted for as an interest-bearing loan. Liabilities carried at amortised cost are initially recorded net of transaction costs, defined as incremental costs, IAS 39.43.
Finance costs and distributions Finance costs on financial liabilities are calculated so as to give a constant rate of charge on the outstanding liability.
Finance costs on financial liabilities, other than at fair value through profit or loss, are calculated using the effective interest method, ie at a constant rate of charge on the outstanding liability, IAS 39.47. This is similar to the UK GAAP approach, but the mechanics of the effective interest method under IAS 39 and FRS 4 are different and in some circumstances can lead to different finance charges. In particular, IAS 39 is more prescriptive in how to deal with changes in estimates of future cash flows, IAS 39.AG6-AG8.
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IFRS Interest, gains and losses relating to financial instruments or component parts classed as liabilities are reported in the income statement, IAS 32.35. Distributions to holders of a financial instrument classed as an equity instrument are debited directly to equity, IAS 32.35.
Same as IFRS.
Subsequent measurement The carrying amount of a financial liability is increased by the finance costs accrued and reduced by payments made in respect of the debt. Pre-FRS 26 UK GAAP has no separate requirements relating to liabilities held for trading.
Except for liabilities at fair value through profit or loss, financial liabilities are carried at amortised cost, effectively the same basis as for debt under FRS 4, IAS 39.47. Liabilities at fair value through profit or loss are measured at fair value with gains or losses recognised in income statement, IAS 39.47.
Derecognition and settlement Gains and losses on repurchase or early settlement of debt are recognised in the profit and loss account for the year in which repurchase or early settlement occurs. Derecognition of liabilities is not addressed specifically in UK GAAP, pre-FRS 26.
The difference between carrying amount and the amount paid in settlement is recognised in the income statement, IAS 39.41.
Liabilities are derecognised when the obligation therein is extinguished. IFRS contains detailed requirements on liability derecognition, IAS 39.39-40.
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UNITED KINGDOM Other points Same as IFRS.
IFRS Under IAS 32, treasury shares are presented in the balance sheet as a deduction from equity. Acquisition of treasury shares is presented as a change in equity. No gain or loss is recognised in the income statement on the sale, issuance or cancellation of treasury shares. Consideration received is presented as a change in equity, IAS 32.33.
1.24 Recognition and measurement of derivatives UNITED KINGDOM Relevant standard: none pre FRS 26. This section focuses on the pre-FRS 26 differences between UK GAAP and IAS 39. Basic accounting requirements UK GAAP does not address recognition and measurement of derivatives. IFRS Relevant standard: IAS 39
All derivatives are classed as held-for-trading financial instruments, and may be either assets or liabilities, IAS 39.9.
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UNITED KINGDOM Derivative instruments are not generally recognised under UK GAAP. Changes in value, if reported, may not be reported in the profit and loss account.
IFRS All derivative instruments are recognised initially at cost, which may be nil, and remeasured in the balance sheet to fair value. All changes in fair value are recognised in the income statement, with limited exceptions under hedge accounting provisions. See Sections 8 and 8 for more on accounting for financial assets and liabilities at fair value through profit or loss. This creates major differences from UK GAAP in accounting for items such as interest swaps, currency options, and forward contracts. Hedge accounting will often be used in such areas, but this is subject to strict conditions regarding documentation, at inception of the hedge, effectiveness tests and detailed rules as to qualifying hedged items and hedging instruments.
Embedded derivatives No equivalent in UK GAAP.
An embedded derivative is a component of a hybrid instrument that includes both a derivative and a host contract, with the effect that some of the cash flows of the combined instrument vary in a similar way to a stand-alone derivative, IAS 39.10.
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UNITED KINGDOM No equivalent in UK GAAP.
IFRS An embedded derivative is separated from the host contract and accounted for as a derivative under IAS 39 when: its economic characteristics are not closely related to those of the host contract a separate instrument with the same terms would be a derivative, and the hybrid instrument is not measured at fair value with changes reported in net profit or loss.
If an embedded derivative cannot be separately measured, the entire contract should be treated as held for trading, IAS 39.11. No equivalent in UK GAAP. The IAS 39 fair value option permits instruments containing embedded derivatives to be designated irrevocably on initial recognition as being at fair value through profit or loss, with limited exceptions, IAS 39.11A.
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IFRS Examples of embedded derivatives that need to be separated and carried at fair value through profit or loss are: a lease contract with an early repayment option, at a value not similar to its amortised cost an option to extend the remaining term of a debt instrument without adjustment to the current market interest rate at the time of the extension terms in a purchase contract that provide for alterations to the purchase price in the event of changes to interest rates or foreign exchange rates purchases or sales in a foreign currency which is not the functional currency of either party to the contract, with some exceptions.
Other examples are given in IAS 39.AG30.
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1.25 Hedge accounting UNITED KINGDOM Relevant standard: SSAP 20 where an entity does not adopt FRS 26, otherwise FRS 26. Hedging is not addressed in UK GAAP, except to a very limited extent in SSAP 20. IFRS Relevant standards: IAS 39
IAS 39 sets out extensive requirements on hedge accounting. Hedge accounting is not restricted to foreign currency, and may cover other risks, such as the change in fair value of fixed rate debt due to interest rate changes. Hedge accounting is purely optional but is a key tool in avoiding the profit volatility. Hedge relationships are of three types: fair value hedges. Hedges of exposure to changes in value of a recognised asset or liability cash flow hedges. Hedges of exposure to variability in cash flows associated with a recognised asset or liability or a forecast transaction hedges of net investment in foreign operation, IAS 39.86.
No equivalent in UK GAAP other than for: permitting the use of the rate in a matching forward contract under SSAP 20.46 hedge of foreign equity investment. Section 11 looks at this type of hedge.
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IFRS IAS 39 hedge accounting is applied only if extensive conditions are met. These include requirements for: formal documentation, which must be in place at the inception of the hedge, setting out the hedging relationship and the enterprise's risk management strategy the hedge to be highly effective and its effectiveness capable of reliable measurement, IAS 39.88.
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IFRS Where the conditions for hedge accounting are met: for a fair value hedge, the hedged item is remeasured with any gain or loss being included in the income statement, so as to offset the effect on the income statement of the hedging instrument's change in fair value being included in the income statement. The hedging instrument is similarly remeasured, IAS 39.89-94 for a cash flow hedge, the portion of the gain or loss on the hedging instrument that is an effective hedge is recognised directly in equity and the ineffective portion is normally recognised in the income statement. The gain or loss in equity is then recycled to the income statement when the hedged item is recognised in the income statement, IAS 39.95-101 for a hedge of a net investment in a foreign enterprise, accounting is as for cash flow hedges, IAS 39.102.
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1.26 Disclosures UNITED KINGDOM Relevant standard: for entities within the scope of FRS 26, FRS 29 (same as IFRS 7) applies for periods commencing on or after 1 January 2007 (and can be adopted earlier). Prior to FRS 29, the disclosure rules of FRS 25 apply (same as IAS 32) for entities not within the scope of FRS 26, FRS 13 disclosure rules apply (but this is only to entities which have securities publicly traded). IFRS Relevant standard: IFRS 7 (Note: IFRS 7's disclosures are extensive; only a brief overview of the main differences compared to FRS 13 is given here.) IFRS 7 is mandatory for periods commencing on or after 1 January 2007 with earlier adoption encouraged. Prior to IFRS 7, the disclosure requirements of IAS 32 apply. This comparison assumes adoption of IFRS 7.
This document compares the FRS 13 requirements to those of IFRS 7. FRS 13 applies only to entities that have securities publicly traded. IFRS 7 applies to all entities that prepare financial statements under IFRS. IFRS 7 exempts interests in subsidiaries, associates and joint ventures (however if IAS 39 were to be used for the accounting for those investments, they would be within the scope of IFRS 7). IFRS 7 applies to derivatives linked to interests in those subsidiaries (unless the derivatives meet the definition of an equity instrument under IAS 32). IFRS 7 has no similar exemption.
FRS 13 exempts only interests in subsidiaries, associates and joint ventures not held exclusively with a view to subsequent resale.
FRS 13 exempts certain equity shares, options and warrants issued by the reporting entity.
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UNITED KINGDOM FRS 13 permits short-term debtors and creditors to be excluded from disclosures, other than currency risk disclosures. Narrative disclosures describe the role that financial instruments have in creating or changing the risks that the entity faces. These include objectives and policies in using financial instruments to manage these risks.
IFRS IFRS 7 has no similar exemption.
IFRS 7 requires qualitative disclosures for each type of risk to describe: the exposures to risk and how they arise the objectives, policies and processes for managing risk and the methods used to measure risk any changes thereon from the previous period.
The types of risks will include credit risk, liquidity risk, market risk, IFRS 7.31-33. IFRS 7 includes detailed disclosure requirements where IAS 39 hedge accounting is applied, IFRS 7.22-24.
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UNITED KINGDOM Specific numerical disclosures are required about: interest rate risk currency risk liquidity risk, including material undrawn committed facilities fair values financial instruments used for trading financial instruments used for hedging certain commodity contracts.
IFRS IFRS 7's numerical disclosures include: fair values of each class of financial asset and liability, IFRS 7.25 valuation techniques used, IFRS 7.27 quantitative disclosures in respect of credit risk, liquidity risk and market risk, IFRS 7.34 carrying amounts in accordance with IAS 39 categories, IFRS 7.8 detailed disclosures for financial assets or financial liabilities at fair value through profit or loss, IFRS 7.9-11 disclosure of collateral, both taken and pledged, IFRS 7.1415 disclosure of defaults and breaches on loans payable, IFRS 7.18-19 detailed disclosures of items included in the income statement, IFRS 7.20.
FRS 13 does not contain numerical disclosure requirements about credit risk exposure, but does require narrative disclosures relating to the entity's policy for controlling and managing credit risk where there is significant exposure.
IFRS 7 requires quantitative disclosures on credit risk. This includes an ageing analysis of past-due financial assets that are not impaired, eg trade receivables that have not paid within their contractual terms. IFRS 7 also requires disclosure in respect of impairment of financial assets, eg bad debt provisions, IFRS 7.36-37.
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UNITED KINGDOM FRS 13 does not require disclosure of significant terms and conditions, though it does require disclosures that show the effect of the instruments on the entity's interest rate and currency profiles, liquidity position and other market risk exposures.
IFRS IFRS 7 also requires quantitative analysis which includes: detailed credit risk disclosures for liquidity risk, a maturity analysis, IFRS 7.39. The illustrative guidance clarifies that this disclosure is of the gross undiscounted cash flows, and so will not equal the balance sheet for market risk (interest, currency and other price risk) a sensitivity analysis, IFRS 7.40, with further details in the illustrative guidance to IFRS 7.
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Group accounts
1.27 Basic requirements for group accounts
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UNITED KINGDOM Relevant statute and standards: CA 1985, FRS 2.
IFRS Relevant standard: IAS 27 and SIC-12.
Definition of parent and subsidiary An undertaking is the parent of A subsidiary is an entity, including another undertaking, its subsidiary an unincorporated entity such as a if any of the following applies: partnership, that is controlled by another entity, its parent, IAS 27.4. it holds a majority of voting rights Control is presumed to exist where in the undertaking it is a member of the undertaking the parent owns, directly or indirectly through subsidiaries, and has the right to appoint or more than half the voting power of remove directors holding a majority of voting rights at board an entity unless, exceptionally, it can be demonstrated that such meetings on substantially all ownership does not constitute matters control, IAS 27.13. it has the right to exercise dominant influence by virtue of Control also exists where the provisions in the undertaking's parent owns half or less of the constitution or by a control voting power when there is: contract it is a member of the undertaking power over more than half the and controls, via an agreement voting rights through an with other shareholders, a agreement with other investors majority of voting rights in the undertaking power to govern the financial and operating policies under if the parent has the power to statute or an agreement exercise or actually exercises a dominant influence or control; or power to appoint or remove the they are managed on a unified majority of board members basis. power to cast the majority of votes at board meetings, A parent is also treated as the IAS 27.13. parent of the subsidiaries of its subsidiaries. The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing an entity's power to govern another entity, IAS 27.14-15. Requirement to prepare group accounts
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UNITED KINGDOM An entity which is a parent at its year end should prepare consolidated group accounts, subject to exemptions, FRS 2.21: for small and medium-sized groups, as defined by CA 85 (note - as a result of the Companies Act 2006, the medium sized exemption will be withdrawn with effect from 6 April 2008.) for parent companies which are also wholly-owned or majority-owned subsidiaries included in the publicly available group accounts of a parent, incorporated in an EEA state, drawn up under the EU 7th Directive, provided the parent seeking exemption does not have securities quoted and minority interests do not object for a parent company which is also a wholly owned subsidiary or a majority owned subsidiary of a parent, not incorporated in an EEA state, provided the conditions in section 228A(2) and section 228A(1)(b) of CA 85 are met. These provisions require the higher up group accounts to be prepared in a manner equivalent to accounts drawn up in accordance with the EU 7th directive, that these accounts are audited and that they are publicly available and that the company itself does not have a listing on any regulated market of an EEA state. This brings the exemption more into line with IAS 27 where all of the subsidiaries fall within exclusions from consolidation.
IFRS A parent should present consolidated financial statements unless, IAS 27.10: it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote have been informed about and do not object to the entity not presenting consolidated financial statements parent's debt or equity are not traded in a public market or are about to be traded in a public market, and the ultimate or intermediate parent of the parent produces consolidated financial statements that comply with IFRS.
Unlike FRS 2 and the CA 85, there are no size exemptions.
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UNITED KINGDOM Group accounts are prepared in addition to the parent's own individual accounts. However, a parent that is required to prepare group accounts is required to publish only its individual balance sheet and restated notes. Its individual profit and loss account need not be published provided that its individual profit for the year is disclosed.
IFRS IAS 27 does not mandate the preparation of separate financial statements. However IAS 27.38 notes that IAS 27.37 and IAS 27.39-42 specify accounting and disclosures when separate accounts are produced. There is no exemption from preparing the parent's individual income statement under IFRS; however, the exemption from its publication remains available under S230, Companies Act 1985, applying the EU 7th Directive.
Exclusion from consolidation A subsidiary should be excluded from consolidation when, FRS 2.25: the interest is held exclusively with a view to subsequent resale and has not previously been consolidated, in which case held at the lower of cost or net realisable value. Disposal must occur within approximately one year of acquisition, otherwise the subsidiary will need to be consolidated FRS 2.25b, FRS 2.29 and FRS 2.11 severe long-term restrictions substantially hinder the exercise of the rights of the parent over the subsidiary.
IAS 27 does not address exclusion of subsidiaries from consolidation. There is no exclusion from consolidation where an interest is held exclusively with a view to subsequent resale; however IFRS 5 has special measurement and presentational requirements where a newly acquired subsidiary meets its requirements for being classified as a discontinued operation, IFRS 5.15-16 and IFRS 5.32-33. Under the IAS 27 definition of a subsidiary, the existence of severe long-term restrictions is likely to mean that the definition ceases to be met.
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UNITED KINGDOM Interests held with a view to resale are usually treated as current asset investments, valued at the expected net sale proceeds. Where there are severe long-term restrictions, the subsidiary is included in the group accounts at its equity value at the date the restrictions came into effect, unless it falls to be treated as an associate or joint venture under FRS 9.
IFRS If the held for sale criteria are met on initial recognition the IFRS 5.15-16, measurement, and IFRS 5.32-33, presentation, requirements are used. Measurement is at fair value less costs to sell for assets or disposal groups acquired as part of a business combination. All other subsidiaries are consolidated normally. If the definition of control is not met then the entity is not a subsidiary, in which case it is accounted for under IAS 28 (associates), IAS 31 (joint ventures) or IAS 39 as appropriate.
Definition of control The definition of control is based on the ability to direct the financial policies and operating activities with a view to gaining economic benefit, FRS 2.6. FRS 2.14 contains additional guidance and examples of situations where the parent/subsidiary relationship is presumed, these are detailed earlier in this document. FRS 5 also requires inclusion of quasi-subsidiaries.
Control is based on the power to govern the financial and operating policies so as to gain economic benefit, IAS 27.4. IAS 27.13-15 include detailed guidance which is similar to FRS 2. IAS 27.14-15 contain guidance on whether to take account of potential voting rights on unexercised options, etc. See below for more on special purpose vehicles.
Treatment in parent's individual accounts/separate financial statements
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UNITED KINGDOM In a parent's individual accounts, subsidiaries are carried at cost less provisions for impairment or at a revalued amount on a basis which appears to the directors to be appropriate (for example, based on net asset value). FRS 11 on impairment applies to the investments.
IFRS In a parent's separate financial statements, investments in subsidiaries that are not classified as held-for-sale are carried on one of the following bases, IAS 27.37: cost in accordance with IAS 39.
If the acquired business qualifies as held for sale, then it is accounted for under IFRS 5. Note that IAS 27 does not mandate the preparation of separate accounts but specifies the accounting when they exist, IAS 27.38.
Pre-acquisition dividends Not dealt with in FRS 2 but normally dividends paid are recorded in the parent's profit and loss account even if relating to pre-acquisition profits, see FRS 6, Appendix I, paragraph 16. However this may necessitate an impairment charge under FRS 11.
IAS 27.4 requires that pre-acquisition dividends are deducted against the cost of the investment under the cost method. Note that there is currently no transitional relief from this in IFRS 1, although a exposure draft providing some limited transitional relief has been issued.
Reporting date of subsidiaries FRS 2.42 states that a subsidiaries' accounts used for the consolidation are normally based on same year-end as the parent.
IAS 27.26 similar.
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UNITED KINGDOM FRS 2.43 requires that where subsidiary accounts are not as at the same year end, then adjustments for material items must be made and, in any case, the accounts of the subsidiary must not be drawn up to a date more than three months before the year-end date of the group, it cannot be after the parent's year-end date.
IFRS Where the subsidiary accounts used are based on a year-end different to the parent, then adjustments for the effects of significant transactions must be made. In any case the subsidiary accounts must be drawn up to a date within three months of parent's year-end, either before or after, IAS 27.27.
1.28 Minority interests UNITED KINGDOM Relevant standards: FRS 2, FRS 4 Minority interests are usually presented in the balance sheet separately from shareholders' funds on the face of the consolidated balance sheet, either after all liabilities or, more commonly below capital and reserves. Minority interests are generally presented in consolidated profit and loss account as a deduction against after tax profits. IFRS Relevant standards: IFRS 3, IAS 27 Minority interests are presented in the consolidated balance sheet within equity, separately from the parent-shareholders' equity, IAS 27.33.
IAS 27.33 and IAS 1.81 require the consolidated profit to be allocated and separately disclosed between that due to minority interests and that due to equity shareholders. Therefore minority interest is regarded as an allocation of profit rather than a deduction against profits.
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UNITED KINGDOM Many non-equity shares issued by subsidiaries to third parties are likely to be classified as debt under FRS 25.
IFRS Minority interests in instruments classified as equity under IAS 32 are shown as minority interests. Minority interests in instruments classified as financial liabilities of the group are shown with other group financial liabilities. Similarly, minority interests in the acquiree are initially stated at the minority's proportion of the fair value of the acquiree's identifiable assets, liabilities and contingent liabilities, being those which were recognised as part of the fair value exercise on consolidation, IFRS 3.40 and also IAS 27.22(c). No goodwill is attributed to minority interests. Where losses attributable to the minority exceed the minority interest in the subsidiary's equity, the excess and any further losses are charged against the majority interest except to the extent that the minority has a binding obligation to, and is able to, make good the losses, IAS 27.35.
Minority interests are initially measured using the fair values of the acquired subsidiary's identifiable assets and liabilities. No goodwill is attributed to minority interests, FRS 2.38.
Minority interests in the consolidated balance sheet represent their share of net assets or liabilities of the consolidated subsidiary. Where losses in a subsidiary attributable to the minority interest result in the interest being in net liabilities, the group should make provision to the extent that it has any commercial or legal obligation to provide finance that may not be recoverable in respect of the subsidiary's accumulated losses. Any provision so made is set directly against the debit balance on minority interests in the profit and loss account and balance sheet, FRS 2.37.
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1.29 Quasi-subsidiaries/Special purpose entities UNITED KINGDOM Relevant standard: FRS 5 A quasi-subsidiary is a company, trust, partnership or other vehicle that is not a subsidiary but which is directly or indirectly controlled and which conveys benefits and risks that are in substance no different from those of a subsidiary. The definition of a parent and subsidiary in UK GAAP sets out specific criteria rather than being based explicitly on control, as under IAS 27. IFRS Relevant standard: SIC-12 The definition of parent and subsidiary in IFRS is based more explicitly on control than the legalistic definition in UK GAAP. The main features of special purpose entities (SPEs) are that: they may be created to accomplish a narrow and well-defined purpose they may be companies, trusts, partnerships or unincorporated entities the arrangements impose strict limits on their decision-making powers. These provisions may specify that policies cannot be modified other than by the entity's creator or sponsor, ie they operate on 'autopilot'.
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UNITED KINGDOM Quasi-subsidiaries are consolidated in the same way as subsidiaries, except in the limited circumstances in which a linked presentation under FRS 5 is more appropriate. In addition to consolidating it, a summary of the results of the quasi-subsidiary is required to be disclosed under FRS 5.38.
IFRS SPEs are consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting enterprise. Factors which may indicate control include the following: the SPE's activities are conducted on behalf of the enterprise according to the enterprise's specific business needs so that it obtains the benefits from the SPE's activities the enterprise in substance has the decision-making powers or has delegated them through an 'autopilot' arrangement the enterprise has, in substance, the rights to obtain the majority of the benefits of the SPE and hence may be exposed to the risks inherent in those benefits the enterprise in substance retains the majority of the residual or ownership risks related to the SPE.
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1.30 Acquisition in stages and disposals Acquisition in stages Under FRS 2.50, assets and liabilities of a subsidiary are included in the consolidation at their fair value at the date it becomes a subsidiary.
Under IFRS 3.58, the fair value exercise is done as at each date of investment. Therefore if 20% was purchased on date 1 and 40% on date 2, separate fair value exercises on date 1 and 2 would be required.
If on date 1 a 20% stake was purchased and then on date 2 a further 40%, a fair value exercise is only required on date 2. This rule is due to CA 85 schedule 4A, paragraph 9(2). However FRS 2.89 notes that the true and fair override may be appropriate in order to assess fair value at each separate stage, similar to IFRS 3. The latter approach is normally used under UK GAAP. Under FRS 2.51, if a stake in an existing subsidiary is increased, a fair value exercise and recognition of goodwill on the additional investment is required, as at the date of the additional investment. IFRS do not currently address this issue.
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Disposal of subsidiary FRS 2.46-47 require the proceeds to be compared to the carrying amount and the difference to be included in profit and loss. However, there are differences to IAS 27 as follows: exchange gains or losses are not recycled to profit and loss, under pre-FRS 23 UK GAAP included in the carrying amount for the disposal calculation is goodwill not previously written off through the profit and loss account, FRS 2.46 and FRS 2.47 and FRS 10.71(c). Therefore any goodwill under SSAP 22 previously written off direct to reserves would be included in the carrying value in calculating the profit or loss on disposal.
The gain or loss on disposal, proceeds less subsidiary's carrying amount at date of disposal, is included in the income statement under IAS 27.30. Also recycled to the income statement are foreign exchange differences previously recognised directly in equity in accordance with IAS 21, or included in equity as a net investment hedge under IAS 39. Goodwill remaining in the balance sheet is included in the carrying amount for the disposal. Goodwill previously written off to equity, including that under SSAP 22 prior to transition to IFRS, is not included in the disposal profit or loss calculation, IFRS 3.80. If an entity ceases to be a subsidiary, and does not become an associate or a jointly controlled entity, then the remaining investment is accounted for in accordance with IAS 39, IAS 27.31. The carrying amount at the date the entity ceased to be a subsidiary then becomes deemed initial cost, IAS 27.32.
If an entity ceases to be a subsidiary, and does not become an associate or joint venture, then the remaining investment in that entity is recorded at its carrying amount at the date of ceasing to be a subsidiary, its deemed cost. Thereafter it is accounted for in accordance with the CA rules on investments (Section 8). This presumes the entity is not adopting FRS 26.
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1.31 Business combinations UNITED KINGDOM Relevant standard: FRS 6 IFRS Relevant standards: IFRS 3
Acquisitions and mergers/uniting of interests Business combinations are IFRS 3 requires business acquisitions unless they meet the combinations to be accounted for definition of a merger in FRS 6. by applying the purchase (acquisition) method, IFRS 3.14. The pooling of interests method A merger is a business combination (merger accounting) is not that results in the creation of a new permitted for combinations falling reporting entity in which: within IFRS 3's scope; an acquirer must always be established the shareholders of the combining parties come together IFRS 3.17. in a partnership for the mutual sharing of risks and benefits of the combined entity, and no party to the combination in substance obtains control over any other or is otherwise seen to be dominant. Some combinations are scoped out via IFRS 3.3, mainly joint ventures and business combinations involving entities or businesses under common control pre and post the combination, eg group reorganisations.
FRS 6.6-12 set out detailed criteria for determining whether the definition of a merger is met. Group reconstructions are dealt with separately. Merger accounting must be used for business combinations that are mergers and acquisition accounting must be used for business combinations that are acquisitions. However, in practice, merger accounting remains voluntary as it is easy to breach the conditions for its use under FRS 6. Acquisition accounting is referred to as the 'purchase method' under IFRS 3.14 and must be used for all business combinations falling within IFRS 3. An acquirer must always be established per IFRS 3.17.
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UNITED KINGDOM FRS 6 sets out extensive disclosure requirements for business combinations, with additional disclosures being required for substantial acquisitions.
IFRS IFRS 3 requires extensive disclosure requirements for each business combination effected during the period and between the year-end and the date of approval of the accounts, IFRS 3.66-71. IFRS 3 requires disclosure of the amounts recognised at the acquisition date of each class of the acquiree's assets, liabilities and contingent liabilities and the carrying amounts immediately prior to acquisition. Separate presentation of the acquired entity's results in the income statement is not required. However disclosures are required in relation to the acquiree's profit or loss since acquisition and the revenue and profit or loss of the combined entity for the whole accounting period regardless of the acquisition date.
FRS 6 requires the financial statements to disclose a table of book and fair values of acquiree's assets and liabilities, with details of fair value and other adjustments.
FRS 3 requires amounts for acquisitions to be identified separately in the profit and loss account for turnover and operating profit, with amounts for the lines in between being shown either in the profit and loss account or in the notes.
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UNITED KINGDOM Reverse acquisitions Reverse acquisition accounting is not dealt with in UK standards and is contrary to the Companies Act 1985. However, a true and fair override is occasionally invoked to apply the technique in situations similar to those envisaged under IFRS 3.
IFRS IFRS 3.21 and IFRS 3 Appendix B include provisions relating to reverse acquisitions. A reverse acquisition typically occurs where a parent issues sufficient voting shares to the shareholders of the acquiree in exchange for their shares that control passes to the former shareholders of the acquired enterprise. In this case, the enterprise issuing the shares is deemed to have been acquired by the other enterprise. The latter is deemed to be the acquirer and applies the purchase method to the assets and liabilities of the enterprise issuing the shares. IFRS 3 Appendix B should be consulted in detail for guidance on the required accounting for reverse acquisitions.
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UNITED KINGDOM Group reconstructions A group reconstruction is defined in FRS 6 as an arrangement involving any of the following:
IFRS
IFRS 3 does not deal with transactions among enterprises under common control. There is no specific guidance under IFRS for the transfer of a shareholding in a group reconstructions or similar arrangements. IFRS 3.3 scopes subsidiary from one group out group reorganisations from company to another IFRS 3. IFRS 3.10-13 and IFRS 3 the addition of a new parent Appendix A provide additional company to a group guidance as to where this applies. the transfer of shares in one or more subsidiaries to a new company that is not a group company but whose shareholders are the same as those of the group's parent the combination into a group of two or more companies that before the combination had the same shareholders.
FRS 6 permits, but does not require, the use of merger accounting for a group reconstruction where the statutory criteria for using merger accounting are met, FRS 6.13.
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1.32 Fair values in acquisition accounting UNITED KINGDOM Relevant standard: FRS 7 Identifiable assets and liabilities The identifiable assets and liabilities recognised on acquisition are those of the acquired entity that existed at the date of acquisition. These should be measured at fair values reflecting their conditions on the date of acquisition, FRS 7.5-6. IFRS Relevant standards IFRS 3
Per IFRS 3.37, the identifiable assets, liabilities and contingent liabilities acquired that are recognised are those of the acquiree that existed at acquisition together with any liabilities recognised for provisions on acquisition. They should be recognised separately at acquisition only if: in the case of an asset, other than an intangible asset, it is probable that any associated future economic benefit will flow to the acquirer and its fair value can be measured reliably in the case of a liability, other than a contingent liability, it is probable that there will be outflow an of resources embodying economic benefits and its fair value can be measured reliably in the case of an intangible asset or a contingent liability its fair value can be measured reliably, ie no probability criterion for recognition.
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UNITED KINGDOM The following do not affect fair values at acquisition and are treated as post-acquisition items, FRS 7.7: changes resulting from the acquirer's intentions or future actions impairments or other changes resulting from events subsequent to the acquisition provisions or accruals for future operating losses or reorganisation and integration costs expected to be incurred as a result of the acquisition, whether they relate to the acquired entity or to the acquirer.
IFRS Liabilities for terminating or reducing the activities of the acquiree are recognised only where at the acquisition date an existing liability for restructuring exists. Liabilities should not be recognised for future losses or other costs expected to be incurred as a result of the business combination, IFRS 3.41. Restructuring provisions are included as part of acquired liabilities only if the acquiree has an existing liability under IAS 37 as at the acquisition date. A liability is recognised for any payment that the acquiree is contractually required to make in the event of it being acquired such as to employees or suppliers, IFRS 3.42. Liabilities for restructuring plans which were conditional on the business combination cannot be included, IFRS 3.43.
Provisions are recognised in the fair value of identifiable assets and liabilities acquired only if the obligation giving rise to the provision existed in the acquired entity at the time of acquisition. Consequently, provisions for restructuring as a result of the acquisition are not recognised on acquisition.
Per FRS 7.37 liabilities, or assets, would be recognised for those contingent liabilities, or assets, that crystallise as a result of the acquisition, provided the underlying contingency was in existence before the acquisition.
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UNITED KINGDOM The fair value of stocks and work-in-progress is the lower of replacement cost and net realisable value, FRS 7.52-57.
IFRS The fair value of finished goods and work-in-progress is the estimated selling price less anticipated future costs and a reasonable profit allowance. The fair value of raw materials is their current replacement cost, IFRS 3.B16(d). The fair value of tax assets and liabilities is the amount of tax benefit arising from tax losses or the taxes payable in respect of profit or loss in accordance with IAS 12 assessed from the perspective of the combined entity. The tax asset or liability is determined after allowing for the tax effect of restating assets, liabilities and contingent liabilities to fair value, IFRS 3.B16(i). See Section 6 for more details, but note that IAS 12 will often lead to a more substantial deferred tax provision than is the case with FRS 19, for instance in relation to fair value adjustments and also in relation to other temporary differences which may have been treated as permanent differences under FRS 19.
Deferred tax assets existing at acquisition but previously not regarded as recoverable, such as trading losses, may satisfy FRS 19's recognition criteria as a consequence of the acquisition. Any such assets of the acquiree are recognised in the fair value exercise. Assets arising in the acquirer are recognised as a post-acquisition item, FRS 7.75 and FRS 7.22. Per FRS 7.74 and FRS 7.21, deferred tax on fair value adjustments etc is recognised in the same way as if the timing adjustments had arisen in the entity's own accounts, eg deferred tax on fair value adjustments to property are only recognised if there is a binding agreement to sell the asset and no rollover relief is available.
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IFRS Per IFRS 3.65, if the acquiree's tax losses carried forward are not included as a deferred tax asset, but are realised subsequently, then the benefit of recognising this deferred tax asset is credited to the income statement. However, goodwill is reduced to the amount that would have been recognised had the deferred tax asset been recognised on acquisition. This reduction is recognised as an expense in the income statement. Any such deferred tax asset recognised cannot result in the recognition of "negative goodwill". Defined benefit plan assets and liabilities are recognised at the present value of the defined benefit obligation less the fair value of any plan assets, IFRS 3.B16(h). See Section 5 for more details. This is a major area of difference. IFRS 3 and IAS 38 will lead to many more items being accounted for as an intangible under IFRS. IFRS 3.B16(a) requires the use of current market values for active market investments, no scope exists to adjust for unusual price fluctuations where this is an active market or to adjust for the effect of large holdings. IFRS 3.B16(b) requires assessment of non-active market investments via alternative techniques, and more detailed guidance on fair value is contained in IAS 39.
Pension surpluses or deficits are recognised in the fair value exercise and measured according to FRS 17, FRS 7.71 and FRS 7.19.
See Section 5 in respect of intangible assets within an acquisition.
Quoted investments should be valued at market price, adjusted for unusual price fluctuations or for the size of the holding, FRS 7.13.
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UNITED KINGDOM Per FRS 7.15 and FRS 7.64 require contingent assets and liabilities to be included at fair value, this is similar to IFRS 3. FRS 7 contains no rules on the accounting thereafter in future periods.
IFRS IFRS 3.47-50 requires a contingent liability to be recognised initially at fair value where this can be measured reliably. Thereafter the contingent liability should be measured at the higher of the amount required under IAS 37 and the amounts recognised under IFRS 3 less cumulative amortisation recognised in accordance with IAS 18, where relevant. IFRS 3.B16(l) clarifies that the fair value of the contingent liability is the amount "that a third party would charge to assume those contingent liabilities".
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UNITED KINGDOM Where the fair values of identifiable assets and liabilities have only been determined provisionally by the directors by the date of approval of the first post-acquisition financial statements of the acquirer, those provisional fair values should be used, and the disclosures required by FRS 7.24 given. In the next financial statements, ie the first full financial year after the period in which the acquisition occurred, the provisional fair values should be adjusted if necessary, with a corresponding adjustment to goodwill. Thereafter, any adjustments other than fundamental errors should be recognised as profits or losses when they are identified, FRS 7.25.
IFRS Where the initial accounting can be determined only provisionally, the combination is accounted for using those provisional values. Adjustments to provisional values as a result of completing the initial accounting are recognised within twelve months, not the end of next reporting period, of the acquisition date, but as at the acquisition date, IFRS 3.62. IFRS 3.62(b)(iii) notes that where there are adjustments made in the accounting period following that in which the combination occurred, the comparatives are also restated. Thereafter any adjustments do not lead to restatement of the business combination, other than the following: errors accounted for in accordance with IAS 8, IFRS 3.63-64. This requires restatement of prior periods in accordance with the normal IAS 8 principle adjustments for deferred tax assets in relation to the acquiree's income tax losses that did not satisfy the criteria for recognition when the business combination was accounted for initially but are realised subsequently are made to goodwill without time limit, although not to the extent of creating "negative goodwill", IFRS 3.65.
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UNITED KINGDOM Cost of acquisition Per FRS 7.26 and FRS 7.28, the cost of acquisition is the cash paid and the fair value of other purchase consideration given, together with the fees and similar incremental costs directly incurred in making the acquisition, other than those required to be deducted from the issue proceeds of a financial instrument under FRS 25.
IFRS IFRS 3's requirements are similar to those in UK GAAP. Costs of arranging and issuing financial liabilities and costs of issuing equity instruments are not included in the cost of a business combination but are instead dealt with under IAS 32 and IAS 39. In general although not inconsistent with FRS 7, the IFRS 3 guidance is more lengthy, for instance containing more guidance on the appropriate methods for determining the fair value of non-cash consideration, IFRS 3.24-31.
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UNITED KINGDOM Where the amount of purchase consideration is contingent on future events, a reasonable estimate of the fair value should be made. The cost of acquisition should be adjusted when revised estimates are made, with corresponding adjustments to goodwill, until the ultimate outcome is known, FRS 7.27.
IFRS IFRS 3's requirements are similar to those in UK GAAP. The cost of the combination is adjusted if: a contingent amount, such as an earn-out, was previously estimated but that estimate is revised, IFRS 3.33 no contingent amount was previously included in the cost, on the basis of not being probable or not reliably estimable, but subsequently it can be estimated and becomes probable, IFRS 3.34.
IFRS 3.35 clarifies that an adjustment to the acquisition cost is not made where additional amounts are paid to the seller to compensate for the reduction in value of the assets previously given to the seller. For example, the acquirer uses some of its own equity shares or debt instruments for part of the consideration, but then provides a guarantee to make additional payments if its own share price or the value of the debt instrument falls. In the case of equity instruments, the fair value of the additional payment is offset by an equal reduction in the value attributed to the instruments initially issued. In the case of a debt instrument, the additional payment is regarded as a reduction in the premium or an increase in the discount on the initial issue.
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1.33 Treatment of goodwill UNITED KINGDOM Relevant standard: FRS 10 Positive purchased goodwill is capitalised and presented as an intangible asset. IFRS Relevant standard: IFRS 3 Positive purchased goodwill is capitalised, IFRS 3.51. IAS 1 does not mandate showing goodwill as a separate heading in the balance sheet. Goodwill is not amortised and instead must be tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, IFRS 3.54-55. This is a major difference to UK GAAP and adds to the relevance of identifying intangible assets, which may be amortised.
Amortisation of positive goodwill, FRS 10.15: 20-year maximum useful economic life is a rebuttable presumption life may be longer, or even indefinite an annual impairment test is required where the useful economic life exceeds 20 years from initial recognition or is indefinite.
Where goodwill is amortised over a period not exceeding 20 years, a limited impairment review is required at the end of the first full year following the acquisition even if there is no indication of impairment. FRS 10 includes special provisions regarding this review.
IFRS requires an annual impairment review of goodwill and there is therefore no comparable requirement.
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UNITED KINGDOM Negative goodwill is shown as a negative asset immediately below the goodwill heading in the balance sheet. Negative goodwill up to the fair value of non-monetary assets acquired is recognised in the profit and loss account in the periods in which the non-monetary assets are recovered, FRS 10.49. Any negative goodwill in excess of the fair value of non-monetary assets acquired is recognised in the profit and loss account in the periods expected to benefit.
IFRS The term "negative goodwill" is not used in IFRS 3. If the fair value of the identifiable net assets acquired exceeds the fair value of the consideration the excess is recognised immediately in profit or loss, ie in the income statement. However, further tests are required to ensure that the negative goodwill is genuine rather than, say, due to overstatement of the fair value of the other assets acquired, IFRS 3.56.
Transitional provisions (for first time adoption) Goodwill written off to reserves Similar effect under IFRS 1 and prior to the introduction of FRS 10 IFRS 3, but goodwill previously remains in reserves until the debited to reserves, eg prior to relevant business is sold or closed, transition to IFRS, is not recycled and is charged to the profit and loss to profit at the time of sale. account at that time, FRS 10.71.
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IFRS IFRS 1 Appendix B sets out detailed rules for business combinations prior to the date of transition. IFRS 1 IG 22 also provides useful illustrations. Past business combinations need not be restated in accordance with IFRS 3. If the information necessary to restate past business combinations in accordance with IFRS 3 is available, such restatement is permitted. However, if a past combination is restated, all subsequent combinations must also be restated, IFRS 1.B1.
Not relevant.
Where goodwill is carried forward from business combinations prior to the transition to IFRS, this should remain on the balance sheet at its existing, amortised, value, but amortisation ceases from the date of transition. This goodwill is then tested annually for impairment, including at the date of transition. Any existing negative goodwill should be transferred to reserves in the opening IFRS balance sheet. Goodwill previously written off directly to reserves on an acquisition accounted for under SSAP 22 is not recapitalised; nor is it charged against profits on sale of the relevant operation, IFRS 1.B2(i).
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IFRS Goodwill under the old GAAP at transition needs to be adjusted in the following cases, IFRS 1.B2(g): a previously recognised intangible asset no longer qualifies for recognition and is then included in goodwill, IFRS 1.B2(c). Note other, non-intangible, assets or liabilities not previously recognised but now requiring recognition on IFRS transition result in a corresponding entry to reserves rather than goodwill if an intangible asset was previously not recognised, as an intangible, but was subsumed within goodwill, and would have qualified for recognition as an intangible in the balance sheet of the acquiree under IAS 38, then the intangible is recognised and goodwill adjusted per IFRS 1.B2(f). For example development costs previously expensed within the acquired entity must be capitalised if they met the IAS 38 recognition criteria adjustments in respect of contingent consideration.
No other adjustments to goodwill are made on transition, IFRS 1.B2(h). Not relevant. IFRS 1 requires capitalised goodwill to be tested for impairment at the date of transition, IFRS 1.B2(g)(iii).
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IFRS A business combination occurring prior to transition date that had previously been accounted for as a merger need not be reclassified. Any other adjustments to assets and liabilities on transition within a subsidiary, other than those noted above which affect goodwill, would be adjusted to opening reserves, IFRS 1.B2(c)(ii), IFRS 1.B2(d) and IFRS 1.B2(f). Note that deferred tax adjustments or minority interest adjustments on transition may follow from other changes, IFRS 1.B2(k). IFRS 1.IG4 includes a useful example of this where an intangible is not recognised on transition and goodwill is increased by the effect of the intangible elimination less the elimination of the deferred tax on the intangible. No deferred tax adjustment is recognised on the initial recognition of goodwill, IAS 12.15(a).
Not relevant.
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Associates and joint ventures
1.34 Associates UNITED KINGDOM Relevant standard: FRS 9 Definition An associate is an entity other than a subsidiary in which an investor has a participating interest and over whose operating and financial policies the investor exercises a significant influence, FRS 9.4. IFRS Relevant standards: IAS 28
An associate is an entity, including an unincorporated entity such as a partnership over which the investor has significant influence and which is neither a subsidiary nor an interest in a joint venture, IAS 28.2. IAS 28 requires only that the investor is in a position to exercise significant influence. This may mean that investees fall within the definition of an associate under IFRS but not under UK GAAP.
FRS 9 requires the actual exercise of significant influence, FRS 9.4.
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UNITED KINGDOM FRS 9 sets out extensive and detailed guidance on determining whether or not significant influence exists. This includes a rebuttable presumption that a 20% holding of voting rights gives rise to significant influence but also focuses on considering the nature of the relationship in each individual case. One key factor is that the investor needs to have active involvement in policies and a voice in decisions on strategic issues, FRS 9.13-17. The influence of the investor is established after taking into account conversion rights or options, FRS 9.4.
IFRS IAS 28 sets out less extensive guidance on identifying significant influence. This includes a 20% voting rights presumption and also states that significant influence is normally evidenced by board representation, participation in policy-making, material transactions, interchange of managerial personnel or provision of essential technical information, IAS 28.6-7. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether an entity has significant influence, IAS 28.8. Loss of significant influence arises when an entity loses the power to participate in the financial and operating policy decisions of the investee, IAS 28.10.
Treatment in consolidated accounts Associates are accounted for in Associates are accounted for in consolidated accounts under the consolidated accounts under the equity method, FRS 9.26. equity method based on present ownership interests and not taking account of potential voting rights, IAS 28.13.
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UNITED KINGDOM FRS 9 does not deal specifically with investments held exclusively with a view to subsequent resale but such investments would fall outside FRS 9's definition of an associate. Similarly, severe long-term restrictions would place an investee outside the definition of an associate.
IFRS The equity method is not used for associates where the investment is classified as held for sale under IFRS 5, IAS 28.13(a). However, where the associate is operating under severe long-term restrictions the equity method is still applied where the investor continues to have significant influence. Where an investor ceases to have significant influence over the associate it shall be accounted for under IAS 39, IAS 28.18.
The investor's share of the associate's operating profit or loss is shown immediately below group operating profit, but after the share of any joint venture's operating profit. Below operating profit, the share of the associate's results is shown separately for each category in the consolidated profit and loss account, FRS 9.27.
The investor's share of the associate's profit or loss is shown separately, IAS 28.38, in the consolidated income statement. IAS 1.81 lists this before the line item for tax expense. However, a footnote in the IAS 1 Implementation Guidance Examples states that the figure is the share of profit attributable to equity holders of the associate, ie after tax and minority interests in the associate. The investor's share of any discontinued operations of the associate is to be disclosed separately, IAS 28.38.
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UNITED KINGDOM In the consolidated STRGL, the investor's share of an associate's gains and losses should be included and shown separately under each heading.
IFRS The investor's share of changes recognised directly in the associate's equity is recognised directly in the equity of the investor and disclosed in the statement of changes in equity, or statement of recognised income and expense, IAS 28.11 and IAS 28.39. There is no specific requirement to disclose dividends received from associates separately. These would normally be included under investing activities in the cash flow statement.
In the consolidated cash flow statement, dividends received from associates are shown as a separate item below operating cash flows. Any other cash flows between the investor and its associate are included under the appropriate standard heading. No other cash flows of the associate are included. In the consolidated balance sheet, the investor's share of the associate's net assets and any related goodwill is included as a category of fixed asset investments. There is no specific requirement to disclose this balance separately on the face of the consolidated balance sheet, although such a presentation is common. Although the goodwill is presented with the amounts for associates, it is accounted for, ie usually amortised, according to FRS 10's requirements.
In the consolidated balance sheet, associates are disclosed as a separate item in the balance sheet, classified as a non-current asset, IAS 28.38. The investment is initially recorded at cost and the carrying amount is increased or decreased to recognise the investor's share of profits or losses, net of distributions received by the investor from the associate, IAS 28.2 and IAS 28.11. Goodwill arising on investments in associates is not separately disclosed. Goodwill on associates is accounted for in line with other goodwill, ie it is not amortised but subject to annual impairment reviews.
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UNITED KINGDOM Losses of associates continue to be accounted for, even if this results in an interest in net liabilities, until an irrevocable event occurs that marks the investor's irreversible withdrawal from its investee as an associate. Interests in net liabilities are classified as provisions or liabilities, FRS 9.44.
IFRS Losses under the equity method are accounted for only until the investment is reduced to nil unless the investor is under an obligation to make good those losses, IAS 28.29-30. Subsequent profits are only recognised once any unrecognised losses are extinguished. There is no equivalent requirement under IFRS.
Additional disclosures are required for significant associates where the investor's interest exceed the 15% and 25% thresholds set out in FRS 9. Treatment in investor's individual accounts In the investor's individual balance sheet, all investments in associates are carried at cost less provisions for impairment or at a revalued amount on a basis which appears to the directors to be appropriate, for example, based on net asset value.
Treatment in investor's individual accounts and in its separate financial statements Per IAS 28.35, IAS 27.37-42, where an investor also prepares consolidated accounts, associates, other than those classified as held for sale in accordance with IFRS 5, are included in the investor's separate financial statements, if any, on one of the following bases: at cost less impairment; or in accordance with IAS 39.
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UNITED KINGDOM Where an investor does not prepare consolidated accounts, the relevant amounts for associates should be provided by preparing a separate set of financial statements or by showing the amounts as additional information in the investor's financial statements, FRS 9.48.
IFRS Where an investor does not prepare consolidated accounts, eg because it has no subsidiaries, associates are included in the investor's individual financial statements under the equity method. However the investor is exempt from equity accounting if all of the conditions in IAS 28.13(c) are met: the investor is itself a subsidiary and its owners do not object its debt or equity are not traded on a public market the investor did not file financial statements with a securities commission, and the parent or ultimate parent prepares consolidated accounts available for public use which comply with IFRS.
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UNITED KINGDOM Investment funds, such as those in the venture capital and investment trust industry, are required to include all investments, other than subsidiaries, held as part of their investment portfolio in the same way, irrespective of whether the investor has significant influence or joint control over that investment, FRS 9.49 Consequently a company in this industry would record an investment in an associate, if that investee were part of the investor's investment portfolio, in its balance sheet at either cost or market value.
IFRS Where the investor is a venture capital organisation; or mutual fund, unit trust or similar entity, the investor can designate an investment, that would otherwise be an associate, as at fair value through profit or loss. In these circumstances the investment is not equity accounted but recognised in the balance sheet at fair value with movements in its fair value recognised in the income statement, IAS 28.1. Alternatively such organisations may classify the investment in associate as held-for-trading: again the investment is carried at fair value in the balance sheet with movements in fair value recognised in the income statement in accordance with IAS 39.
1.35 Joint ventures and JANEs UNITED KINGDOM Relevant standards: FRS 9, UITF 31 Definitions A joint venture is an entity in which the reporting entity holds an interest on a long-term basis and is jointly controlled by the reporting entity and one or more other venturers, FRS 9.4. IFRS Relevant standards: IAS 31, SIC-13
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control, IAS 31.3. IAS 31 is broadly similar in its definition of a joint venture, however the detail in IAS 31 should be consulted in all cases.
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UNITED KINGDOM The definition of a joint venture is restricted to jointly controlled entities. In FRS 9, an 'entity' is defined in economic terms. In this context it is a body corporate, partnership or unincorporated association carrying on a trade or business with or without a view to profit. This must be a trade or business of its own and not just a part of the trades or businesses of entities that have interests in it. A "Joint Arrangement that is Not an Entity" (JANE) exists where there is joint control but no 'entity' as defined by FRS 9, FRS 9.3 and FRS 9.8.
IFRS Joint ventures divide into three types, IAS 31.7: jointly controlled operations, where there is joint use of assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure separate from the venturers themselves, broadly equivalent to a JANE jointly controlled assets, where there is joint control, and often joint ownership, of assets contributed to, or acquired for the purpose of, the joint venture. The assets are used to obtain benefits for the venturers, no corporation, partnership, other entity or financial structure separate from the venturers themselves is established. This is also broadly equivalent to a JANE jointly controlled entities, which involve the establishment of a corporation, partnership or other entity which controls the venture's assets, incurs liabilities and expenses and earns income, equivalent to a joint venture, but in some cases could be a JANE under FRS 9.
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UNITED KINGDOM Per FRS 9.24, an arrangement with the form but not the substance of a joint venture is accounted for in the same way as a JANE. FRS 9.8-9 needs to be consulted in detail in respect of the substance consideration, which could result in a JANE, even when the venture is via a separate legal entity, but where is it is not in substance a "trade or business".
IFRS Under IAS 31.27, a jointly controlled entity may be similar in substance to a jointly controlled operation or a jointly controlled asset, but structured differently. Hence, there is more emphasis on the form of the arrangement rather than its economic substance under IFRS than under UK GAAP. It is therefore possible to have a joint controlled entity in IFRS which is a JANE in UK GAAP. Treatment of joint operations and jointly controlled assets For a jointly controlled operation, a venturer should recognise in its separate financial statements, and thus in its consolidated financial statements: the assets it controls and the liabilities it incurs the expenses it incurs and its share of the income earned by the joint venture, IAS 31.15.
Treatment of JANEs A participant in a JANE should account for its own assets, liabilities and cash flows, measured according to the terms of the agreement governing the arrangement, FRS 9.18. This treatment applies in the individual financial statements of a participant, even where the JANE is structured as a separate legal entity.
Treatment of jointly controlled assets, eg two oil companies owning a pipeline, is similar taking into account a venturer's share of assets and liabilities, IAS 31.21. These requirements have a similar effect to those of FRS 9 for JANEs.
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UNITED KINGDOM IFRS Treatment of joint ventures in consolidated accounts Joint ventures are included in The benchmark treatment for joint consolidated accounts using gross ventures classified as joint entities equity accounting, FRS 9.20-21. is proportionate consolidation, This is equity accounting as for IAS 31.30. Under proportionate associates, but with additional consolidation, two reporting disclosure on the face of the formats are permitted, IAS 31.34: relevant primary statements of: combination line-by-line of the the investor's share of gross venturer's share of each asset, assets and gross liabilities in liability, income and expense of amplification of the share of net the joint entity with that of the assets included under equity investor, with additional accounting disclosure in the notes of the investor's share of current and the investor's share of the joint long-term assets and liabilities venture's turnover, but not as and income and expenditure part of group turnover. reporting the share of each asset, liability, income or In the consolidated profit and loss expense of the joint venture as a account, the investor's share of separate line item in the operating profits of joint ventures is venturer's financial statements. shown immediately below group operating profit but before share of associates' operating profit. Per IAS 31.38, the allowed alternative treatment for joint ventures classified as joint entities FRS 9 permits the inclusion of a is equity accounting, in the same memorandum column showing the way as for associates under investor's share of its joint venture IAS 28, but with additional on a line-by-line basis in disclosure in the notes of the amplification of the amounts investor's share of current and included under gross equity long-term assets and liabilities and accounting. income and expenditure. The allowed alternative treatment is discouraged by IAS 31.40.
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UNITED KINGDOM FRS 9 does not deal specifically with investments held exclusively with a view to subsequent resale but such investments would fall outside FRS 9's definition of a joint venture. Similarly, severe long-term restrictions would place an investee outside the definition of a joint venture.
IFRS Where the investment is acquired and held for sale in accordance with IFRS 5, proportionate consolidation or equity accounting should not be used, IAS 31.42. Where the joint venture is operating under severe long term restrictions, proportionate consolidation or the equity method should be applied unless joint control is lost. Where the benchmark treatment, proportionate consolidation, is applied, this should continue even if the jointly controlled entity has losses or net liabilities. Losses under the allowed alternative treatment, equity method, are accounted for only until the investment is reduced to nil unless the investor is under an obligation to make good those losses (Section 10). There is no equivalent requirement under IFRS.
Losses of joint ventures continue to be accounted for, even if this results in an interest in net liabilities, until an irrevocable event occurs that marks the investor's irreversible withdrawal from its investee as a joint venture. Interests in net liabilities are classified as provisions or liabilities, FRS 9.44.
Additional disclosures are required for significant joint ventures where the investor's interest exceed the 15% and 25% thresholds set out in FRS 9.
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UNITED KINGDOM Treatment of joint ventures in the investor's individual accounts Where the investor issues consolidated accounts, in its individual balance sheet, all investments in joint ventures are carried at cost less provisions for impairment or at a revalued amount on a basis which appears to the directors to be appropriate, eg based on net asset value, FRS 9.20. Where an investor does not prepare consolidated accounts, the relevant amounts for joint ventures should be provided by preparing a separate set of financial statements or by showing the amounts as additional information in the investor's financial statements, FRS 9.48.
IFRS Treatment of joint ventures in the investor's individual accounts and in its separate financial statements If the investor also issues consolidated accounts, jointly controlled entities should be accounted for in the investor's separate financial statements under IAS 27.37-42, via IAS 31.46, which require the investment to be included at cost less impairment or in accordance with IAS 39. Per IAS 31.31 and IAS 31.39, an investor that does not issue consolidated financial statements because it does not have subsidiaries should account for a jointly controlled entity in its individual accounts in accordance with IAS 31's proportional consolidation or equity method rules. The same would apply to any other entity that does not prepare consolidated accounts unless it is exempt under IAS 31.2(c), ie the venturer is a subsidiary itself and its owners do no object; its debt or equity are not traded on a public market; the investor did not file financial statements with a securities commission etc; and the parent or ultimate parent prepare consolidated accounts available for public use which comply with IFRS.
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11
Other matters
1.36 Foreign currency translation UNITED KINGDOM Relevant standards: SSAP 20, UITF 9. Note: entities adopting FRS 26 are required to apply the provisions of FRS 23 and FRS 24; these are the same as IAS 21 and IAS 29. These notes compare SSAP 20 and UITF 9 with IFRS. IFRS Relevant standards: IAS 21, IAS 29 and IAS 39
Functional currency and presentation currency SSAP 20 does not address directly IAS 21 defines functional currency the issue of which currency to use as the currency of the primary for measurement and reporting. economic environment in which However, through its definitions of the entity operates. All other 'local currency', now more currencies are then treated as commonly known as 'functional foreign currencies. IAS 21.9-14 currency', and 'foreign currency', contain extensive guidance on the SSAP 20 implies that the financial determination of the functional statements should be prepared in currency, which is not a matter of the local currency. The local choice. currency is the currency of the primary economic environment in The presentation currency is the which the entity operates and currency in which the financial generates net cash flows. Even for statements are presented, which is a UK company, this need not be essentially a matter of choice. sterling. Financial statements must be prepared in the entity's functional currency but may then be presented in any currency.
169
UNITED KINGDOM UK GAAP does not specifically address the presentation of financial statements in currencies other than the functional currency in which they were prepared.
IFRS IAS 21 requires that where financial statements are presented in a currency other than the functional currency the translation into a presentation currency should be done using the same principles as the translation of a foreign operation into the presentation currency of the group financial statements, in effect, the closing rate/net investment method. Where the functional currency is that of a hyperinflationary economy, the closing rate at the current balance sheet date should be used for the translation into the presentation currency.
Individual transactions and balances Initial recognition: individual Initial recognition: individual transactions are translated at the transactions are translated at the exchange rate on the date of the rate on the date of the transaction, transaction, or at an average rate or at an average rate for a period if for a period if rates do not fluctuate rates do not fluctuate significantly, significantly. IAS 21.21-22. If the transaction is to be settled at a contracted rate, that rate should be used. If the transaction is covered by a related or matching forward contract, that rate may be used. The use of a contracted rate is not allowed under IAS 21. Instead derivative items such as forward contracts are accounted for in accordance with IAS 39, ie normally carried at fair value through profit or loss (Section 8). This is a major difference to SSAP 20, and in effect under IAS 39 the fair value effects of forward contracts are recognised on inception of the contract and subsequently. Section 8 discusses the hedge accounting provisions of IAS 39.
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UNITED KINGDOM Monetary items are retranslated at the closing rate on the balance sheet date. Non-monetary items are not retranslated, save in the limited case where the optional hedging provisions are used.
IFRS Treatment under IFRS is similar. In addition, IAS 21 states that where non-monetary items are included at fair value, these should be translated at the exchange rate for the date on which the item's fair value was determined, IAS 21.23. SSAP 20 is not specific on this. Exchange gains and losses on settled items and unsettled monetary items are taken to profit and loss for the period, IAS 21.28. When a gain or loss on a non-monetary item is recognised direct in equity then the gain or loss on foreign exchange is also taken to equity, eg revaluation under IAS 16 or non-monetary financial assets classed as available for sale. Conversely if the gains or losses on a non-monetary item are included in the profit or loss then the related foreign exchange difference would also be included in profit or loss, eg gains on investment property or gains on financial assets designated as at fair value through profit or loss, IAS 21.30.
Exchange gains and losses on settled items and unsettled monetary items are taken to the profit and loss account for the period. SSAP 20 does include an exception to defer gains on long term loans on the grounds of prudence where there is evidence of a lack of marketability, SSAP 20.11.
171
UNITED KINGDOM Where a company has used foreign currency borrowings to finance or provide a hedge against its foreign equity investments, optional hedging provisions may be invoked provided the SSAP 20.51 conditions are met. SSAP 20.51 permits investments to be retranslated at closing rate in the investor's individual accounts, and the exchange differences taken to reserves. The exchange difference arising on the related borrowings are then offset in reserves against the difference on retranslation of the investment, with any net amount being shown in the STRGL. Excess differences on the borrowings go to the profit and loss account for the year.
IFRS Where investments in subsidiaries, associates or joint ventures are carried at cost in the investor's separate financial statements, hedge accounting will not be possible. The investment remains at historic rate and gains and losses on retranslation of borrowings are taken to the income statement. If the investments are carried as available-for-sale under IAS 39, the borrowings are unlikely to constitute an effective hedge under that standard. If investments are carried in the investor's individual accounts under the equity method, eg because consolidated accounts are not prepared, the requirements for consolidated accounts apply.
Translation of foreign operations Where the trade of a foreign enterprise is more dependent on the economic environment of the investing company's currency than that of its own reporting currency, the temporal method should be used to translate the foreign enterprise. The temporal method involves a foreign enterprise's transactions being translated as if they were made directly by the entity itself.
It is necessary for each operation to determine its functional currency and then to measure its results and financial position in that currency. If the operation's functional currency is the same as that of the parent, it will therefore prepare its IFRS accounts in the same currency as the parent, in effect, the same result as under the temporal method in SSAP 20. IAS 21.9-11 contains more extensive guidance on the determination of functional currency, through the use of primary and secondary indicators.
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UNITED KINGDOM In cases where the temporal method is not appropriate, the closing rate/net investment method should be used.
IFRS Foreign operations with a functional currency different to that of the reporting entity are translated into the parent's functional currency for consolidation etc. The financial statements of a foreign operation are translated as follows, IAS 21.38-47: all assets and liabilities are translated at the closing rate the results are translated at the actual rate ruling on the dates of the transactions, or an average rate as an approximation all resulting exchange differences are classified as a separate component of equity until disposal of the net investment, at which time they are included in the gain or loss on disposal in the income statement, IAS 21.48.
Under the closing rate/net investment method: all assets and liabilities of the foreign operation are translated at the closing rate either the average rate for the period or the closing rate may be used to translate the results of the foreign operation all resulting exchange differences are taken to reserves and shown in the STRGL. They are not included in the profit and loss account on subsequent disposal.
SSAP 20 does not prescribe a method for the translation of goodwill where the closing rate/net investment method is used. In practice, either closing or historic rate is acceptable under UK GAAP.
Goodwill arising on the acquisition of a foreign operation and any fair value adjustments are treated as assets and liabilities of the foreign entity and retranslated at the closing rate, IAS 21.47.
173
UNITED KINGDOM Under SSAP 20.20, inter-company deferred balances can be treated as part of the net investment in the foreign operation for the purposes of the consolidated accounts, with differences taken to reserves. Unlike IAS 21 there is no ability, or requirement, to recycle these exchange differences to profit once the foreign operation is disposed of.
IFRS Where a monetary item payable to or receivable from a foreign operation is in substance part of the net investment in the foreign operation, then in the consolidated accounts the forex movement on that item would be taken to equity, although it would remain in profit or loss in the individual accounts, IAS 21.15 and IAS 21.32. Any such gains or losses included in equity would be recycled to the income statement on the disposal of the foreign operation. IFRS hedging provisions are included via IAS 39.102. In consolidated accounts, management can opt for hedge accounting in respect of a hedge over a net investment, with foreign exchange movements on the hedging instrument, eg foreign currency borrowings, taken to equity, to the extent effective, and then recycled to profit or loss once the foreign operation is disposed of. Note that to apply hedge accounting hedge documentation must be prepared, in advance, and the effectiveness rules of IAS 39 apply these are much more restrictive than those of SSAP 20, see Section 8.
In consolidated accounts, optional hedging provisions are available in SSAP 20.57 in respect of foreign net investments financed or hedged against by foreign currency borrowings. The exchange difference arising on the borrowings may be offset in reserves against the difference taken to reserves under the closing rate/net investment method on retranslation of the net investment. Any remaining difference on translating the net investment is shown in the STRGL. Excess differences on the borrowings go to the profit and loss account for the year. The amount of borrowings used as a hedge is limited to the cash that the hedged net investment is expected to generate. Any gains or losses taken to reserves are not recycled to profit on future disposal of the foreign operation to which they relate.
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UNITED KINGDOM Hyperinflation UITF 9 deals only with how to incorporate the results from operations in hyperinflationary economies into financial statements that are not issued in the currency of a hyperinflationary economy. UITF 9 described hyperinflation in terms of its effect on the true and fair view, but in any case an inflation rate of 100% over three years results in needing to use UITF 9.
IFRS IAS 29 addresses reporting in the currency of a hyperinflationary economy. IAS 21 addresses the incorporation of results from operations in hyperinflationary economies into an investor's consolidated financial statements. IAS 29.3 gives a list of characteristics that might indicate hyperinflation, including the 100% criterion, but also qualitative factors.
175
UNITED KINGDOM UITF 9 permits the same method to be used as is set out in IAS 29. However, UITF 9 also permits a different treatment, whereby the foreign enterprise in the hyperinflationary economy uses a stable currency, such as the US dollar, as its functional currency in preparing its financial statements, which are then translated under the closing rate method for consolidation.
IFRS Under IAS 29, the accounts of an enterprise whose functional currency is the currency of a hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date. The functional currency is determined in accordance with IAS 21 which means that it is not appropriate for an enterprise to adopt another currency, such as the US dollar, as its measurement currency simply to avoid the requirements of IAS 29 for retranslation. The financial statements of a foreign entity that reports in the currency of a hyperinflationary currency are restated in accordance with IAS 29 prior to their translation into the investor's presentation currency. This translation is carried out using the normal procedures for foreign entities except that the results for the period are translated at the closing rate.
176
1.37 Government grants UNITED KINGDOM Relevant standard: SSAP 4. IFRS Relevant standard: IAS 20 and SIC-10. Government grants, including non-monetary grants at fair value, should not be recognised until there is reasonable assurance that the enterprise will comply with the attached conditions and that the grants will be received.
Grants should be recognised in the profit and loss account only when the conditions for their receipt have been met and it is reasonably certain that they will be received. Where a grant takes the form of a non-monetary asset, the grant is measured at the fair value of the asset transferred. Grants made to provide immediate financial support or to reimburse expenditure previously incurred are recognised in the profit and loss account when they are receivable, SSAP 4.13.
Grants that become receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support with no future related costs should be recognised as income of the period in which they become receivable, IAS 20.20. Grants are recognised as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. Grants should not be credited to equity, IAS 20.12.
Grants made to finance general activities over a period or compensate for the loss of current or future income are recognised in the profit and loss account in the period in respect of which they are paid.
177
UNITED KINGDOM A government interest free, or below market rate, loan, pre FRS 26, would be recognised at the amount received. Where FRS 26 is adopted the treatment is the same as the IFRS treatment.
IFRS Interest free loans: IAS 39.43 requires a below market interest rate loan to be recognised initially at fair value. The fair value of the loan at the time of its initial receipt would be recognised as a loan and the balance would be recognised as a grant. However IAS 20.37 directly contradicts IAS 39. The IAS 20.37 treatment would essentially be consistent with pre-FRS 26 UK GAAP (ie the loan would not be restated at fair value). At the time of writing, it is considered that there is an accounting policy choice to apply IAS 39.43 or IAS 20.37 for such loans. Grants relating to fixed assets, including non-monetary grants at fair value, should be presented in the balance sheet either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset.
Grants relating to fixed assets should be deferred and released to the profit and loss account over the useful economic life of the assets concerned. In principle, SSAP 4 permits such grants to be deducted from the cost of the related asset, but this treatment is prohibited for companies by CA 1985. Potential liabilities to repay grants should be provided for to the extent that repayment is probable. Grants that become repayable are accounted for as a change in an accounting estimate.
Grants that become repayable should be accounted for as a change in an accounting estimate. Potential liabilities to repay grants are covered by IAS 37, and are provided for to the extent that repayment is probable.
178
1.38 Earnings per share UNITED KINGDOM Relevant standard: FRS 22. Scope Same as IFRS. IFRS Relevant standard: IAS 33.
IAS 33 applies to entities whose ordinary shares or potential ordinary shares are publicly traded and entities in the process of issuing such shares, IAS 33.2.
Measurement basic EPS Same as IFRS.
Basic EPS is calculated by dividing the profit or loss attributable to ordinary equity holders of the parent entity by the weighted average number of ordinary shares outstanding during the period. Profit or loss is stated after adjusting for the after tax effects of preference shares classed as equity. IAS 33.13-17 has detailed guidance for various transactions involving preference shares, including the effect of cumulative equity preference shares and "increasing rate" equity preference shares on the earnings attributable to ordinary shareholders. The weighted average number of ordinary shares is the number outstanding at the beginning of the period adjusted by the number brought back or issued during the period multiplied by a time weighting factor, IAS 33.19-30.
Same as IFRS.
Same as IFRS.
179
IFRS Shares are normally recorded from the date consideration is receivable, IAS 33.21 sets out some examples. The weighted average number of shares is adjusted, for all periods presented, for events, other than the conversion of potential ordinary shares, that have changed the number of shares outstanding without a corresponding change in resources, IAS 33.26. For example, bonus issues, share splits, share consolidations, the bonus element in a rights issue, IAS 33.27. Where a share consolidation is combined with a special dividend and the effect is a share repurchase at fair value, the reduction in ordinary shares is recognised from the date on which the special dividend is paid, IAS 33.29.
Same as IFRS.
Same as IFRS.
Measurement diluted EPS Same as IFRS.
Diluted EPS is based on the profit and loss and the weighted average number of shares outstanding, adjusted for the effects of all dilutive potential ordinary shares, IAS 33.31.
180
UNITED KINGDOM Earnings in diluted EPS Same as IFRS.
IFRS Earnings in diluted EPS is the profit or loss attributable to ordinary equity holders of the parent adjusted for: dividends, or other items, on dilutive potential ordinary shares interest related to dilutive potential ordinary shares other changes in income or expenses resulting from the conversion of dilutive potential ordinary shares, IAS 33.33.
Number of shares in diluted EPS Same as IFRS.
The weighted average number of ordinary shares for the diluted EPS calculation is that calculated for the basic EPS plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. Conversion is deemed to have occurred at the beginning of the period or, if later, the date of issue of the potential dilutive ordinary shares, IAS 33.36. IAS 33.62-63, include detailed guidance on purchased or written share options.
181
IFRS The dilutive potential ordinary shares are determined independently for each period presented. The number of dilutive potential ordinary shares in the year to date period is not a weighted average of the dilutive potential ordinary shares included in each interim computation, IAS 33.37. Potential ordinary shares that are cancelled or allowed to lapse during the period are included in the number of dilutive potential ordinary shares only for the portion of the period during which they were outstanding, IAS 33.38. Potential dilutive ordinary shares that are converted to ordinary shares in the period are included in the calculation of diluted EPS from the beginning of the period to the date of conversion, IAS 33.38. The resulting ordinary shares are included in both basic and diluted EPS.
Same as IFRS.
Method of determining whether or not dilutive The provision in FRS 22 is the Potential ordinary shares are same; however the definition of treated as dilutive only when their discontinued operations is different conversion to ordinary shares in IFRS, therefore this may result in would decrease earnings per share the inclusion of different potential or increase loss per share from dilutive ordinary shares in the continuing operations, IAS 33.41. calculation of diluted EPS.
182
IFRS When considering whether potential ordinary shares are dilutive each issue of potential ordinary shares is considered separately. The most dilutive potential ordinary shares are considered first followed by the next most dilutive etc, IAS 33.44.
Diluted EPS effect of share options and warrants Same as IFRS. In order to calculate diluted EPS the conversion of all dilutive options and other potential dilutive ordinary shares is presumed. The assumed proceeds from these issues should be regarded as having been received from the issue of shares at the average market price of ordinary shares for the period, IAS 33.45. The proceeds include the fair value of services to be received in a share-based payment, IAS 33.47A. The difference between the number of ordinary shares issued and the number of ordinary shares that would have been issued at the average market price is treated as an issue of shares for no consideration, IAS 33.45.
183
UNITED KINGDOM Employee share options Same as IFRS.
IFRS Share options with fixed or determinable terms and non-vested ordinary shares are treated as options in the calculation of diluted EPS, even although they may be contingent on vesting. They are treated as contingent on grant date. Performance based employee share options are treated as contingently issuable shares because their issue is contingent upon satisfying specified conditions in addition to the passage of time, IAS 33.48.
Contingently issuable shares Same as IFRS.
Contingently issuable ordinary shares are included as outstanding, ie included as if ordinary shares issued and included in the basic EPS calculation from the date when all necessary conditions are satisfied. Shares that are issuable solely after the passage of time are not contingently issuable shares, because the passage of time is a certainty, IAS 33.24.
184
IFRS Similar to basic EPS, contingently issuable shares are included in diluted EPS if the associated conditions are satisfied, and for diluted EPS are included from the beginning of the period or from the date of the contingent share agreement if later. If conditions are not satisfied, the number of contingently issuable shares in the diluted EPS is based on the number that would be issuable if the end of the period were the end of the contingency period. Restatement is not permitted if the conditions are not met when the contingency period expires, IAS 33.52.
Contracts that may be settled in cash or shares Same as IFRS. When an entity has issued a contract that may be settled in cash or ordinary shares at the entity's option, the entity shall presume that the contract will be settled in ordinary shares and the resulting potential ordinary shares included in the diluted EPS if the effect is dilutive, IAS 33.58. For contracts that may be settled in cash or ordinary shares at the holders' option, the more dilutive of cash settlement and share settlement shall be used in calculating diluted EPS, IAS 33.60.
185
UNITED KINGDOM Presentation Same as IFRS.
IFRS Both basic and diluted EPS are required to be disclosed on the face of the income statement for profit or loss from continuing operations, if presented, and for profit or loss for the period for each class of ordinary shares, IAS 33.9, IAS 33.30 and IAS 33.66. IAS 33.68 requires disclosure on the face of the income statement or in the notes the basic and diluted EPS from discontinued operations.
Same as IFRS.
Basic and diluted EPS should be presented with equal prominence, IAS 33.66. Basic and diluted EPS are both presented even if the amounts are negative, IAS 33.69.
Same as IFRS.
Additional EPS figures (Adjusted EPS) Same as IFRS. If an entity discloses EPS figures using a different component of profit or loss, other than that specified by IAS 33, the weighted average number of ordinary shares should be calculated in accordance with IAS 33, IAS 33.73. Same as IFRS. IAS 33.73 requires that where an additional EPS figure is presented, it is disclosed in the notes. The basic and diluted EPS for this additional amount should be disclosed with equal prominence.
186
UNITED KINGDOM Retrospective adjustments Same as IFRS.
IFRS Basic and diluted EPS are restated for all periods presented for the effects of a capitalisation, a bonus issue, a share split. If these changes occur after the balance sheet date but before the financial statements are authorised for issue, the EPS calculations, including previous periods, are restated using the new number of shares, IAS 33.64. Diluted EPS of any prior period should not be adjusted for changes in assumptions used or for the conversion of potential ordinary shares into ordinary shares, IAS 33.65.
Same as IFRS.
1.39 Post-balance sheet events UNITED KINGDOM Relevant statute and standard: CA 1985, and FRS 21 Same as IFRS. IFRS Relevant standard: IAS 10.
An enterprise should adjust the amounts recognised in its financial statements to reflect adjusting events after the balance sheet date, IAS 10.8. An enterprise should not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the enterprise or to cease trading, or that it has no realistic alternative but to do so, IAS 10.14.
Same as IFRS.
187
IFRS Disclosure of a non-adjusting post balance sheet events is required where non-disclosure could influence the economic decisions of users of the financial statements, IAS 10.10. A liability may not be recognised for dividends proposed or declared after the balance sheet date. However, the amount of such dividends must be disclosed. Under IAS 32, dividends on equity instruments will be charged direct to equity, and not in the income statement IAS 10.12. The financial statements must disclose the date when they were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise should disclose that fact, IAS 10.17.
Same as IFRS, although disclosure of dividends is also governed by the CA 85 Schedule 4 paragraph 35A.
Same as IFRS. CA 85 requires the date of approval of the financial statements by the board to be stated on the face of the balance sheet, which must be signed by a director, whether a company prepares its accounts under UK GAAP or IFRS.
188
1.40 Segment reporting UNITED KINGDOM Relevant statute and standard: CA 1985, SSAP 25 IFRS Relevant standard: IAS 14. The IASB have issued IFRS 8, which replaces IAS 14. IFRS 8 however is only mandatory for periods commencing on or after 1 January 2009 (although earlier adoption is encouraged but would only be allowed once the new standard is adopted by the EU). This document compares IAS 14 to UK GAAP. IAS 14 is significantly different to UK GAAP. IAS 14 applies only to enterprises whose equity or debt securities are publicly traded and to entities that are in the process of issuing debt or equity securities in public markets, IAS 14.3. There is no 'seriously prejudicial' exemption in IAS 14 for such enterprises.
CA 1985 requires turnover to be analysed by geographical market and class of business. Disclosure is not required where it would be seriously prejudicial to the company's interests. For public companies, companies that have a plc as a subsidiary, and very large private companies, SSAP 25 requires additional disclosures, but these are not required where it would be seriously prejudicial to the company's interests to provide them. There is no UK GAAP equivalent of primary and secondary formats.
Segment reporting is divided into primary and secondary segment formats according to the dominant source and nature of an enterprise's risks and returns. Either business segments or geographical segments may be the primary format, IAS 14.26.
189
UNITED KINGDOM Under SSAP 25, the definition of reportable segments is left to the management of the company, though SSAP 25 provides guidance on the factors that should influence management.
IFRS An enterprise's internal organisational and management structure and system of internal financial reporting to the board is normally the basis for identifying the predominant source and nature of risks and rates of return, IAS 14.26. If a 'matrix approach' is used for managing the company and for internal reporting, business segments are treated as the primary segment format, IAS 14.27(a). However, an enterprise is permitted to present in addition geographical segment information as a primary segment format, IAS 14.29.
190
UNITED KINGDOM SSAP 25 requires disclosure by geographical market and class of business of: segment turnover, also required by CA 1985 segment result segment net assets.
IFRS Segment information disclosed under the primary segment format includes: revenue result assets liabilities investment in assets that are expected to be used in more than one period depreciation and amortisation other significant non-cash expenses share of net profit or loss of associates and joint ventures, and the aggregate investment in those associates and joint ventures, IAS 14.50-66.
Segment totals are reconciled to aggregate information in the financial statements.
Segment information disclosed under the secondary segment format includes: revenue assets investment in assets that are expected to be used in more than one period, IAS 14.68-72.
Segment information should be reconciled to aggregate information in the financial statements, IAS 14.67.
191
1.41 Related party disclosures
192
UNITED KINGDOM Relevant standard: FRS 8 Definitions Two or more parties are related where, at any time during the financial period, FRS 8.2.5: one party directly or indirectly controls the other the parties are subject to common control from the same source one party has influence over the financial and operating policies of the other to the extent that the other party might be inhibited from pursuing at all times its own separate interests the parties, in entering a transaction, are subject to influence from the same source to such an extent that one of the parties to the transaction has subordinated its own separate interests.
IFRS Relevant standard: IAS 24
A party is related to an entity if, IAS 24.9: the party: directly or indirectly controls, is controlled by, is under common control with the entity; has an interest that gives significant influence; or has joint control over the entity the party is an associate the party is a joint venture in which the entity is a venturer the party is a member of the key management personnel of the entity or its parent the party is a close member of the family of any individual referred to in any of the four categories above the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, management personnel of the entity or its parent or a close member of the family of any individual referred to in either of the immediately preceding two bullets the party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity.
Main difference to FRS 8 is that IAS 24 does not include in its related party definition two parties under common influence as opposed to control.
193
UNITED KINGDOM As above.
IFRS IAS 24's list of related parties does not include entities managed or managing under a management contract, unlike FRS 8.2.5(c)(iv). However, in practice, if the management contract led to control or significant influence then it would be likely to fall into one of the above categories. Unlike FRS 8.2.5(c)(iii), IAS 24 does not specifically mention persons acting in concert, but IAS 24 arguably would produce a similar result as it does not specifically say that the controlling party must be a single individual or entity. IAS 24 is intended to apply only to the related party relationships listed above.
As above.
FRS 8 sets out a long list of deemed and presumed related parties, which covers at least those identified in IAS 24. However, FRS 8's lists are not intended to be exhaustive and it is possible that parties falling outside the scope of the IAS 24 definition and supporting guidance will be considered to be related parties under FRS 8. Disclosure of controlling party Disclosure is required of the name of the immediate and, if different, ultimate controlling party irrespective of whether any transactions have taken place with the reporting entity, FRS 8.18.
Related party relationships between parents and subsidiaries should be disclosed irrespective of whether there have been any transactions between the related parties. Disclosure of the name of the entity's parent and ultimate controlling party, if different, is required, IAS 24.12.
194
UNITED KINGDOM IFRS Disclosure of transactions and balances FRS 8 requires disclosure of IAS 24.17 requires disclosure of material related party transactions, the following information for irrespective of whether a price is related party transactions: charged, including the following particulars: nature of the related party relationship names of the transacting related amount of the transactions parties outstanding balances a description of the relationship the terms and conditions of a description of the transactions outstanding balances the amounts involved including whether they are secured and the nature of any other elements necessary for consideration to be provided an understanding of the financial in settlement statements details of any guarantees the amounts due to or from given or received related parties at the balance sheet date and any provisions for provisions for doubtful debts non-recovery bad and doubtful debts amounts written off in the period expensed. in respect of debts due to or from related parties. The disclosures referred to above are made separately for the following categories: the parent entities with joint control or significant influence subsidiaries associates joint ventures in which the entity is a venturer key management personnel of the entity or its parent other related parties, IAS 24.18.
Note that the name of the related party does not have to be disclosed.
195
UNITED KINGDOM FRS 8.3(e) scopes out emoluments in capacity as employee of the reporting entity. This is because company law or Listing Rules generally cover this area in the UK.
IFRS In addition an entity shall disclose key management personnel compensation in total and for each of the following categories: short-term employee benefits post-employment benefits other long-term benefits termination benefits share-based payment, IAS 24.16.
As directors are part of 'key management' under IAS 24, their emoluments and transactions will be covered by the standard, although IFRS contain no direct equivalent of the directors' emoluments disclosures in UK company law. However, Companies Act 1985 disclosures continue to apply to UK companies adopting IFRS. FRS 8.2.5 definition of related parties means that disclosure is required of all transactions if that party met the related party definition at any point during the financial year. Therefore all transactions in the period require disclosure even if the related party relationship ceased during the period. IAS 24 only requires disclosure for the period during which the parties were related, IAS 24.9 and IAS 24.17. Therefore a difference compared to FRS 8 exists if the related party relationship was only for part of the accounting period.
196
UNITED KINGDOM Similar transactions by one type of related party may be aggregated unless disclosure of an individual transaction, or connected transaction, is necessary for an understanding of the impact on the financial statements or is required by law. FRS 8 includes a special definition of materiality, which requires materiality to be assessed not only by reference to the entity, but also by reference to the related party where that party is an individual such as a director, member of key management or close family.
IFRS Items of a similar nature may be aggregated except where separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements, IAS 24.22.
There is no such special definition in IAS 24. Therefore materiality is always judged in the context of the entity itself. IFRS materiality guidance is contained in IAS 1.
197
UNITED KINGDOM Disclosure of transactions is not required: in consolidated financial statements, of any transactions or balances eliminated on consolidation, FRS 8.3(a) in a parent's own financial statements when those statements are presented with consolidated financial statements, FRS 8.3(b) in the financial statements of subsidiaries, 90% or more of whose voting rights are controlled within the group, of transactions with group members or investees of the group qualifying as related parties, eg associates. This exemption is available only if consolidated financial statements are publicly available and is conditional on the subsidiary's financial statements stating that the exemption has been taken.
IFRS Disclosure of transactions is not required in consolidated financial statements, of any transactions or balances eliminated on consolidation, IAS 24.4. However, unlike FRS 8, there is no exemption in the individual accounts of the parent or subsidiaries. IAS 24.3 requires the parent's separate financial statements to disclose details of transactions with other group companies. IAS 24 contains no exemptions for any subsidiaries separate financial statements if these are prepared using IFRS.
FRS 8.16 allows an exemption where complying with FRS 8 would conflict with a confidentiality duty arising by operation of law, but this exemption does not include the effects of terms stipulated in a contract. For example, banks are obliged by law to observe a strict duty of confidentiality in respect of their customers' affairs.
IAS 24 does not include any similar exemption.
198
Disclaimer
As mentioned in the introduction, the comparison laid out in this document is not intended to be a complete list of all existing differences between UK GAAP and IFRS. This publication has been prepared only as a guide in general terms, and it should not be regarded as a substitute for obtaining advice on your own specific circumstances. No warranty (express or implied) is given by Grant Thornton UK LLP as to the accuracy or completeness of the information contained in this publication. Grant Thornton UK LLP accepts no responsibility for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

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Comparison between UK GAAP and International Financial Reporting Standards

Comparison between UK GAAP and International Financial Reporting Standards

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