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Progress report - the building of a ‘stable platform’ by 2005 for IFRS Back  
SSome time ago the International Accounting Standards Board (IASB) set itself the objective of having in place by March 2004 a stable platform of those International Financial Reporting Standards (IFRS) which EU listed companies would be required to adopt in 2005. Much has been done by the IASB in achieving its objective with the issue of seventeen revised standards – including those in the controversial area of financial instruments, and four new standards which include those on share-based payment and business combinations.

While substantial progress has been made by the IASB, there remain many areas in which we continue to await new standards. These include revenue recognition, reporting comprehensive income, insurance accounting and completion of Phase II of the project on business combinations.

It is clear that considerable change will be a continuing feature of financial reporting for some time to come. We focused on one of the major new standards – share-based payment – in a previous edition. Later in this article, we shall comment on some aspects of the standard on business combinations.

Unlisted entities – reporting position
Many people have expressed continuing concern regarding the absence of a decision by the Irish government on extending the scope of application of IFRS to unlisted entities. This is a significant planning issue for many companies in terms of developing group reporting processes and systems and responding to transitional requirements.

Some hold the view that the decision when it comes will enable companies to opt for either IFRS or our current standards, possibly with a phase-in period for certain entities.

This would be a position similar to that in the U.K. where it is proposed that all companies, other than charities, will be allowed from 2005 onwards use either IFRS or UK GAAP in the preparation of both their group and company financial statements. The decision to opt for IFRS will be considered irreversible and there is a rebuttable presumption that all companies within a group will use consistent standards. This would have the advantage of companies being allowed to use IFRS for both their individual company and group accounts. In Ireland, the Companies (Auditing and Accounting) Act 2003 enshrines in law for the first time the requirement for companies to comply with accounting standards. This section of the Act awaits commencement by Ministerial Order and, fundamentally, clarification as to which standards will apply.

Convergence of standards
A consultation document has issued from the Accounting Standards Board setting out their proposed strategy for convergence. This appears to take a sensible approach of total convergence over a period of time but on a measured basis with some new or revised standards in 2005 and 2006 – including the full implementation of FRS17 on Retirement Benefits, FRS20 on share-based payments, IAS32 requirements on disclosure and presentation of financial instruments for all companies and revised standards on post-balance sheet events and earnings per share. Otherwise, the move to new standards will follow on from the completion of projects by the IASB.

The impact of change will be a challenge for all entities in the coming years irrespective of any decision made by the Irish government.

New international standard on business combinations
The new standard on business combinations brings with it significant change. The standard requires that all business combinations within its scope must be accounted for as acquisitions requiring the identification of an acquirer which may be difficult in some circumstances.

The scope of the Standard when issued excluded the following business combinations:
• Separate entities or businesses brought together to form a joint venture;
• Restructuring of entities under common control;
• Combinations of two or more mutual entities; and
• Separate entities or businesses are brought together by contract alone without the obtaining of an ownership interest.

The IASB has since issued an exposure draft proposing to broaden the scope of the standard to include the latter two categories of business combination, which would mean that the only exclusions are joint ventures and combinations of entities under common control which may be a feature of many group restructurings.

The ASB has indicated that it does not propose to adopt the requirements of the new standard and will defer any introduction of a new standard until the IASB has completed both phases of its project and the overall position and requirements are clear.

Goodwill and intangibles
The area where the new standard is likely to have most impact is that of goodwill. Companies will no longer be allowed to amortise goodwill and instead will be required to carry out impairment reviews on an annual basis, or more frequently should conditions indicate possible impairment. This may lead to some fluctuation in the reported earnings of companies and companies will be keen to avoid the ‘big hit’ of an impairment provision in the event of a downturn in performance or similar circumstances.

What may also be of concern to companies is the wide range of disclosures they will be required to make to support their conclusions on the recoverable value of goodwill. If the recoverable amount of goodwill is based on value in use the disclosures should, in addition to parameters such as growth rate and discount factors, include:

• A description of each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets / forecasts; and
• A description of management’s approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information.

Companies may have concerns regarding the sensitivity of this information and its predictive nature.
The new standard also imposes more stringent requirements for the recognition of intangibles separate from goodwill. Intangible assets must be separately recognised if they are separable or subject to contract or legal agreement and capable of having their fair value reliably measured. The objective clearly is to achieve a position where goodwill is the excess of the fair value of purchase consideration over the fair value of the net worth of the business.

On first-time adoption, companies must apply IFRS3 at date of transition – 1st January 2004 for December year end companies. An entity may choose to restate a business combination that occurred prior to that date but, if so, they must restate all combinations that occur after that date. Where goodwill has been previously recognised in business combinations, the following applies:-

• Goodwill amortisation to discontinue with an impairment review of the goodwill carrying value; and
• Any negative goodwill eliminated against retained earnings.
We are in a time of significant change for financial reporting. Considerable attention will need to be given to maintaining awareness and responding to these changes with appropriate provision made for training, systems development and implementation of revised group reporting processes.

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