uk gaap vs. ifrs - ey

UK GAAP vs. IFRSThe basics

Spring 2011

Contents

Introduction 1

Inventories 2

Construction contracts 3

Income taxes 5

Property, plant and equipment 8

Leases 10

Revenue recognition 12

Employee benefits 14

Government grants 16

Foreign exchange 17

Borrowing costs 19

Consolidated and separate financial statements 20

Interests in associates and joint ventures 23

Impairment of assets 26

Provisions, contingent liabilities and contingent assets 28

Intangible assets 29

Financial instruments: recognition and measurement 30

Investment property 33

Business combinations 35

Non-current assets held for sale and discontinued operations 38

1UK GAAP vs. IFRS The basics

Introduction

The UK’s Accounting Standards Board (ASB) has issued an Exposure Draft FRED 43 Application of Financial Reporting Standards outlining its plans for the future of financial reporting in the UK and the Republic of Ireland. If approved, the standard will introduce a three-tier approach which will require entities that have previously reported under Generally Accepted Accounting Principles in the UK and Ireland (referred to in this document as UK GAAP) to adopt either EU Adopted IFRS (IFRS) or the proposed Financial Reporting Standards for Medium–sized Entities (the FRSME).

Entities that meet the ASB’s definition of ‘publicly accountable’ will be required to report under IFRS. Large and medium-sized entities that are non-publicly accountable entities (and publicly accountable entities that are prudentially regulated and meet all three small-size criteria) will have the option to adopt IFRS or the FRSME. Small non-publicly accountable entities are permitted to apply the FRSSE, but have the option to adopt IFRS or the FRSME.

As part of the change process, UK entities will need to determine the appropriate framework to transition to, as well as determine the impact of the change to their financial reporting, tax status, business processes and operations in general.

This document highlights the areas where there are likely to be significant recognition and measurement differences between the requirements under the current IFRS standards and interpretations and the existing requirements and practices under UK GAAP. It does not address issues of presentation or disclosure of transactions and balances in the financial statements. In addition the following areas (driven by IFRS standards) have been scoped out of this analysis as they only affect specific entities or activities, or they are not applicable to most private UK companies — Accounting by Retirement Benefit Schemes (IAS 26), Agriculture (IAS 41), Insurance Contracts (IFRS 4), Exploration for and Evaluation of Mineral Resources (IFRS 6) and Service Concession Arrangements (IFRIC 12).

Please note that this is not an exhaustive list of all the potential differences that exist between UK GAAP and IFRS. Many differences depend on the specific nature of an entity’s operations and industry, the nature and extent of its transactions and where choices are available, the specific accounting policies previously applied under UK GAAP and those to be adopted under IFRS. In addition, this document does not address transition issues arising from application of IFRS 1 First Time Adoption of IFRS. Therefore it should not be used as a tool for determining all the impacts of transitioning to IFRS. Accordingly, this document should be viewed as a starting point for determining accounting differences, typically during the diagnostic phase of a conversion project, and not an all-inclusive comprehensive impact assessment checklist.

This document is based on the IFRS standards in issue as at 31 March 2011. Note that the IASB continues to issue new, and amend existing, IFRS standards and interpretations. This is both as part of the joint FASB/IASB project for the convergence of IFRS with US GAAP as well as stand-alone IASB projects to improve or issue new pronouncements to serve the needs of the users of financial information. Therefore in future periods, some of the key differences highlighted in this document may cease to apply or additional differences may arise as a result of changes to existing standards. Please refer to the IASB website at www.iasb.org for the status of IASB projects.

In addition, the EU continues its endorsement process of issued IASB standards and therefore additional differences can arise between those standards issued by the IASB and those that are available for adoption by companies in the UK. Please refer to the European Financial Reporting Advisory Group (EFRAG) website (www.efrag.org) for the status on endorsement of IFRS standards in the EU.

We hope you find this document useful.

May 2011

2 UK GAAP vs. IFRS The basics

Inventories

IAS 2 Inventories (‘IAS 2’) and SSAP 9 Stocks and Long-term Contracts (‘SSAP 9’) use the principle that the primary basis of accounting for inventories is cost unless the net realisable value (‘NRV’ which represents the best estimate of the net amounts inventories are expected to realise) is lower than cost, in which case the inventories are written down to NRV. Generally, costs of inventories comprise all costs of purchase, costs of conversion,

based on the entity’s normal level of activity, and other costs in bringing the inventories to their present location and condition. Both GAAPs allow the use of standard costing methods or retail methods provided that the method used gives a result which approximates to cost.

IFRS UK GAAP

Scope IAS 2 excludes construction work in progress; financial instruments; biological assets and agricultural produce at the point of harvest. Its measurement rules exclude inventories measured at NRV in accordance with established practice in certain industries (e.g., minerals and mineral products) and inventories of commodity broker-traders measured at fair value less costs to sell.

SSAP 9 covers both stocks and long-term contracts, there are no specific exclusions.

Inventories of a service provider should include the cost of services for which the revenue has not been recognised.

UK GAAP does not provide explicit guidance on inventories of service providers.

Classification of spare parts and service equipment

Major spare parts and servicing equipment qualify as property, plant and equipment (P,P&E) if an entity expects to use them in more than one period or they can only be used in conjunction with a specific item of P,P&E.

While there is no specific guidance in UK GAAP, company law distinguishes between fixed assets, that are intended for use on a continuing basis in the company’s activities, and current assets. Practice varies with some entities capitalising these assets as tangible fixed assets and others as stocks.

Components of cost

IAS 2 is more prescriptive in respect of the components of cost of inventories including the capitalisation of overheads and other indirect costs. IAS 2 generally excludes selling costs, most storage costs, abnormal production costs and general administrative overheads.

SSAP 9 is less prescriptive than IAS 2 and permits under certain circumstances the inclusion of selling costs, but takes a similar approach to other costs.

Borrowing costs are capitalised if the inventories meet the definition of qualifying assets and are not manufactured or otherwise produced in large quantities on a repetitive basis.

There is no requirement to capitalise borrowing costs under UK GAAP, although it is permitted under company law.

Inventory purchased on deferred payment terms

Where inventories are purchased on deferred payment terms, such arrangements are deemed to include a financing element to be accounted for separately and hence an interest expense recognised over the period of the financing.

There is no specific guidance under UK GAAP therefore practice varies.

Transfer of rental assets to inventory

An entity that routinely sells items of P,P&E that it had previously held for rental to others, should transfer such assets to inventories at their carrying amount when they cease to be rented and held for sale. Any proceeds on transfer being recognised as revenue under IAS 18 Revenue Recognition (‘IAS 18’).

There is no specific guidance under UK GAAP. Generally, the carrying amounts of fixed assets would not be transferred to inventories unless its nature had clearly changed.

Disposals of fixed assets are reported separately as an item below operating profit.

For the purpose of the statement of cash flows, cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale, and cash receipts from rentals and the subsequent sale of such assets are cash flows from operating activities.

Cash flows associated with the disposal of fixed assets are classified as ‘capital expenditure and financial investment’.

Significant differences

Similarities


Construction contracts

IAS 11 Construction Contracts (‘IAS 11’) and SSAP 9 Stocks and Long-term Contracts (‘SAAP 9’) prescribe the percentage of completion method of accounting for contracts when the outcome of a contract can be estimated reliably, although differences exist in the way the method is applied under the two standards. SSAP 9’s requirements on long-term contracts need to be read in conjunction with guidance on revenue recognition in FRS 5 Application Note G Revenue Recognition (‘FRS 5 App G’) and UITF 40 Revenue Recognition and Service Contracts (‘UTIF 40’). Accounting should be performed on a contract-by-contract basis, although in certain circumstances it is necessary to combine or segment construction contracts in order to reflect their substance.

Both standards require that an entity should recognise a loss on a contract when it is probable that losses will be incurred in respect of a construction/long-term contract.

Similarly, when the outcome of a contract cannot be estimated reliably, no profit should be recognised.

Contract costs generally comprise all direct and indirect costs that are attributable to, and reimbursable under, the contract. Pre-contract costs incurred before recognition criteria are met are expensed and cannot be reinstated. Where the effect of the time value of money is material, the payments to be received under the contract are discounted.

IFRS UK GAAP

Definition of construction contract

A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. IFRIC 15 Agreements for the Construction of Real Estate clarifies that a buyer should be able to specify major structural elements of the design of a real estate construction and/or specify major structural changes during construction.

Construction contracts include contracts for rendering of services (e.g., project managers and architects) directly related to the construction of the asset and for the demolition/restoration of assets or restoration of the environment following demolition of assets.

A long-term contract is a contract entered into for the design, manufacture or construction of a single substantial asset or the provision of a service (or of a combination of assets or services which together constitute a single project) where the time taken substantially to complete the contract is such that the contract activity falls into different accounting periods.

Contracts with a duration shorter than one year are accounted for as long-term contracts if they are sufficiently material to distort turnover and attributable profit. Services provided on an ongoing basis, e.g., help desk support, maintenance or cleaning services, are not accounted for as long-term contracts.

Contracts with multiple elements

An entity is required to identify separate components of an agreement, including contracts for construction of real estate, directly related services, and the delivery of other goods or services.

Components for the delivery of other goods and services are accounted for under IAS 18.

Contracts involving a combination of assets and services that constitute a single project are required to be accounted for as long-term contracts except where the criteria below are met, in which case the components are accounted for separately.

Combining and segmenting construction contracts

A contract that covers a number of assets should be ►segmented if separate proposals and negotiations were held for each asset and the costs and revenues of each asset can be identified.

A group of contracts should be combined if the ►contracts were negotiated as a single package, are so closely interrelated that they are in effect part of a single project with an overall profit margin, and are performed concurrently or in a continuous sequence.

Where a contract provides for the construction of ►an additional asset at the option of the customer, the construction of the additional asset is treated as a separate construction contract if it differs significantly in terms of technology or function from the original assets, or its price is negotiated without regard to the original contract price.

Where a contractual arrangement consists of ►various components that operate independently of each other and a reliable fair value can be attributed to each component, such components are recognised separately.

Conversely, the commercial substance of two or ►more separate contracts may require them to be accounted for as a single transaction (bundling).

For service contracts, where there are ►distinguishable phases of a single contract, it may be appropriate to account for the contract as two or more separate transactions provided the value of each phase can be reliably estimated.


Similarities


IFRS UK GAAP

Percentage of completion method

This method is applied on a cumulative basis to determine the current estimates of contract revenue and contract costs. When the outcome of the contract cannot be reliably measured, revenue is recognised only to the extent it is probable contract costs are recoverable, provided no loss is foreseen.

Profit for the period is derived once contract costs and revenues have been recognised as appropriate. As a result, IFRS does not seek to achieve a uniform profit margin in a contract that is not a cost plus contract.

Contract costs are recognised in the periods in which the work is performed except for costs relating to future activity, which are deferred as an asset.

Turnover should be determined based on an entity’s right to consideration in accordance with the stage of completion.

Attributable profit is recorded on a prudent basis based on stage of completion depending on the expected outcome, degree of uncertainty surrounding the outcome and any unknown inequalities in profitability at different stages of the contract.

Contract costs are the derived amount once revenue and attributable profit are determined.

Method of determining stage of completion

Various methods of determining the stage of completion are allowed including:

Proportion of contract costs incurred compared to ►total estimated contract costs;Surveys of work performed; and ►Completion of a physical proportion of the contract ►work provided the entity can measure the work performed by the contractor reliably

There are no specific methods prescribed, but SSAP 9 requires that the method used to determine the stage of completion should reflect the entity’s right to consideration. In practice similar methods are used.

Use of the proportion of costs basis is only appropriate where the contractor is able to demonstrate that costs incurred provide the best evidence of performance under the contract terms and the right to consideration.

Contract revenue

Contract revenue comprises the initial amount of revenue agreed in the contract and variations in contract work, claims and incentive payments to the extent they are probable and reliably measurable.

Revenue is measured at the fair value of the consideration received or receivable. Where payments are deferred, revenue will be their present value.

Revenue should reflect a seller’s right to consideration at the fair value of the work performed to date compared to the total fair value of consideration under the contract, based on values at the inception of the contract.

SSAP 9 is more prudent than IAS 11 in its approach to claims and variations.

Differences may arise in the measurement and timing of recognition of revenue compared to that under IFRS.

Contract costs Contract costs comprise direct contract costs, costs attributable to contract activity in general allocated to the contract and any other costs specifically chargeable to the customer under the terms of the contract, including where appropriate borrowing costs.

Contract costs exclude selling costs, general administration costs, and research and development costs unless where specifically reimbursable under the contract, but may be reduced by any incidental income not included in the contract revenue.

SSAP 9 is less prescriptive in the component of costs and in some instances permits inclusion of selling costs.

There is no requirement to capitalise borrowing costs although the capitalisation of interest on borrowings financing the production of the asset is permitted under company law.

Pre-contract costs

Costs incurred in securing the contract that relate directly to the contract are included as part of the contract costs if they can be separately identified and measured reliably and it is probable that the contract will be obtained.

Directly attributable pre-contract costs (relating to securing the specific contract) may be capitalised only where it is virtually certain that the contract will be awarded and that the contract will result in future net cash flows with a present value no less than the asset recognised.

Construction contractsSignificant differences (cont’d)


Income taxes

IAS 12 Income Taxes (‘IAS 12’) addresses the accounting for current and deferred taxes under IFRS while FRS 16 Current Tax (‘FRS 16’)and FRS 19 Deferred Tax (‘FRS 19’) provide guidance under UK GAAP on the accounting for current tax effects and expected future tax consequences of events that have been recognised (i.e., deferred tax).

Current tax is measured at the amount expected to be paid or recovered from the tax authorities and deferred tax is measured using the tax rates and laws expected to apply when the asset is realised or settled (or when the timing difference reverses under UK GAAP) using tax rates and laws enacted or substantively enacted at the end of the reporting period.

Both IAS 12 and FRS 19 require deferred tax liabilities to be recognised in full subject to certain limited exceptions, although these are not identical.

Similarly, they restrict the recognition of deferred tax assets (arguably FRS 19 has stricter criteria) and require entities

to reassess the recoverability of deferred tax assets at each reporting date.

Current and deferred tax is included in profit or loss except to the extent it relates to gains and losses recognised outside the profit or loss account or the tax arises from a business combination. Tax relating to items recognised in Other Comprehensive Income (OCI)/Statement of Total Recognised Gain and Losses (STRGL) is also recognised in OCI/STRGL.

Any deferred tax assets of an acquired entity and/or an acquirer which become recoverable as a consequence of an acquisition transaction may be recognised and measured in accordance with the relevant tax standards. Deferred tax assets of the acquiree are recognised in the fair value exercise whereas deferred tax assets of the acquirer are recognised in profit or loss.

Subsequent reassessments of the acquiree’s deferred tax assets are recognised in profit or loss, unless they qualify as hindsight adjustments, relating to conditions at the acquisition date.

IFRS UK GAAP

Calculation of deferred tax

Deferred taxation is based on temporary differences, i.e., differences between the carrying amount of an asset or liability in the statement of financial position and its tax base (subject to certain exceptions).

Deferred tax is based on timing differences (i.e., differences between an entity’s taxable profits and its results as stated in the financial statements, that arise from the inclusion of gains and losses in tax assessments in different periods to those when recognised in the financial statements) that have originated but not reversed as at the balance sheet date (subject to certain exceptions).

In addition to the areas highlighted here, other significant differences may arise from the difference between the timing difference and temporary difference approach e.g., in respect of foreign currency translation, intra-group transactions or in relation to certain structured products.

Recognition of a deferred tax liability

A deferred tax liability is recognised for all taxable temporary differences except to the extent that it arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Deferred tax is recognised on timing differences that have originated but not reversed by the balance sheet date, but not on permanent differences.

Specific rules apply for certain types of timing differences e.g., capital allowances, which can lead to differences from IFRS.

Investment in subsidiaries, branches, associates and interests in joint ventures

A deferred tax liability is recognised for all taxable temporary differences associated with such investments, except to the extent that the parent, investor or venturer is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

A deferred tax asset for deductible temporary differences arising from investments in subsidiaries, associates and branches and joint ventures is recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.

A deferred tax provision is required only to the extent that dividends payable by a subsidiary, associate or joint venture have been accrued at the balance sheet date or a binding agreement to distribute the past earnings in future has been made.

Any provision is made net of double taxation relief.


Similarities


IFRS UK GAAP

Recognition of a deferred tax asset

A deferred tax asset is recognised to the extent that it is probable that there will be taxable profit against which a deductible temporary difference can be used, unless the deferred tax asset arises from the initial recognition of an asset or liability that is not from a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit.

Further guidance is provided on the assessment of the recoverability of unused tax losses and credits.

Deferred tax assets are only recognised to the extent that they are regarded as recoverable i.e., it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Additional guidance is provided on the requirements for the recognition of deferred tax assets due to unrelieved tax losses.

Discounting Discounting of deferred tax balances is not permitted. Discounting is permitted but not required.

Measurement of tax

The calculation of deferred tax should take into account the manner in which the entity expects to recover or settle the carrying amount of its assets and liabilities. Therefore a P,P&E item is recovered through use to the extent of its depreciable amount (cost less residual value), and through sale at its residual value.

The manner in which an entity recovers or settles an asset or a liability is not relevant.

Specific rules are included on capital allowances, revaluations and rollover relief.

Deferred tax on revalued assets

The deferred tax liability or asset arising from revaluation of a non-depreciable asset should be measured on the basis of the tax consequences that would follow from the recovery of the carrying amount of the asset through sale. A non-depreciable asset differs from an asset which is not depreciated but is by its nature depreciable, such as an investment property.*

Deferred tax should be recognised on timing differences arising when an asset is continuously revalued to fair value with changes in fair value being recognised in profit or loss.

For other non-monetary assets, deferred tax is only recognised if there is a binding agreement to sell the revalued asset and the reporting entity has recognised the gains and losses expected to arise on sale unless, if at the balance sheet date, it is more likely than not that the gain will be rolled over.

Tax benefit in respect of share-based payments

The tax deduction for share-based payments may differ from the cumulative remuneration expense e.g., if the tax deduction is based on the intrinsic value of the share option at the date of exercise. In that case, the tax is based on the expected deduction available in future periods or, if unknown (as is the case in the UK), an estimate based on the year-end share price and pro-rated for the period to date compared to the full vesting period.

The current or deferred tax (assuming recoverable) in respect of this tax deduction is included in profit or loss for the period, except that any excess of current or deferred tax over the amount of the tax rate applied to the amount of the related cumulative remuneration expense is recognised directly in equity.

In general, the timing difference approach compares the future tax deduction expected, based on the year-end share price with the amount of the tax rate applied to the related cumulative remuneration expense.

Deferred tax assets on timing differences are only recognised if they are recoverable. Any excess of the expected future tax deduction over the tax attributable to the cumulative remuneration expense is a permanent difference which is not recognised.

All tax relating to share-based payment deductions is recognised in profit or loss.

*IAS 12 was amended in 2010, effective 1.1.2012 (if adopted by the EU). The amendment introduces a rebuttable presumption that deferred tax on an investment property carried at fair value is determined on the basis that it is recovered through sale. The presumption is rebutted if the investment property is depreciable and the business model is to consume substantially all its benefits over time rather than through sale.

Income taxesSignificant differences (cont’d)


IFRS UK GAAP

Tax impacts on business combinations

If a temporary difference arises because of a business combination, it is recognised as part of the accounting for that business combination and affects the calculation of the goodwill arising on the business combination.

Deferred tax is recognised on fair value adjustments on the acquiree’s assets and liabilities in the same way as if the adjustments had been gains or losses recognised before the acquisition. Unlike IFRS, deferred tax is not normally recognised on positive revaluation adjustments to P,P&E or intangible assets.

A deferred tax asset may be recognised in respect of tax-deductible goodwill, even on initial recognition of a business combination.

No deferred tax arises on initial recognition of goodwill, although if it is tax deductible, deferred tax on any future timing differences between the tax deduction and amortisation/impairment may need to be recognised. Further differences may also arise in relation to deferred tax on legacy tax deductible goodwill eliminated against reserves.


Property, plant and equipment

IAS 16 Property, Plant and Equipment (‘IAS 16’) and FRS 15 Tangible Fixed Assets (‘FRS 15’) have similar definitions of property, plant and equipment (‘P,P&E) or tangible fixed assets (under UK GAAP), and require that such assets are initially recorded at cost and subsequently carried either using the cost model (i.e., at cost less accumulated depreciation and accumulated impairment losses) or revaluation model (i.e., at fair value as at the date of latest revaluation less accumulated depreciation and accumulated impairment losses). Revaluation gains are recognised in OCI/STRGL except to the extent they reverse previously recognised losses. The policy selected must be applied to the entire class of assets.

The cost of an asset includes its purchase price, including duties and non-refundable purchase taxes, and costs directly attributable to bringing it to the location and condition required

for its intended use. Capitalisation of start-up and similar pre-production costs is not permitted unless these are necessary to bring the asset to its required location and condition for use. However, the cost of dismantling and removing an asset and restoring the site on which it is located, which is incurred on acquisition of or use of the asset (other than and produce inventories), should be included.

The depreciation method used should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. Both standards permit non-depreciation if an asset’s residual value is equal to or exceeds its carrying amount.

Subsequent expenditure relating to an asset may be capitalised only if certain recognition criteria, included in each standard, are met.

IFRS UK GAAP

Scope IAS 16 excludes from its scope; assets classified as held for sale, biological assets, exploration and evaluation assets, and mineral rights and reserves.

Entities using the cost model for investment properties use the cost method as prescribed in IAS 16.

FRS 15 applies to all tangible fixed assets except investment properties (but applies to investment properties in the course of construction).

UK GAAP does not have the concept of either assets held for sale or biological assets.

Cost Cost is the amount of cash or cash equivalents paid and the fair value of the other consideration given to acquire an asset at the time of its acquisition or, where applicable, the amount attributed to the asset when initially recognised in accordance with specific requirements of other standards. If payment for the asset is deferred beyond normal credit terms, interest is recognised over the period of credit.

Borrowing costs related to a qualifying asset must be capitalised.

FRS 15 does not contain this definition of cost of fixed assets.

Cost is defined in the CA 2006 to include purchase price (and acquisition expense) or the production cost (being the purchase price of raw materials and consumables, and directly attributable production costs).

There is no specific guidance for treatment where payment is deferred but in practice, where the payment is material, it may be discounted.

Capitalisation of directly attributable finance costs is permitted, but not required.

Capitalisation of subsequent costs

Subsequent costs should meet the same recognition criteria for capitalisation as the initial expenditure on the asset, i.e., when it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably.

If part of an asset is replaced, the old part is derecognised (even if not previously depreciated separately), and the new part is capitalised provided the recognition criteria are met.

Subsequent expenditure is capitalised only when it improves the condition of the asset beyond its previously assessed standard of performance.

Expenditure to maintain the asset’s previously assessed performance standard is expensed.

The cost of replacing or restoring a component is expensed as incurred if the component has not been treated separately for depreciation purposes.

Cost of major inspection and overhaul

The cost of a major inspection is capitalised and depreciated provided that the P,P&E recognition criteria are met.

The costs of parts replaced in an overhaul would be accounted for in the manner discussed under capitalisation of subsequent expenditure above.

Any remaining carrying amount of any previous major inspection is derecognised at the same time even if it had not been depreciated separately.

Costs of a major overhaul/inspection should only be capitalised where the subsequent expenditure restores the economic benefits of the assets that have been consumed by the entity and already reflected in depreciation.

The cost capitalised should be depreciated over the period to the next overhaul/inspection.

The remaining carrying amount of previous overhaul/inspections is derecognised.


Similarities


IFRS UK GAAP

Revaluation model

Assets are revalued to ‘fair value’, determined from market-based evidence for land and buildings or ‘market value’ for plant and equipment, which is generally the open market value (OMV).

Where there is no market-based evidence, due to the specialised nature of the asset or if it is rarely sold, an estimation using an income or depreciated replacement cost approach may be used.

Initial application of the revaluation policy is a period change and not a change in policy to be treated retrospectively.

The ‘value to the business’ model used requires revaluations to ‘current value’ i.e., assets are measured at the lower of replacement cost and recoverable amount.

FRS 15 is more prescriptive in the basis of valuation of both specialised and non-specialised properties and other assets and the processes required for valuation e.g., use of independent valuers. These bases may differ from fair value under IFRS.

A change to a revaluation model is a change in accounting policy and requires retrospective restatements.

Revaluation losses

A revaluation loss is recognised in profit or loss, except to the extent that it reverses an increase previously recognised in OCI.

Revaluation losses are recognised in the profit and loss account if they result from a clear consumption of economic benefits. All other losses are recognised in STRGL until the asset’s carrying amount reaches its depreciated historical cost, and then in the profit and loss account, except to the extent that the asset’s recoverable amount is greater than its revalued amount. It is possible to have debit balances in the revaluation reserves.

Depreciation of assets

Each part of an item of P,P&E that has a cost that is significant in relation to the cost of the item must be depreciated separately. Parts may be grouped if they have a similar useful life and depreciation method or if insignificant.

Renewals accounting is not permitted under IFRS.

Depreciation of an asset ceases when the asset is either classified as held for sale or derecognised.

Assets should be analysed into major components with substantially different useful economic lives, but there is no requirement to separately depreciate parts of an asset.

In some industries (e.g., water industries) renewals accounting is applied in accounting for tangible fixed assets within a system or network.

Depreciation ceases at the end of the useful life or on disposal of the asset.

If no depreciation is charged (as immaterial) or the remaining useful life of asset exceeds 50 years, a mandatory annual impairment review is required.

Reassessment of depreciation methods and residual values

Depreciation methods and residual value should be reassessed at least annually.

Depreciation methods are changed if there is a significant change in the expected pattern of consumption.

Reassessment of residual values is only required for material residual values to take account of the effects of technological changes.

A change in depreciation method is permitted only if it gives a fairer presentation, no requirement for annual review.

Measurement of residual values

Residual value is the amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Residual value is the net realisable value of an asset at the end of its useful economic life, based on prices prevailing at the date of acquisition or revaluation of the asset and does not take account of future price changes.


Leases

Accounting for leases under IAS 17 Leases (‘IAS 17’) and SSAP 21 Lease Accounting and Hire Purchase Contracts (‘SSAP 21’) is driven by the lease classification which is based on the extent to which the risk and rewards of ownership are transferred under the lease agreement. Both standards classify leases as either finance leases (i.e., one that transfers substantially all the risks and rewards incidental to ownership) and operating leases, with different accounting treatments for each.

UK GAAP, SSAP 21 addresses the classification of standalone lease transactions. FRS 5 Reporting the Substance of Transactions (‘FRS 5’) requires leases to be classified in accordance with their substance and for some lease arrangements, e.g., for sale and leasebacks with repurchase options, FRS 5 includes more specific guidance. This section is a comparison of the requirements in IAS 17 and SSAP 21.

A lessee records a finance lease by recognising an asset and a liability, measured at the lower of the present value of the minimum lease payments or the fair value of the asset. The minimum lease payments are apportioned between repayment of the lease liability and interest payments so as to produce a constant rate of interest on the remaining lease liability. An asset held under a finance lease is accounted for in the same way as other assets of the same category. Operating lease rental/income is recognised on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern of benefits.

A manufacturer-dealer lessor does not recognise a selling profit on an operating lease of an asset (until the asset is ultimately sold) and restricts the selling profit on a finance lease of an asset to that which would apply if a market interest rate was charged.

IFRS UK GAAP

Lease classification

IAS 17 includes a number of situations that individually or in combination would lead to a lease being classified as a finance lease. There is no 90% test rule.

UK GAAP would consider a similar list of indicators, but has a rebuttable presumption that transfer of risks and rewards occurs if the present value of the minimum lease payments discounted at the interest rate implicit in the lease, amounts to substantially all (normally 90% or more) of the fair value of the leased asset.

Lease classification is made at the inception of the lease which is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease.

Inception is the earlier of the time the asset is brought into use and the date from which rentals first accrue.

Embedded derivatives

Embedded derivatives are required to be separated (and measured at fair value through profit or loss) unless they are closely related to the host contract.

For entities that have not adopted FRS 26 Financial Instruments: Measurement (‘FRS 26’), there is no requirement to separate out the embedded derivatives that are not closely related to the host contract.

Leases of land and buildings

When a lease includes land and buildings elements, the classification of each element as a finance or operating lease is assessed separately. An important consideration is that land normally has an indefinite economic life.

There are no detailed rules regarding the allocation between land and buildings elements.

The minimum lease payments are allocated between land and buildings in proportion to the relative fair values of the interests in each element.

In the context of the UK property market, only those leases of land and buildings that are of such length that they allow the lessee to redevelop the site are likely to include a significant value for the land element.

Determining whether an arrangement contains a lease

An arrangement is, or contains, a lease if the fulfilment of the arrangement is dependent on the use of, and conveys a right to use, a specific asset or assets.

IFRIC 4 Determining whether an Arrangement Contains a Lease (‘IFRIC 4’) provides further guidance in determining whether these criteria are met at inception of a lease.

There are no similar requirements to those under IFRIC 4.


Similarities


IFRS UK GAAP

Lessee accounting — finance lease

A leased asset is recognised at the lower of the fair value of the asset or the present value of the minimum lease payments, discounted at the interest rate implicit in the lease or, if this is not available, the entity’s incremental borrowing rate.

A leased asset is recognised at the present value of the minimum lease payments, discounted at the interest rate implicit in the lease (or at the borrowing rate on a similar lease), or at the fair value of the assets if it is a sufficiently close approximation of the present value of the minimum lease payments.

The interest rate implicit in the lease is the discount rate that at lease inception equates the sum of the present value of the minimum lease payments and unguaranteed residual value to the lessor to the fair value of the leased asset plus initial direct costs of the lessor.

The interest rate implicit in the lease excludes the impact of initial direct costs of the lessor.

Contingent rentals are expensed as incurred. There is no guidance on treatment of contingent rent.

Lessor accounting — finance lease

The net investment is the gross investment in the lease i.e., the minimum lease payments and any unguaranteed residual value accruing to the lessor, discounted at the interest rate implicit in the lease.

Net investment in the lease is the gross investment in the lease less gross earnings allocated to future periods.

Initial direct costs are included in the initial measurement of a finance lease receivable and are factored into the calculation of the interest rate implicit in the lease.

Finance income is recognised on a pattern reflecting a constant periodic rate of return on the net investment in the finance lease.

Initial direct costs may be deferred or expensed immediately.

The total gross earnings are allocated to accounting periods to give a constant rate of return on the lessor’s net cash investment (includes other cash flows e.g., tax) in the lease.

Operating leases — lease incentives

Lessees and lessors should recognise the cost or benefit of lease incentives over the lease term, usually on a straight-line basis unless some other basis is more representative.

Lease incentives are recognised over the shorter of the lease term and a period ending on a date from which it is expected the prevailing market rental will be payable, usually on a straight-line basis unless some other basis is more representative.

Sale and leaseback transactions

IAS 17 rules apply to sale and leasebacks when the leaseback includes a ‘right of use’ to the asset.

Where a sale and leaseback transaction results in an operating lease and the transaction is at fair value, any profit or loss is recognised immediately. If the transaction is below or above fair value, the loss or gain is deferred and amortised over the period in which the asset is expected to be used.

SSAP 21 rules apply to sales and leasebacks but the substance of the arrangement would be considered under FRS 5.

The guidance is similar, except that the period of deferral is the shorter of the lease term or the period to the next rent review.

If the transaction results in a finance lease, any excess of sales proceeds over the carrying amount of the asset is deferred and amortised over the lease term. Alternatively the lease payable may be treated as a secured loan.

For a sale and finance leaseback, no profit should be recognised on entering into the arrangement and no adjustment should be made to the carrying value of the asset. The finance received from the lessor is recognised as a liability in accordance with its substance as a loan.

In addition to the differences highlighted above, and despite the basic similarities between the two standards, there are some further differences of detail in the requirements (including key definitions) and some areas where practice has developed in the UK (including where there are no explicit requirements in the standards) e.g., contingent rentals, the treatment of initial direct costs, grant-financed assets held under a lease, and any reassessments or modifications to leases.


Revenue recognition

The requirements of IAS 18 Revenue Recognition (‘IAS 18’), on the recognition of revenue arising from the sale of goods and provision of services, are generally similar to those of FRS 5 App G, although the underlying approach differs and IAS 18 includes more extensive guidance.

Under both IAS 18 and FRS 5 App G revenue should be measured at the fair value of the right to consideration after deducting any amounts collected on behalf of third parties (e.g., taxes and amounts collected on behalf of a principal in an agency relationship) and any discounts given to customers. Where the time value of money is material, the fair value is determined by discounting future expected receipts using an imputed rate of interest.

IFRS UK GAAP

Scope IAS 18 addresses the sale of goods, rendering of services and the use of an entity’s assets yielding interest, royalties and dividends.

In addition to the general principles of revenue recognition, IAS 18 provides specific guidance on measurement of revenue arising under a wide range of different business scenarios, some of which overlap with those discussed in FRS 5 App G.

The scope of FRS 5 App G is narrower and addresses only the supply of goods and services to a customer.

FRS 5 App G sets out basic principles and provides guidance on specific situations, including long-term contractual performance, separation and linking of contractual arrangements (including software and maintenance, inception fees and vouchers), bill and hold arrangements, sales with rights of return and presentation of turnover as principal or agent.

Exchange transactions

A transaction where goods or services are exchanged or swapped for goods or services of a similar nature and value does not generate revenue.

Where they are exchanged for dissimilar goods or services, the transaction generates revenue which should be measured at the fair value of the goods received, (or if not reliably measurable, the fair value of goods or services given up) adjusted by any cash and cash equivalents transferred.

For barter transactions involving advertising, SIC 31 Revenue – Barter Transactions Involving Advertising Services provides similar guidance to UITF 26.

UK GAAP does not include guidance on exchange transactions, therefore practice may vary. Generally, the principles under UITF 26 Barter Transactions for Advertising (‘UITF 26’) may be applied in practice.

UITF 26 states that no turnover should be recognised unless there is persuasive evidence of the value at which the advertising could be sold for cash in a similar transaction.

However, the CA 2006 restriction, in respect of recognition of unrealised profits, discourages the recognition of gains on barter transactions in the profit and loss account.

Recognition of revenue from sale of goods

Revenue shall only be recognised when all the criteria regarding the following have been met:

Transfer of significant risks and rewards of ►ownership;Transfer of the continuing managerial involvement ►and control of goods;The amount of revenue can be measured reliably; ►It is probable that the economic benefits will flow to ►the entity; andThe related costs of the transaction can be ►measured reliably.

Additional guidance regarding accounting for the sale of goods is provided with detailed examples in the IAS 18.

Revenue arising in an exchange transaction with a customer, e.g., on the sale of goods, should be recognised when the entity has the right to consideration in exchange for its performance.

Basic principles underlying revenue recognition are generally similar, but FRS 5 App G is less prescriptive.

Similarities



IFRS UK GAAP

Customer loyalty programmes

Award credits granted as part of a sales transaction are considered a separately identifiable component of the sales transaction and therefore the consideration is allocated to the award credits, measured by reference to their fair values.

Guidance on measuring fair value does not specify whether the fair value or relative fair value of the award credit should be used, but the proportion of vouchers expected to be redeemed should be considered.

Consideration in respect of the award credit is deferred and recognised as revenue on subsequent redemption or when the obligation to supply the award is fulfilled.

There is less detailed guidance under UK GAAP.

Where vouchers are issued revenue should be reported at the consideration received or receivable less the fair value of the awards, having regard to the proportion of the vouchers expected to be redeemed, only where the fair value is significant in the context of the transaction.

Free vouchers distributed independently of a sales transaction do not give rise to a liability, unless products would be sold at a loss, resulting in an onerous contract.

Transfers of assets from customers

IFRIC 18 Transfers of Assets from Customers (‘IFRIC 18’) specifies that where an entity receives an item of P,P&E (or cash for the acquisition or construction of such an item) that must be used to connect the customer to a network and/or to provide ongoing access to a supply of goods or services; the credit arising on initial recognition of that asset represents revenue.

Recognition of the revenue will depend on the nature of the services to be provided to the customer.

There is no similar guidance under UK GAAP. The ASB did not implement IFRIC 18 into UK GAAP.

Interest, royalties and dividends

Interest is recognised using the effective-interest method in IAS 39 Financial Instruments: Recognition and Measurement (‘IAS 39’).

Royalties are recognised on an accruals basis in accordance with the substance of the relevant agreement.

Dividends are recognised when the shareholders’ right to receive payment is established.

Interest income is generally recognised at a constant return on the carrying amount of the asset, except where FRS 26 (same as IAS 39) is applied.

FRS 5 App G does not provide specific guidance in respect of royalties. In practice the general revenue recognition principles would apply.

Dividends are generally recognised as revenue when there is a right to consideration.

Revenue from rendering of services

Where the outcome cannot be measured reliably, revenue is recognised only to the extent of costs recognised that are considered to be recoverable, i.e., no profit is recognised. If it is not probable that the costs will be recoverable, the costs are expensed.

When a specific act is much more significant, recognition of revenue is postponed until that act is executed. Costs are expensed.

The amount of revenue should reflect any uncertainties as to the amount the customer will pay.

Where the right to consideration does not arise until the occurrence of a specified future event or outcome outside the seller’s control, revenue is not recognised until that event occurs.


Employee benefits

IAS 19 Employee Benefits (‘IAS 19’) and FRS 17 Retirement Benefits (‘FRS 17’) provide similar guidance in distinguishing between and accounting for employee pension schemes as defined contribution schemes and defined benefit schemes. Under both GAAPs, the periodic post-retirement benefit cost under defined contribution plans is based on the contribution

payable for the accounting period. The accounting for defined benefit plans has many similarities as well. The defined benefit obligation is the present value of benefits that have accrued to employees through services rendered to that date, based on actuarial methods of calculation.

IFRS UK GAAP

Scope IAS 19 applies to accounting for all employee benefits, except for share-based payments which are in the scope of IFRS 2 Share-based Payments (‘IFRS 2’).

Employee benefits include all forms of consideration given by an entity (or others on its behalf) in exchange for services rendered by employees, and include short-term employee benefits, post-employment benefits, other long-term employee benefits and termination benefits.

FRS 17 only deals with retirement benefits.

FRS 20 (equivalent to IFRS 2) applies to share-based payments.

There is no specific guidance under UK GAAP for other employee benefits, which are generally accounted for in a manner similar to other operating expenses i.e., on an accruals basis.

Short-term compensated absences

Short-term accumulating compensated absences, e.g., accrued holiday pay, are recognised as a liability and measured at the additional amount that the entity expects to pay as a result of unused entitlement that has accumulated at the end of the reporting period.

There is no similar requirement under UK GAAP, where practice varies as to whether accrued holiday pay is recognised.

Defined contribution schemes — discounting

Where contributions payable to a defined contribution plan do not fall wholly due within 12 months after the end of the period in which the employees render services, they should be discounted at a rate based upon high-quality bond market yields.

There is no similar specific requirement under UK GAAP, therefore practices vary.

Recognition of actuarial gains and losses

An entity has the option to recognise actuarial gains and losses immediately either through profit or loss or OCI or by deferral using the corridor approach.

All actuarial gains and losses are recognised in the STRGL in the period in which they arise.

Frequency of valuations and using experts

In determining the present value of defined benefit obligations and the fair value of plan assets, the use of a qualified actuary is encouraged but not required.

Full actuarial valuations by a professionally qualified actuary must be obtained at least every three years, and in the interim periods the actuary must review the most recent actuarial valuation and update it to current conditions.

Defined benefit plans — group schemes

An entity participating in a group plan should be able to obtain information about the plan as a whole (measured using IAS 19 actuarial assumptions). Group plans are not treated as multi-employer schemes under IFRS.

If the group has a contractual agreement or stated policy for charging the net defined benefit cost of the plan to individual group entities, each entity recognises the net defined benefit cost so charged in its financial statements.

If there is no such agreement or policy, the net defined benefit cost is recognised in the separate or individual financial statements of the group entity that is legally the sponsoring employer of the plan. The other group entities recognise a cost equal to their contribution payable in the period in their financial statements.

Where more than one employer participates in a defined benefit scheme (i.e., multi-employer, group scheme or state scheme), FRS 17 permits defined contribution accounting (with appropriate additional disclosures) if the employer’s contributions are set in relation to the current service period only, or the contributions are affected by a surplus or deficit and the employer is unable to identify its share of the underlying assets and liabilities in the scheme on a consistent and reasonable basis.

For group schemes, this opens the possibility that in certain circumstances, no individual entity in the group recognises the defined benefit obligations, although in the group financial statements containing the entities, it is recognised.


Similarities


In addition to the key differences highlighted above, there are slight differences in terminology between the two standards and related guidance (e.g., the definition of expected return or discount rate) which could lead to a different treatment in certain circumstances.

IFRS UK GAAP

Recovery of surplus and minimum funding requirement

Where a surplus exists an entity must assess whether the asset is recoverable. If recoverable, the asset is measured at the lower of:

The asset determined under IFRS (i.e., fair value of i. plan assets plus unrecognised past service costs and actuarial losses (less gains) less the present value of plan obligations; and The sum of the present value of any future ii. refunds or reductions in future contributions, any unrecognised net actuarial losses (corridor method only), and unrecognised past service costs.

IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (‘IFRIC 14’) clarifies when refunds or reductions in future contributions are regarded as available in terms of the recoverability of the asset, and how a minimum funding requirement might affect the availability of reductions in future contributions or give rise to a liability.

The employer should recognise an asset to the extent that it is able to recover a surplus either through reduced future contributions or through refunds from the scheme.

There is no guidance on the treatment of minimum funding requirements or the requirement to consider minimum funding requirements in determining the amounts recoverable from employer contributions.

Defined benefit plans — settlements and curtailments

An entity recognises gains or losses on curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs, based on the values of plan assets and obligation remeasured using actuarial assumptions at that time.Where linked with a restructuring, a curtailment is accounted for at the same time as the related restructuring.

Losses arising on a settlement or curtailment not allowed for in the actuarial assumptions are measured at the date on which the employer becomes committed to the transaction. Gains arising on a settlement or curtailment not allowed for in the actuarial assumptions are measured at the date on which all parties whose consent is required are irrevocably committed to the transaction.

Other long-term employee benefits (other than pension)

The projected-unit method is used to determine the liability in respect of other long–term employee benefits (i.e., benefits which fall due 12 months after the end of the period in which employees rendered the related services). All actuarial gains and losses are recognised immediately in profit or loss.

There are no specific rules in relation to other long-term employee benefits. General practice is to provide for the estimate of the future liabilities and spread the cost over the vesting period.


Government grants

IAS 20 Government Grants (‘IAS 20’) and SSAP 4 Accounting for Government Grants (‘SSAP 4’) provide guidance in respect of government grants and other forms of government assistance. Both standards restrict the recognition of grant income in profit or loss until there’s reasonable assurance of receipt of the grant and the entity’s fulfilment of associated conditions. If the grant

relates to immediate support or compensation for past expenses, it is recognised immediately. Grants are recognised in profit or loss on a systematic basis in the periods in which an entity recognises, as expenses, the related costs for which the grants are intended to compensate.

IFRS UK GAAP

Scope IAS 20 excludes from its scope government assistance provided for an entity that is in the form of benefits available in determining taxable profits (or losses) or which are determined or limited based on an income tax liability, associated with government ownership of the entity, or related to biological assets accounted for at fair value less costs to sell under IAS 41. In general, IAS 20 should not be applied by analogy to non-government grants.

Government grants include a below market interest rate loan.

The scope of SSAP 4 is wider, it includes agricultural grants and may be applied as best practice for accounting for grants and assistance from sources other than government.

SSAP 4 does not address below market interest rate loans.

Criteria for recognition

Government grants are not recognised until there is reasonable assurance that the entity will comply with the conditions attached and that the grants will be received.

Government grants are not recognised in profit or loss until the conditions for receipt have been complied with and there is reasonable assurance that it will be received.

Non-monetary grants

An entity may chose to record the grant at fair value or nominal value of the non-monetary asset received.

Non-monetary grants are measured at the fair value of the assets transferred.

Presentation of a grant related to an asset

On the balance sheet an entity may choose to offset the grant against the carrying amount of the related asset or recognise the grant separately as deferred income and amortise over the useful life of the related asset.

Conversely, where a grant becomes repayable, the entity can either increase the asset’s carrying amount or reduce any deferred income in respect of the grant.

In principle, UK GAAP allows both the treatments allowed under IFRS. However, the Companies Act 2006 prohibits the deduction of a grant amount from the carrying amount of an asset.

Where a grant becomes repayable, an entity is not permitted to increase the carrying amount of the related asset.


Similarities


Foreign exchange

FRS 23 The Effects of Changes in Foreign Exchange Rates (‘FRS 23’) implements IAS 21 The Effects of Changes in Foreign Exchange Rates (‘IAS 21’) guidance into UK GAAP. However, FRS 23 is only applicable to UK companies that apply FRS 26. All other companies apply SSAP 20 Foreign currency translation (‘SSAP 20’) which is the basis for the comparison given below.

Similar to IAS 21 (FRS 23), SSAP 20 requires an entity to determine its main currency, i.e., local currency (IAS 21/FRS 23 uses the term functional currency) and provides guidance as to how this should be determined. Both standards provide guidance as to how entities should translate their transactions and balances denominated in any other currencies (i.e., foreign

currencies) as well as the results and balance of their foreign operations. A foreign currency transaction is translated into the functional/local currency and initially recognised at that amount.

Subsequently, foreign currency balances are translated at closing rates for monetary assets and liabilities (with exchange differences reflected in profit or loss), historical rate for non-monetary items measured at historical cost, and the exchange rate ruling on the date when the fair value was determined for non-monetary assets carried at fair value (where revaluation gains are recognised in OCI/equity so are the related gains exchange differences).

IFRS UK GAAP

Determining functional currency

Functional currency is the currency of the primary economic environment in which the entity operates and that mainly influences labour, material and other costs of providing goods and services.

IAS 21 provides a list of factors to be considered when determining functional currency.

Local currency (under SSAP 20) is the currency of the primary economic environment in which the entity operates and generates net cash flows.

SSAP 20 guidance on determining an entity’s local currency is less prescriptive than IAS 21/FRS 23.

Translation of foreign currency transactions

Foreign currency balances are translated at closing rate for monetary assets and liabilities; historical rate for non-monetary items measured at historical cost; and for non-monetary assets carried at fair value, at the exchange rate when the fair values were determined.

IFRS does not permit the use of a contracted rate or a forward rate under a related or matching forward contract. Derivatives e.g., forward contracts and hedging relationships are dealt with under IAS 39.

A similar requirement, but the use of contracted or forward rates is permitted.

A transaction that is to be settled at a contracted rate is translated at that rate, and where a trading transaction is covered by a related or matching forward contract, the rate of exchange specified in that contract may be used.

Translation to a presentation currency

An entity translates income and expenses for each income statement (i.e., including comparatives) at exchange rates at the dates of the transactions (or an approximation thereof) and assets and liabilities (i.e., including comparatives) at the closing rate at the date of that balance sheet.

Exchange differences are recognised in OCI under a separate component of equity.

There is no concept of presentation currency.

Financial statements are generally prepared in the entity’s ‘local’ currency.

Foreign operation

A foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.

Groups of assets and liabilities accounted for in foreign currencies will not be viewed as a foreign operation.

A foreign enterprise includes a subsidiary, associated company or branch whose operations are based in a country other than that of the investing company or whose assets and liabilities are denominated mainly in a foreign currency.

A foreign branch is either a legally constituted enterprise or a group of assets and liabilities accounted for in foreign currencies.


Similarities


IFRS UK GAAP

Translation of a foreign operation with a non-hyper-inflationary currency

On translation of a foreign operation with a non-hyperinflationary currency into a presentation currency of the parent for the purposes of the group financial statements, similar procedures apply as for the translation into the presentation currency above.

Goodwill and any fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation. They are expressed in the functional currency of the foreign operation and are translated at the closing rate upon subsequent consolidation by the investor.

Two methods of translation are allowed:

The closing-rate method whereby the profit and loss ►account of a foreign operation may be translated using average or closing rates. All assets and liabilities on the balance sheet are translated at the closing date. Exchange differences are recognised in reserves.The temporal method which is similar to the ►translation of the entity’s own foreign currency transactions and balances (see above) is used where the foreign enterprise is closely interlinked with the investing company such that its results are more dependent on the investor’s economic environment.

There is no specific guidance under SSAP 20 in respect of goodwill and fair value adjustments in respect of the foreign operations acquired.

Net investment in a foreign operation – monetary items

In the consolidated financial statements, exchange differences on monetary items which are part of the net investment in the foreign operation (i.e., long term receivables and loans for which settlement is neither planned not likely to occur in the foreseeable future) are recognised in OCI in a separate component of equity and are recognised in the income statement on disposal of the net investment.

In the separate financial statements of the reporting entity and the foreign operations, the exchange differences are recognised in profit or loss.

Exchange differences on long term loans or intercompany deferred trading balances which are intended to be as permanent as equity are treated as part of the net investment in the foreign enterprise and are recognised in reserves in the consolidated financial statements.

In the individual financial statements of the investing company, such exchange differences are taken to reserves, although an alternative treatment is to report such items at historical rate (as if a non-monetary item).

Hedges of net investment in a foreign operation

Net investment hedging can only be applied in the consolidated financial statements. The usual designation, documentation and effectiveness testing requirements apply.

To the extent the hedge is effective, exchange differences on the hedging instrument are taken to a separate component of equity. Any ineffectiveness is recognised immediately in profit or loss.

In the financial statements of the parent, a loan would be accounted for as a fair value hedge of the investment in the subsidiary. Any exchange differences on the loan are taken to profit or loss, but this will be offset by any exchange gain or loss on the investment.

Where certain conditions are met, the cover method permits the exchange differences on foreign currency loans used to finance or to hedge the exchange risk on its investment in foreign enterprises (including permanent as equity loans and deferred trading balances) to be taken to reserves.

This method is also applicable in the parent’s individual entity accounts where a company uses foreign currency borrowings to finance or hedge its foreign equity investments and meets certain conditions.

Disposal of a foreign operation

The cumulative exchange differences that were previously deferred in a separate component of equity shall be reclassified to profit or loss when the gain or loss on disposal is recognised. On disposal of a subsidiary, with loss of control, any exchange differences relating to non-controlling interests are derecognised but not recognised in profit or loss account.

There is no requirement for cumulative exchange differences to be identified in a separate component of equity, nor to be reclassified to profit or loss on disposal, unless where FRS 23 is applied. Where FRS 23 is applied, the rules on recycling exchange differences differ from those under IAS 21 in certain respects.

IAS 29 (FRS 24 under UK GAAP) Financial Reporting in Hyper-inflationary Economies (‘IAS 29’) and UITF 9 Accounting for Operations in Hyper-inflationary Economies (‘UITF 9’) deal with the translation of results and balances of an entity whose functional currency is a hyper-inflationary currency. There are different rules under IAS 29 and UITF 9 for the translation of results and balances of a foreign operation whose currency is the currency of a hyper-inflationary economy. .

Foreign exchangeSignificant differences (cont’d)


Borrowing costs

IAS 23 Borrowing Costs (‘IAS 23’) addresses the treatment of borrowing costs directly attributed to the acquisition, construction or production of a qualifying asset (i.e., an asset that necessarily takes a substantial period of time to get ready for its intended use or sale). Accounting Regulations under the Companies Act 2006 (‘CA 2006’) allow capitalisation of finance costs. FRS 15 addresses the capitalisation of finance costs relating to tangible fixed assets where an entity takes the option to capitalise finance costs as permitted under CA 2006. Thus under IFRS, entities must capitalise borrowing costs that meet certain criteria while under UK GAAP capitalisation is optional.

IFRS and UK GAAP address the treatment of borrowing costs on

specific and general borrowings. Where general borrowings are used, an appropriate capitalisation rate based on the weighted average of the relevant actual borrowing costs should be used. In both cases similar guidance is provided on the timing of commencement of capitalisation of borrowing costs, its suspension during extended periods in which active development is suspended and when an entity should stop capitalisation (when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete).

Although the rules on capitalisation when applied under IFRS and UK are similar, there may be differences in the detailed application, some of which are highlighted below.

IFRS UK GAAP

Scope A qualifying asset may be any asset (including property, plant and equipment, intangible assets, investment properties and inventories) except that capitalisation is not mandatory for a qualifying asset measured at fair value or inventories that are manufactured or otherwise produced, in large quantities on a repetitive basis.

The scope of FRS 15 only applies to tangible fixed assets although similar guidance may be applicable to other assets where capitalisation would be permitted under the CA 2006.

Capitalisation of borrowing costs

All borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised.

Where specific borrowings are used, actual borrowing costs incurred, less any investment income on temporary investment of funds, are capitalised.

Capitalisation of finance costs is a policy choice as permitted under CA 2006.

In practice, finance costs are often expensed.

While investment income is not explicitly deducted in determining finance costs to be capitalised, FRS 15 requires that finance costs to be capitalised are the actual costs incurred in respect of the expenditure on the asset.

Capitalisation rate

The capitalisation rate is the weighted average of the borrowing costs applicable to borrowings outstanding in the period other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Borrowing costs capitalised shall not exceed the borrowing costs incurred in the period.

The capitalisation rate is based on the weighted average rates applicable to general borrowings outstanding in the period. General borrowings under FRS 15, however, explicitly exclude borrowings for other specific purposes, e.g., acquiring other tangible assets or loans to hedge foreign investments.


Similarities


Consolidated and separate financial statements

IAS 27 Consolidated and Separate Financial Statements (‘IAS 27’) and FRS 2 Accounting for Subsidiary Undertakings (‘FRS 2’) provide similar guidance on the preparation of consolidated financial statements. While the detailed conditions for exemption from preparing consolidated financial statements differ between FRS 2 (which are based on the CA 2006) and IAS 27, for companies preparing financial statements under EU adopted IFRS (rather than as issued by the IASB), the requirements to prepare consolidated financial statements are as set out in company law.

The determination of whether or not entities are consolidated by a reporting entity is based on control, although some differences exist in the definition of control. This difference in definition will often not result in a practical effect.

Under both IAS 27 and FRS 2 a subsidiary’s financial statements should be prepared using consistent accounting policies and as of the same date as the financial statements of the parent unless it is impracticable to do so. The basic consolidation procedures are also similar under the two standards.

IFRS UK GAAP

Scope IAS 27 specifies the treatment to be applied in consolidated financial statements and in accounting for investments in subsidiaries, jointly controlled entities, and associates in the individual financial statements of the parent of the group, investor or venturer.

FRS 2 applies to consolidated financial statements and to the individual financial statements of a parent that has taken the exemption not to prepare consolidated financial statements. The treatment of investments in subsidiaries, associates and joint ventures is addressed under the CA 2006.

Control Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Where potential voting rights exist that are currently exercisable or convertible, an investor is required to consider all facts and circumstances but is not required to consider the intention of management and the financial ability to exercise or convert such rights.

Subsidiary undertakings include undertakings where an investor has actual exercise of dominant influence or control over the undertaking.

There is no additional guidance therefore where potential voting rights exist, the general definition of a subsidiary would be considered (i.e., not just currently exercisable but also the intention and ability to exercise).

Special-purpose entities

A special-purpose entity (SPE) is consolidated when the substance of the relationship is that the SPE is controlled by the entity.

Control may exist even if the entity owns little or no equity in the SPE and may arise through predetermination of the SPE’s activities (operating on autopilot).

SIC 12 Consolidation — Special Purpose Entities (‘SIC 12’) provides further guidance on determining whether an entity has control over an SPE.

A quasi-subsidiary undertaking is a company, trust, partnership or other vehicle which (though not fulfilling the definition of a subsidiary undertaking) is directly or indirectly controlled by the reporting entity and gives rise to benefits no different from those that would arise if the vehicle was a subsidiary.

A quasi-subsidiary undertaking should be consolidated (unless it is held exclusively for resale and has not previously been consolidated).

Exclusion of subsidiaries from consolidation

Consolidated financial statements should include all subsidiaries of the parent.

Where a subsidiary is classified as held for sale, it is still consolidated, however IFRS 5 measurement rules apply.

Subsidiaries must be excluded from consolidation where severe long-term restrictions substantially hinder the exercise of the rights of the parent over the assets or management of the subsidiary, or the parent’s interest is being held exclusively with a view to resale (provided the subsidiary has not been consolidated previously).


Similarities


IFRS UK GAAP

Employee Share Option Plans/Employee Benefit Trusts (ESOPs/ EBTs)

A sponsoring company should consolidate an ESOP/EBT that it controls.

In practice, some entities include the ESOP/EBT within the individual financial statements of the sponsoring company in addition to consolidation in the group financial statements.

If the shares held by the ESOP are those of the group’s parent, they should be accounted for as treasury shares.

The sponsoring company of an ESOP/EBT should recognise the assets and liabilities of the trust in its own financial statements whenever it has de facto control of those assets and liabilities.

Consolidation — coterminous periods

If it is impracticable to use subsidiary financial statements prepared at the same reporting date, non-coterminous subsidiary financial statements may be used provided they are prepared within three months of the parent’s reporting date, are for the same length of period and appropriate adjustments are made for significant transactions or events between the subsidiary’s and parent’s reporting dates.

The use of non-coterminous subsidiary financial statements (subject to similar appropriate adjustments for significant transaction/events) is permitted but only where the subsidiary’s reporting period end is within three months before the parent’s reporting date.

Non-controlling interest (NCI)

NCI is the equity in a subsidiary not attributable to owners of the parent. It comprises the amount of NCI identified in a business combination, plus the NCI’s share of changes in equity since the business combination.

NCI is a wider concept than minority interest and would include share options or the equity component of convertible loans issued by a subsidiary. However, the proportion of profit or loss and changes in equity allocated to NCI are determined based on present ownership interest.

The policy adopted by an entity on initial recognition of NCI (i.e., fair value of the NCI interests or the NCI’s proportionate share of the fair value of the identifiable net assets) would determine the amount of NCI in subsequent periods. The choice is made on a transaction by transaction basis.

Minority interest (MI) is the interest in a subsidiary undertaking included in the consolidation that is attributable to the shares held by, or on behalf of, persons other than the parent and its subsidiary undertakings.

There is no option to fair value MI at the time of acquisition and changes in equity allocated to MI are determined based on present ownership interest.

Losses attributable to NCI

Total comprehensive income is attributed to the owners of the parent and to the NCI, even if this results in the NCI having a deficit balance.

Losses in excess of the MI’s share in the subsidiaries are attributable to the MI except that the group should make a provision to the extent it has any commercial or legal obligation to provide finance that may not be recoverable in respect of those losses.


Significant differences (cont’d)

Consolidated and separate financial statements

IFRS UK GAAP

Reduction in ownership without losing control (partial disposals)

The carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative ownership interests in the subsidiary. Any difference between such amount and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent.

The proportionate share of the cumulative exchange differences recognised in OCI is reattributed to the NCI in the foreign operation where the subsidiary is a foreign operation. Similar adjustments are needed for other elements of OCI.

The difference between the carrying amount of the subsidiary’s net assets (including any unamortised goodwill) attributable to the group’s interest before and after the reduction, together with any proceeds received, are recognised in the group profit or loss.

Where FRS 23 is not applied, exchange differences related to foreign operations are not recycled. Where FRS 23 is applied the requirements for recycling differ to those in IAS 21. Recycling of other elements recognised in the STRGL is not explicitly addressed.

Loss of control of a subsidiary

A gain or loss is recognised as the net effect of:

The carrying amount of the subsidiary’s net assets ►including goodwill;The carrying amount of any non-controlling interest; ►Fair value of any investment retained as at date of ►loss of control; andAny gains and losses reclassified to profit or loss ►from OCI (including exchange differences).

The gain or loss on disposal is calculated by comparing:

The carrying amount of the group’s share of the ►net assets of the subsidiary undertaking (including unamortised goodwill and goodwill previously eliminated against reserves) before disposal; with Any remaining carrying amount attributable to the ►group’s interest after the cessation together with any proceeds received.

Where FRS 23 is applied, the requirements for recycling foreign exchange differences differ to IAS 21 notes.

Accounting for investments in the separate financial statements

Interests in subsidiaries, jointly controlled entities (JCEs) and associates are carried either at cost (except if classified as held for sale) or in accordance with IAS 39 rules.

Each category of investments (e.g., all subsidiaries), should be treated consistently.

Where investments in JCEs and associates are carried at fair value under IAS 39 (permitted for certain investment entities) in the consolidated financial statements, they must also be accounted for in the same way in the separate financial statements.

In the parent’s individual accounts, CA 2006 allows investments to be carried at:

Cost less impairment; ►Valuation (using the alternative accounting rules, ►with revaluation changes taken to reserve); or►In accordance with FRS 26 where applied (mainly ►as available-for-sale financial assets given that fair value through profit or loss classification is permitted only in rare circumstances).


Interests in associates and joint ventures

Interest in associatesIAS 28 Associates (‘IAS 28’) and FRS 9 Associates and Joint Ventures (‘FRS 9’) provide similar guidance on the accounting for an investor’s interest in an associate. Generally, both use the equity method whereby the investment in an associate should initially be recognised at cost, and adjusted thereafter for the post-acquisition changes in the investor’s share of net assets of the investee.

Any profit or loss on a transaction with an associate is recognised only to the extent of an unrelated investor’s interest in the associate (i.e., the investor’s share is eliminated). Distributions received from an investee reduce the carrying amount of the investment.

Both standards require that the most recently available financial statements of the associate prepared using consistent accounting policies are used in applying the equity method.

On disposal of the investment or where the investor’s interest ceases to be an associate and becomes an investment under IAS 39, the gain or loss arising is recognised in the income statement.

The carrying amount of the interest in associates is presented as one line on the statement of financial position (or balance sheet) and the investor recognises its share of the profit or loss in the investor’s profit or loss as one line item.

Interest in joint venturesIAS 31 Interests in Joint Ventures (‘IAS 31’) and FRS 9 provide guidance on accounting for investors’ interests in various forms of jointly controlled arrangements which may or may not be in the form of a legal entity (i.e., company, partnership etc.).

Under both standards the accounting treatment is prescribed based on the type of joint venture. An investor in a joint venture applies the gross equity method under UK GAAP (similar to equity method with expended disclosures on the face of the primary finances statements). Under IFRS, an investor in a jointly controlled entity, may choose to apply the equity method.

In accounting for the venturer’s interest in jointly controlled operations (i.e., not in an entity) under both standards, the general rule is that each venturer accounts for the assets that it controls, the liabilities it incurs and its share of the income and expenses of the jointly controlled operations. However differences may exist in the detailed application of the rules to specific joint arrangements. In both cases, the most recently available financial information prepared using consistent accounting policies is used.

IFRS UK GAAP

Scope The requirements to apply the equity method for an interest in an associate, or the equity method or proportionate consolidation for a joint venture do not apply:

If the interest is classified as held for sale; ►Where the investor is also a parent exempt from ►consolidation (or is not a parent but meets the same criteria for exemption); or If the interest is held by a venture capitalist, mutual ►funds, unit trust funds and similar entities and the interest is measured at fair value through profit and loss.

Equity accounting is only required in consolidated financial statements, but FRS 9 requires information using equity method where the investor does not prepare consolidated accounts.

There is no exemption from equity accounting when an interest in an associate or a joint venture is held for sale.

Investment funds account for all investments held as part of their investment portfolio, in the same way (i.e., at cost or market value using a true and fair override) including where there is significant influence or joint control.


Similarities


Interests in associates and joint ventures

IFRS UK GAAP

Definition of an associate

An associate is an entity (other than a subsidiary or a joint venture) over which the investor has significant influence.

There is no requirement for the investor to hold a participating interest.

Significant influence is presumed to exist if the investor owns (directly or indirectly) 20% or more of the voting rights of an entity.

The effect of exercisable or convertible rights to shares held by the investor should be considered, but not management’s intention and/or the entity’s financial ability to exercise such rights or options.

An associate is defined as an entity (other than a subsidiary) in which the investor has a participating interest and exercises significant influence.

A participating interest held in shares is a beneficial interest held in another entity on a long-term basis for the purpose of securing a contribution to the investor’s activities by the exercise of control or influence arising from, or related to, that interest.

It is presumed under company law that a holding of 20% or more of the shares will be a participating interest, and a holding of 20% or more of the voting rights will be presumed to exercise a significant influence, unless the contrary is shown.

The investor’s share of the associate and any changes are determined based on present ownership interests and do not reflect the possible exercise or conversion of potential voting rights.

In determining the most appropriate investor’s share, options or interests convertible to shares may be taken into account depending on the conditions attached to them, and the substance of the rights held by the investor.

Types of joint ventures

The three categories of joint ventures are:

Jointly controlled operations (JCO); ►Jointly controlled assets (JCA); and ►Jointly controlled entities (JCE). ►

Activities that have no contractual agreement to establish joint control are not joint ventures.

FRS 9 identifies the following two main categories:

Joint ventures (JV); and ►Other joint arrangements which include: ►

A joint arrangement that is not an entity; and ►

A structure with the form but not the substance ►of a JV.

Accounting for JCEs

JCEs are accounted for using either:

The equity method (same as for associates); or i. Proportionate consolidation, whereby the venturer ii. recognises its share of each of the assets that it controls jointly, liabilities for which it is jointly responsible, and the income and expenses of the jointly controlled entity.

The procedures for proportionate consolidation are similar to consolidation of subsidiaries.

JVs are accounted for using the ‘gross equity method’ only, which is the same as the equity method for associates (including amortisation of related goodwill) except for the gross presentation in the balance sheet and profit and loss account.

Proportionate consolidation is not permitted.

Goodwill amortisation

Goodwill is not amortised under the equity method.

Where proportionate consolidation is applied for a JCE, goodwill is not amortised but is subject to annual impairment testing.

The carrying amount of the investment in the JV or associate is adjusted in each period by any amortisation or writing off of goodwill related to the investment.

Loss-making associates and JCE

Under the equity method, once an investor’s interest in a JCE (including long term interests that are in substance part of the interest) or associate is reduced to zero, it does not recognise its share of further losses unless where there is a legal or constructive obligation or the investor has made payments on behalf of the associate.

Under the proportionate consolidation method, the investor’s share of JCE’s losses is recognised in full.

The investor should continue to use the equity/gross equity method even if this results in an interest in net liabilities, unless there is sufficient evidence that an event has irrevocably changed the relationship between the investor and its investee, marking its irreversible withdrawal from its investee as its associate or JCE.

Significant differences (cont’d)


IFRS UK GAAP

Gains or loss on an investment ceasing to be an associate of JCE

An investor recognises, as a gain or loss, the difference between:

The sum of the fair value of the retained investment ►plus any proceeds from the disposal; andThe carrying amount of the investment at the date ►when significant influence or joint control ceased.

Gains or losses previously recognised in OCI, including foreign exchange differences, are reclassified to the income statement.

If an investor’s proportionate ownership interest is reduced, but there is no loss of significant influence or joint control, the proportionate interest is reclassified through OCI.

The profit or loss is calculated as:

The sales proceeds; less ►The sum of the carrying amount of the investor’s ►share of net assets when the significant influence or joint control ceases and any unamortised goodwill.

There is no specific requirement to transfer gains and losses (e.g., exchange differences) from equity to profit or loss. Where FRS 23 is applied the rules for recycling exchange differences are different to IFRS rules.

There is no similar requirement under UK GAAP.

Impairment of associates and JCEs

After application of the equity method, including recognising any additional losses where applicable, the investor applies the indicators in IAS 39 to determine whether further impairment is required.

If there are impairment indicators (under IAS 39) the entire investment is tested for impairment separately (including goodwill), using the rules in IAS 36, for each investment unless the JCE or associate does not generate cash flows largely independent of those of the other assets of the entity.

Value in use may be determined either by considering the entity’s share of the net present value of the JCE or the associate’s cash flows, or the present value of the expected dividend cash flows (in both cases together with the expected proceeds from ultimate disposal).

Investments in associates and JVs are reviewed for impairment when circumstances exist that indicate the investment may be impaired under FRS 11 Impairment of Fixed Assets and Goodwill (‘FRS 11’) rules. If impaired, such goodwill is written down to its recoverable amount.

Where FRS 26 is applied, financial assets that are not part of the investment in the associate (e.g., loans to associates) are tested for impairment separately. The rules under the CA 2006, otherwise, apply to such balances depending on whether they are classified as current assets or fixed asset investments.


Impairment of assets

IAS 36 Impairment of Assets (‘IAS 36’) and FRS 11 Impairment of Fixed Assets and Goodwill (‘FRS 11’) specify the timing and process for impairment testing as well as the treatment of impairment charges. However, the impairment of certain types of assets, e.g., financial assets (IAS 39/FRS 26) and biological assets (IAS 41) are addressed in those standards. This comparison covers the IAS 36 and FRS 11 impairment rules only. Both standards require that assets should be tested for impairment when events or changes in circumstances indicate that the carrying amount of the assets (or the cash generating unit/income generating unit of which the assets are part) may not be recoverable. They also specify the

circumstances in which a mandatory impairment review is required (not identical). They provide similar guidance on the indicators of potential impairment. Where impairment exists, both standards require that the carrying amount of the assets (or group of assets) should be written down to the recoverable amount, determined as the higher of the value in use and fair value less costs to sell or net realisable amount under UK GAAP). Cash flow projections used for impairment review should be based on the most recent management forecasts based on reasonable and supportable assumptions generally over a period of no longer than five years, unless a longer period can be justified.

IFRS UK GAAP

Timing of impairment reviews

An assessment as to whether impairment indicators exist must be performed at the end of each reporting period. If impairment indicators exist, an impairment review should be performed.

Annual impairment testing is required for goodwill and for an intangible asset with an indefinite life or an intangible asset not yet available for use.

Fixed assets and goodwill are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the fixed asset or goodwill may not be recoverable.

Annual impairment reviews are required where the useful economic life of an intangible asset or goodwill exceeds 20 years from initial recognition, or is indefinite. Annual impairment reviews are also required for tangible fixed assets where no depreciation is charged (as immaterial) or where the remaining life exceeds 50 years.

For intangible assets or goodwill with useful lives of 20 years or less from initial recognition, ‘first year review’ is required, at the end of the first year after acquisition.

Cash vs. Income-generating units

A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash flows from other assets or groups of assets.

An income-generating unit (IGU) is a group of assets, liabilities and associated goodwill that generates income that is largely independent of the reporting entity’s other income streams.

Allocating goodwill to CGUs

Each unit or group of units to which goodwill is allocated shall represent the lowest level within the entity at which the goodwill is monitored for internal management purposes and not be larger than an operating segment as defined in IFRS 8 Segment Reporting (‘IFRS 8’) before aggregation.

If they were acquired as part of the same investment and relate to similar parts of the business, units may be combined in assessing recoverability of the related goodwill.

Where assessed on a combined basis, the IGUs are reviewed individually first, and then the combined unit is reviewed to assess recoverability of goodwill.

Disposals and reorganisations of CGUs containing goodwill

The amount of goodwill is measured on the basis of the relative values of the operations disposed of and retained unless another method better reflects the goodwill associated with the disposed operation.

The requirements are similar when an entity reorganises its reporting structure so as to change the composition of the units to which goodwill is allocated.

With the exception of the treatment of an acquired operation merged with an existing operation (see below), there is no explicit guidance on how goodwill relating to the disposed operation, or on a reorganisation is determined.


Similarities


IFRS UK GAAP

Acquired business merged with existing business

There is no requirement to calculate any notional internally generated goodwill within the existing business. The goodwill acquired is allocated as above.

A notional carrying amount of internal goodwill existing at the date of the ‘merger’ is determined and added to the carrying amount of the combined IGU for the purpose of performing impairment reviews.

Any impairment identified subsequent to the merger is allocated pro-rata to the existing and the acquired businesses and only the portion relating to the acquired goodwill (and any intangible or fixed assets) is recognised in the financial statements.

Cash flows used in the value-in-use test

Future cash flows should be estimated for the asset (or CGU) in its current condition and should exclude cash flows expected to arise from a future restructuring, to which an entity is not yet committed for improving or enhancing performance.

Foreign currency cash flows are estimated in the currency in which they are generated and discounted using a discount rate appropriate to that currency, and then the present value is translated at the spot rate at the date of the value-in-use calculation.

For newly acquired IGUs, FRS 11 permits the costs and benefits of future reorganisations and related capital expenditure anticipated at the time of performing the first full year review, and which are consistent with the budgets and plans at the time, in that and subsequent impairment reviews, to the extent that the investment or reorganisations are still to be incurred. Failure to undertake these per planned schedule, however, may indicate impairment and that these should be reserved for the cash flow forecasts.

There is no specific guidance on foreign currency cash flows.

Allocation of an impairment loss for a CGU/IGU

Impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets pro-rata on the basis of their relative carrying amounts.

The carrying value of each asset must not be reduced below the higher of its fair value less costs to sell, its value in use or zero.

Impairment losses are allocated first to goodwill, then to intangible assets capitalised in the unit and then pro-rata to other tangible fixed assets.

An intangible asset with a readily ascertainable market value (which will rarely be the case) or whose net realisable value can be measured reliably should not be written down below its net realisable value.

Reversal of impairment losses

An impairment loss is only reversed if there has been a change in the estimates used to determine the recoverable amount as a result of a reversal of the factors that caused the original impairment. Reversal of goodwill impairment losses is not permitted.

For assets other than goodwill, the reversal of an impairment loss is recognised as a gain in income unless the asset is carried at a revalued amount in accordance with another standard, in which case it is treated as a revaluation increase in accordance with that standard.

The reversal is allocated pro-rata to the assets, other than goodwill.

Impairment losses on goodwill and intangible fixed assets are reversed if, and only if, there is an external event reversing the impairment in an unforeseen way or the loss arose on an intangible with a readily ascertainable market value.

If the recoverable amount of an asset increases because of a change in economic conditions or expected use of the asset, the reversal of impairment is recognised in profit or loss to the extent that the original impairment loss (adjusted for subsequent depreciation) was recognised in profit or loss.

For a revalued asset, any remaining balance of a reversal is recognised in the STRGL.


Provisions, contingent liabilities and contingent assets

FRS 12 Provisions, Contingent Liabilities and Contingent Assets (‘FRS 12’) implements guidance under IAS 37 Provisions, Contingent Liabilities and Contingent Assets (‘IAS 37’) in UK GAAP. FRS 12 is virtually identical to IAS 37. Both standards require an entity to recognise a provision if, and only if, a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), payment is probable (‘more likely than not’) and the amount can be estimated reliably.

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date; that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party.

In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events.

Restructuring provisions should include only direct expenditures caused by the restructuring, not costs that are associated with the ongoing activities of the entity.

Contingent liabilities and contingent assets should not be recognised, but should be disclosed unless the possibility of an inflow or outflow of economic resources is remote. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

IFRS UK GAAP

Future operating losses

Provisions should not be recognised for future operating losses.

Generally provisions for future operating losses are not permitted.

However, FRS 3 Reporting financial performance includes an exception that where a decision has been made to sell or terminate an operation, any consequential provisions should reflect the extent to which obligations have been incurred that are not expected to be covered by the future profits of the operation. The provision should cover only the direct costs of the sale or termination and any operating losses up to the date of sale of the termination (after taking into account the aggregate profit, if any, from the future profits of the operation).

Provisions are only made when the entity is demonstrably committed to the sale or termination of the operation at the balance sheet date (which requires a binding sale agreement).


Similarities


Intangible assets

The definition of intangible assets ‘identifiable non-monetary assets without physical substance’ is superficially similar under IAS 38 Intangible Assets (‘IAS 38’) and FRS 10 Goodwill and Intangible (‘FRS 10’), but there is much greater recognition of intangible assets under IFRS than has been traditionally the case under UK GAAP, which has a more restrictive definition and recognition criteria.

The recognition criteria under both standards require that there be probable future economic benefits and costs that can be reliably measured. Intangible assets acquired as part of a business combination may be recognised separately from goodwill if certain conditions are met. With the exception of development costs (under SSAP 13 ‘Research and development’) or the ‘development phase’ of an internally developed intangible

asset under IAS 38 which meet strict criteria, internally developed intangibles are not recognised as an asset. In particular, research costs (or costs of the research phase of an internally developed intangible asset), and assets such as internally generated brands, titles and customer lists are not capitalised.

Intangible assets are initially recognised at cost and are subsequently accounted for using either the cost model or the revaluation model (permitted only in the rare circumstances where the intangible has a readily ascertainable market value). There are similar requirements under both IAS 38 and FRS 10, except that IAS 38 does not permit the amortisation of goodwill. Under both standards, intangible assets are amortised over their useful lives, where finite (or if it is indefinite, not amortised).

IFRS UK GAAP

Recognition – intangible assets

The criteria for recognition of intangible assets do not require the asset to be separable. An asset is identifiable if it is separable or it arises from contractual or legal rights.

An asset must be controlled. While it is more difficult in the absence of legal rights, legal enforceability is not a necessary condition for control.

To be recognised as an intangible asset, an asset must be identifiable i.e., capable of being disposed of separately, without disposing of a business of the entity, and controlled by the entity though custody or legal rights.

IAS 38 permits customer relationships to be identified as an intangible asset, where the relevant recognition criteria are met.

A portfolio of clients is not an intangible asset, in the absence of legal rights.

Computer software integral to the related hardware is classified as P,P&E. Computer software not integral to the related hardware is an intangible asset.

Software development costs directly attributable to bringing a computer system or other computer-operated machinery into working condition are treated as part of the cost of the related hardware, not a separate intangible asset.

Recognition — intangible assets acquired in a business combination

For intangible assets acquired as part of a business combination, the probability and reliability of measurement criteria for recognition are deemed always to be met.

There is no restriction on the amount recognised as fair value, if it would create or increase ‘negative goodwill’.

An intangible asset acquired as part of the acquisition of a business should be capitalised separately from goodwill only if its value can be measured reliably on initial recognition.

Unless the intangible asset has a readily ascertainable market value, the fair value should be limited to an amount that does not create or increase negative goodwill on the acquisition. Otherwise, the intangible asset is subsumed in goodwill.

Recognition – internally developed intangible assets

An intangible asset arising from the development phase of an internal project must be capitalised if certain criteria are met.

Where certain criteria (similar, but not identical to IFRS criteria) are met, an entity may capitalise development expenditure.

Goodwill amortisation and impairment

Amortisation of goodwill is not permitted, instead annual impairment testing is required.

Reversals of goodwill impairment are not permitted.

Goodwill is amortised over its useful economic life.

Annual impairment reviews are required where the useful economic life of goodwill exceeds 20 years or is indefinite.

Reversals of impairment are permitted only in restrictive circumstances.


Similarities


Financial instruments: recognition and measurementIn the UK FRS 26 Financial Instruments: Recognition and Measurement (‘FRS 26’) which is equivalent to IAS 39 Financial Instruments: Recognition and Measurement (‘IAS 39’) is mandatory for listed entities (i.e., those with securities admitted to trading on a regulated market) and entities that apply the fair value accounting rules in the CA Act 2006 only, although other entities can choose to apply it. For all other entities limited guidance is available under FRS 4 Capital Instruments (‘FRS 4’) on equity and debt instruments and the rules set out in CA 2006 specifies the accounting rules for investments. FRS 5 Reporting the Substance of Transactions (‘FRS 5’) principles also apply

to the recognition and derecognition of financial assets and liabilities.

IAS 39 and FRS 26 specify the criteria for the classification of financial assets and financial liabilities into the various categories and the basis of accounting under those categories. Generally financial instruments are recognised initially at fair value, plus transactions costs (if the financial instrument is not carried at fair value through profit or loss) and are subsequently measured either at fair value or at amortised cost using the effective interest rate method.

IFRS UK GAAP

Scope IAS 39 applies to all types of financial instruments, subject to certain scope exclusions, e.g., interests in shares of subsidiaries, associates and joint ventures; rights and obligations under lease and insurance contracts; employee benefits; and share-based payments.

IAS 39 applies to contingent consideration.

The scope exemptions under FRS 26 are similar to those in IAS 39, except that FRS 26 does not apply to contingent consideration. Instead, the rules in FRS 7 Fair Values in Acquisition Accounting (‘FRS 7’) apply. Changes to contingent consideration are reflected as adjustments to goodwill.

For entities that do not apply FRS 26, the guidance available under FRS 4 and CA 2006 is very limited and would not cover certain financial instruments, e.g., derivatives and embedded derivatives.

Classification and measurement of financial assets and financial liabilities

IAS 39 provides detailed criteria for classification of financial assets and liabilities.

There are four possible classifications of financial assets:

Available-for-sale financial assets; ►Loans and receivables*; ►Held-to-maturity investments*; and ►Financial assets at fair value through profit or loss ►(FVTPL).

Financial liabilities can be classified as:

At amortised cost*; or ►Financial liabilities at FVTPL. ►

Financial instruments are initially measured at fair value plus transaction costs (if the financial instrument is not carried at FVTPL), i.e., available-for-sale financial assets are measured using the effective interest rate method first, and monetary items denominated in a foreign currency are retranslated, with adjustments recognised in profit or loss. However, subsequent fair value movements are recognised in other comprehensive income.

The instruments marked * are measured at amortised cost using the effective interest rate method.

All other financial assets and financial liabilities are measured at fair value.

Specific rules for reclassification of financial instruments also apply.

No such classification of financial assets and liabilities exists except where FRS 26 (rules are the same as in IAS 39) is applied. For financial liabilities, FRS 4 requires that immediately after issue, debt is stated at the net proceeds, being the fair value of the consideration received after deduction of issue costs. In some cases (e.g., interest free term loans), this will not be the same as the fair value of the financial liability itself, if determined under IAS 39/FRS 26.

Often, debt financial assets are accounted for in a similar way (the mirror image to the treatment prescribed by FRS 4 for debt liabilities).

The Accounting Regulations under the CA 2006 on measurement of investments require that fixed asset investments may be carried:

At cost less impairment; or ►At valuation (using the alternative accounting rules). ►

Current asset investments may be included at the lower of cost and net realisable value (or current cost under the alternative accounting rules).

CA 2006 generally permits financial instruments to be reported at fair value (using the fair value accounting rules) although there are restrictions on which financial instruments may be accounted for using the fair value accounting rules.


Similarities


IFRS UK GAAP

Recognition/ derecognition of financial assets and liabilities

A financial liability or a part of it should be derecognised when it is extinguished, i.e., the obligation specified in the contract is discharged, cancelled or expires.

IAS 39 has complex rules for derecogition of financial assets which differ in a number of ways from UK GAAP.

Linked presentation is not permitted under IAS 39.

There is no specific guidance on derecognition of financial liabilities under FRS 5. FRS 5 adresses the recognition and derecognition of financial assets for those entities not applying FRS 26.

FRS 5 provides for a linked presentation for certain types of ‘ring-fenced’ financing (not permitted under FRS 26).

Derivatives Derivative financial instruments are recognised and measured at fair value.

An entity should separate and account for an embedded derivative separately from the host contract if certain criteria are met i.e., depending on whether or not they are closely related.

Except where FRS 26 is applied, there is no requirement to recognise derivative financial instruments, although if loss making and not hedged, a provision would be required under FRS 12.

Except where FRS 26 is applied, there is no requirement to separate embedded derivatives from host contracts.

Exchange and modification of financial liabilities

An exchange between an existing borrower and lender of debt instruments with substantially different terms is accounted for as an extinguishment of the original liability and the recognition of a new financial liability (i.e., at fair value).

Similarly a substantial modification of the terms of an existing financial liability or a part of it shall be accounted for as an extinguishment.

Except where FRS 26 is applied , gains or losses arising on the early repurchase or settlement of debt are recognised in the profit and loss account in the period during which the repurchase or early settlement is made.

There is no specific guidance in FRS 4 or FRS 5 on exchanges and modifications.

Extinguishing financial liabilities with equity instruments (IFRIC 19)

Equity instruments issued as consideration to extinguish a financial liability in a debt-equity swap are measured at their fair value (or where this cannot be reliably measured, the fair value of the liability extinguished) except in certain specific circumstances.

The difference between the carrying amount of the liability and the consideration paid is recognised in profit or loss.

For entities applying FRS 26, UITF 47 Extinguishing Financial Liabilities with Equity Instruments (‘UITF 47’) is the same as IFRIC 19.

Entities not applying FRS 26 may simply recognise the carrying amount of the liability foregone in equity.

Allocation of finance costs

Financial instruments at amortised cost are measured using the effective interest rate method.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (considering all contractual terms but not future credit losses) through the expected life of the financial instrument or, where appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.

Where FRS 26 is not applied, finance costs of debt are allocated to periods over the term of the debt at a constant rate on the carrying amount.

Where the amount of payments required by a debt instrument is contingent on uncertain future events such as changes in an index, those events are taken into account in calculating finance costs and the carrying amount of debt once they have occurred.


IFRS UK GAAP

Impairment of financial assets

An entity must assess at the end of each reporting period whether there is any objective evidence of impairment of a financial asset or group of financial assets.

Impairment charges for financial assets classified as loans and receivables, or held to maturity are measured as the difference between the asset’s carrying amount and the present value of the estimated future cash discounted using the original effective interest rate and are recognised immediately in profit or loss.

If there is a decline in fair value of an available-for-sale financial asset and there is objective evidence of impairment the impairment loss (and any cumulative amounts previously recognised in OCI) are recognised in profit or loss.

Reversal of impairment is permitted except for unquoted equity instruments carried at cost less impairment (because their fair value cannot be reliably measured).

Where FRS 26 is applied, the rules are the same as in IAS 39.

FRS 11 impairment rules apply to investments in subsidiaries, associates and joint ventures in individual financial statements, but not to other financial assets.

Under company law, where the historical cost rules are applied, recognition of impairment is mandatory only where there is a permanent diminution in value, although entities may recognise a diminution in value which is not permanent.

Hedge accounting

IAS 39 includes detailed requirements on what can qualify as hedged items and hedging instruments, when hedge accounting can be applied and the accounting for different types of hedges, i.e., fair value hedges, cash flow hedges, and hedges of a net investment in a foreign operation, and the requirements for discontinuing hedge accounting.

The ineffective portions of hedges are always recognised in profit or loss.

Where FRS 26 is not applied, generally commercial hedging arrangements are accounted for when the hedged transaction occurs i.e., hedges are not required to be recognised and revalued at each reporting date. Where FRS 26 is applied, the rules are the same as IAS 39.

Distributions of non-cash assets to owners (IFRIC 17)

A liability to distribute non-cash assets to owners should be measured at the fair value of the assets to be distributed.

If the owners have the option of receiving either a non-cash asset or cash, the dividend payable is estimated considering the fair value and probability of the owners selecting each alternative.

On settlement the difference between the carrying amount of the dividend payable and that of the assets distributed is recognised in profit or loss.

No specific guidance exists under UK GAAP in respect of payment of non-cash dividends.

Generally, these would be measured at the book amount of the non-cash assets to be distributed.

Financial instruments: recognition and measurementSignificant differences (cont’d)


Investment property

IAS 40 Investment Property (‘IAS 40’) and SSAP 19 Accounting for Investment Properties (‘SSAP 19’) address the accounting for an investor’s interests in land and/or buildings (i.e., property)

that are used to earn rental income and/or held for capital appreciation. Both standards exclude properties held for own use but include leased properties.

IFRS UK GAAP

Definition and scope

Investment property is land and/or a building, or part of a building, held by the owner to earn rentals and/or for capital appreciation rather than for use in the production or supply of goods or services, or for administrative purposes or sale in the ordinary course of business.

Investment property includes property under construction or being redeveloped for future use as investment property.

If the entity provides significant ancillary services to the occupants, the property is not an investment property.

Investment property is an interest in land and/or buildings in respect of which construction work and development have been completed and which are held for investment potential, with any rental income being negotiated at arm’s length.

It excludes property under construction or redevelopment for future use as investment property.

Intra-group investment property

Property owned by a subsidiary and leased to, or occupied by, the parent or another group company should be treated as investment property in the owner’s individual financial statements if it meets the definition of investment property.

However, such a property cannot be treated as an investment property in the consolidated financial statements as it is owner-occupied property from the perspective of the consolidated financial statements.

SSAP 19 excludes property held for own use or let to another group company from the definition of investment property, therefore such property cannot be included as investment property in the individual or consolidated financial statements.

Leased investment property

An entity that adopts the fair value model has the option, on a property-by-property basis, to account for property interests held under operating leases as investment properties or as operating leases under IAS 17.

Where one such property is classified as investment property, all investment property is accounted for under the fair value model.

Leasehold property is frequently classified as tangible fixed assets (e.g., lease premiums for long term interests) and SSAP 19 applies to such an interest where it meets the definition of an investment property. There is no option to apply lease accounting to leased investment properties.

Measurement at initial recognition

Investment property is measured initially at cost comprising the purchase price and any directly attributable expenditure.

The initial cost of an investment property held under an operating lease (and the related lease liability) is as prescribed under a finance lease by IAS 17. Any lease premium paid will be included within cost (but obviously not the lease liability).

Investment properties are recognised in the balance sheet at their open market value.

The use of cost is not permitted under UK GAAP.


Similarities


IFRS UK GAAP

Subsequent measurement

Entities have an option to use cost or the fair value model, which must be applied to all the investment property held.

However, where investment property is held under an operating lease, the fair value model is used for all investment property.

It is possible to make a separate choice of model for:

All investment property backing liabilities that pay a ►return linked directly to the fair value of or returns from specified assets including that investment property and All other investment property. ►

Under the cost model, IAS 16 is applied to all investment properties other than those held for sale under IFRS 5.

There is no choice of policy, only the fair value model is permitted under SSAP 19.

Properties held on lease must be depreciated where the unexpired term is 20 years or less.

Fair value model

All property, including interests under operating leases, must be measured at fair value without deduction of transaction costs, except where marketable value cannot be reliably determined on a continuing basis, in which case the cost model is applied, to that investment property.

The fair value of investment property held under a lease reflects expected cash flows, and therefore there is a need to add back any recognised lease liability in arriving at the carrying amount of the investment property.

Depreciation is not required under the fair value model.

Investment properties are carried at their open market value.

For investment property under operating leases, general practice is that the open market value should be included net of any accrued rent receivable debtor.

Properties held under a lease must be depreciated where the unexpired term is 20 years or less.

Revaluation gains and losses

All gains and losses shall be included in profit or loss in the period in which they arise.

Changes in the value of investment properties are recognised through the investment revaluation reserve (which can be negative), except where the change is expected to be a permanent diminution in value, in which case it is taken to the profit and loss account.

Change of use of an investment property

IAS 40 contains detailed specific guidance on evidence a change of use and the subsequent accounting for changes in the use of properties to/from investment properties from/to inventories, P,P&E and operating leases.

There is limited guidance on how transfers should be accounted for.

Transfers to investment property are usually made at cost with the properties being subsequently revalued, unless there is a diminution in value on transfer from current assets taken to the profit and loss account under UITF 5 Transfers from Current Assets to Fixed Assets.

Investment propertySignificant differences (cont’d)


Business combinations

IFRS 3 Business Combinations (‘IFRS 3’) and FRS 6 Acquisitions and Mergers (‘FRS 6’) specify similar (but not identical) requirements for accounting for business combinations. Under the acquisition method of accounting, both standards require that the acquirer recognises identifiable assets acquired and liabilities assumed (including any assets and liabilities previously not recognised by the acquiree e.g., contingent liabilities) measured at their acquisition-date fair values, measures consideration transferred at fair value, and determines goodwill arising from the transaction.

IFRS 3 and FRS 7 Fair Values in Acquisition Accounting (‘FRS 7’)provide guidance on how the fair values of assets acquired and liabilities assumed should be determined, although these are not the same.

Both UK GAAP and IFRS permit an investigation period before the fair value excise must be finalised, although the length differs as does the treatment of changes to fair values of assets and liabilities.

IFRS UK GAAP

Scope IFRS 3 excludes from its scope combinations of entities or businesses under common control.

However, it is worth noting that combinations under common control are not identical to the scope of group reconstructions under UK GAAP.

FRS 6 specifically addresses group reconstructions which generally should be accounted for using merger accounting if certain criteria are met.

Definition of a business

A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

It consists of inputs and processes applied to those inputs, which together are or will be used to create outputs.

There is no specific definition of a business under FRS 6 or FRS 7.

As a result, some combinations that would not be regarded as ‘business combinations’ under IFRS may be accounted for as a business acquisition under UK GAAP.

Merger accounting

All business combinations should be accounted for by applying the acquisition method. Merger accounting is not permitted.

The acquisition accounting method is only applied to business combinations that do not meet the criteria for merger accounting. In practice very few third party transactions meet these criteria.

Reverse acquisitions

Usually the acquirer is the entity that transfers consideration. However in reverse acquisitions, the entity issuing its equity interests is the acquiree.

There is detailed guidance on the application of the acquisition method to reverse acquisitions.

The concept of reverse acquisition does not exist in UK GAAP and is also incompatible with CA 2006 and would only be used with a ‘true and fair override’.

Separation of other transactions from the business combination

In identifying whether a transaction is part of the exchange for the acquiree the acquirer considers the reasons for the transaction, who initiated the transaction and its timing.

Where the transaction is driven by and/or is mainly for the benefit of the acquirer or combined entity, it is less likely to be part of the business combination.

Extensive guidance on arrangements for contingent payments to employees or selling shareholders and indicators for when these should be treated as contingent consideration or remuneration is provided.

There is no explicit guidance on separate arrangements entered into at the time of the transactions.

However, where acquisition agreements requiring non-compete or bonuses to vendors who continue to work for the acquired company exist, it is necessary to determine whether the substance of such an arrangement is payment for the business acquired (i.e., contingent consideration) or an expense such as compensation for services or profit sharing.


Similarities


Business combinationsSignificant differences (cont’d)

IFRS UK GAAP

Pre-existing relationship between acquirer and acquiree

A pre-existing relationship that the acquirer had with the acquiree is treated as being settled by the business combination either at fair value if contractual, or if non-contractual at the lower of the amount for which the contract is favourable or unfavourable compared to market and any settlement provisions in the contract.

The gain or loss is recognised in profit or loss.

There is no similar guidance on pre-existing relationships under UK GAAP.

Non-controlling interest (NCI)

NCI is measured either at fair value or at the NCI’s proportionate share of the fair value of the acquiree’s net identifiable assets.

This choice is made on a transaction-by-transaction basis.

Minority interest is measured at the minority interest’s proportionate share of the fair value of the acquiree’s net identifiable assets.

Contingent consideration

Contingent consideration is initially measured at fair value (i.e., a weighted average) and any subsequent changes are recognised in either profit or loss, or OCI in accordance with IAS 39.

Contingent consideration meeting the definition of equity is not remeasured.

Contingent consideration is measured at fair value (i.e., amount probable to be paid) with any subsequent adjustments made against goodwill.

Acquisition costs

An acquirer must expense acquisition-related costs in the periods in which the costs are incurred, except for costs to issue debt or equity securities which shall be recognised in accordance with IAS 32 and IAS 39.

All fees and similar incremental costs incurred directly in making an acquisition (except for the issue costs of shares or other securities) are included in the cost of acquisition.

Recognition of bargain purchase

The excess of the fair value of identifiable assets, liabilities and contingent liabilities over the consideration (i.e., negative goodwill) is recognised immediately through the income statement.

Negative goodwill is capitalised and recognised in the profit and loss account in the periods in which the non-monetary assets are recovered through depreciation and sale. Negative goodwill in excess of the fair value of the non-monetary assets is recognised in the periods expected to benefit.

Measurement of goodwill at acquisition

Goodwill is measured as the difference between the:

Aggregate of the fair values of the purchase i. consideration, non-controlling interest and any previous equity held in the acquiree; andNet fair value of the identifiable assets acquired and ii. liabilities assumed.

Goodwill is the difference between the:

i. Fair value of the purchase consideration; andii. Fair value of the net identifiable assets acquired.Where a minority interest exists, goodwill is determined only in relation to the group’s interest in the acquiree.

Exchange of share-based payment awards held by acquiree’s employees for acquirer’s awards

Exchanges of share-based payment awards in a business combination are accounted for as modifications of the previous awards.

Either all or a portion of the market-based measures of the acquirer’s replacement awards attributable to the employees’ pre-combination service should be included in measuring the purchase consideration.

There is no equivalent guidance under UK GAAP. Where the awards are vested on acqusition, and subsequently exercised, these clearly form part of the consideration.

FRS 7 does not prescribe the basis of measurement of share-based payment awards as part of the acquisition accounting.


IFRS UK GAAP

Measurement of other assets acquired and liabilities assumed

The identifiable assets acquired and the liabilities assumed are measured at their acquisition-date fair values (with limited specified exceptions).

Specific guidance is provided in respect of certain assets and liabilities including:

An acquirer recognises an asset or a liability in ►respect of an operating lease held by the acquiree if the existing lease terms are favourable or unfavourable relative to market.A contingent liability is recognised if it is a present ►obligation arising from past events and its fair value can be measured reliably. Subsequently, the contingent liability is recognised at the higher of the amount required by IAS 37, and the amount initially recognised less, if appropriate, cumulative amortisation. Contingent assets cannot be recognised. ►An indemnification asset is measured on the same ►basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. A reacquired right is recognised as an intangible ►asset and measured on the basis of the remaining contractual term of the related contract.Income taxes, employee benefits, share-based ►payment awards and non-current assets/disposal groups classified as held for sale are measured in accordance with other applicable IFRS standards which are different from their UK equivalent.

FRS 7 prescribes the basis of measuring the fair values on acquisition of most categories of assets and liabilities including:

Intangible assets based on replacement cost, using ►the estimated market value.Stock and work-in-progress at the lower of ►replacement cost and NRV.Tangible assets based on market value (where ►reliable) or depreciated replacement cost.Contingent assets and liabilities may be recognised ►at fair value if their likely outcomes can be determined. Reasonable estimates of the expected outcome may be used.

Although there is no specific guidance on leases, unfavourable leases can be regarded as onerous leases and a provision made for the excess over market rates. However, where this is done, all leases should be considered and an asset recognised for any leases where the rentals at the acquisition date are below market rates.

There is no specific guidance under UK GAAP on recognition and measurement of indemnified assets and re-acquired rights.

Generally assets should not be recognised at amounts above their recoverable amounts, unaffected by acquirer’s intentions.

The application of the detailed guidance under both UK GAAP and IFRS may result in differences.

Business combinations achieved in stages

The acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss.

Any amounts previously recognised through OCI are recognised on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.

The cost of acquisition is the total of the costs of the interests acquired, determined as at the date of each transaction.

Where the fair values of identifiable assets and liabilities recognised as part of the earlier transaction are reassessed compared to their carrying amounts, a revaluation gain is recognised in the STRGL.

Measurement period and reassessment of fair values

Measurement period has a maximum of 12 months.

Changes to fair values during the measurement period are recognised retrospectively, including any consequential effects on the income statement, e.g., depreciation or amortisation.

After the measurement period ends, revisions of the business combination accounting are permitted only to correct material errors.

Where acquisition accounting is not completed by the approval of the first post-acquisition financial statements, provisional fair values are reported. These are amended if necessary with an adjustment to goodwill in the next set of financial statements.

Although FRS 7 does not explicitly address this, changes have generally been dealt with prospectively under UK GAAP.

After the investigation period amendments to fair value are permitted but are dealt with in the profit or loss account (unless fundamental errors).


Non-current assets held for sale and discontinued operationsFRS 3 Reporting Financial Performance (‘FRS 3’) and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (‘IFRS 5’) set out the requirements for the separate presentation of discontinued operations (with comparatives restated, where appropriate) in the profit and loss account/income statement under UK GAAP and IFRS respectively.

IFRS 5 also deals with the measurement and presentation of assets and disposal groups held for sale. There is no equivalent

standard under UK GAAP although relevant rules in other standards (e.g. FRS 7 on accounting for subsidiaries acquired for resale and FRS 3 on provisions on sale or termination of operations) apply.

Both IFRS 5 and FRS 7 require that where a subsidiary is classified for sale, its assets should be measured at the lower of their carrying amount (i.e., cost) and fair value less costs to sell (or NRV under UK GAAP).

IFRS UK GAAP

Definitions A discontinued operation is a component of an entity that has either been disposed of, or is classified as held for sale, and:

Represents a separate major line of business or ►geographical area of operations;Is part of a single coordinated plan to dispose of ►a separate major line of business or geographical area of operations; andIs a subsidiary acquired exclusively with a view to ►resale.

Abandoned operations are reported in discontinued operations in the period in which they are abandoned.

An operation is classified as discontinued if it is sold or terminated subject to certain conditions including:

The sale or termination is to be completed either ►in the period or before the earlier of three months after the commencement of the subsequent period and the date of approval of the financial statements;The sale or termination has a material effect on ►the nature and focus of the reporting entity’s operations and represents a material reduction in its operating facilities; andThe assets, liabilities, results of operations and ►activities are clearly distinguishable, physically, operationally and for financial reporting purposes.

Classification If the carrying amount of a non-current asset (or a disposal group) will be recovered principally through a sale transaction rather than through continuing use, the asset or disposal group is classified as held for sale.

There is no equivalent requirement under UK GAAP.

Measurement of assets held for sale

A non-current asset held for sale is measured at the lower of its carrying amount and fair value less costs to sell.

A newly acquired subsidiary held for sale is measured at fair value less costs to sell.

Any adjustments to the carrying amount of the disposal group are recognised in profit or loss. A gain is not recognised in excess of cumulative impairment losses recognised (under IFRS 5 or previously in accordance with IAS 36).

If there is an impairment to reflect, there is a specified order of allocation to non-current assets in the disposal group.

There is limited guidance under UK GAAP on accounting for assets held for sale or disposal groups.

FRS 7 requires that an interest in a subsidiary or division for resale is shown as a separate current asset, at the lower of cost and net realisable value, instead of being consolidated.

A fixed asset to be disposed of will be largely independent of income streams of other assets and therefore forms its own IGU.

Any impairment in asset values should be recorded.

Assets held for distribution to owners

Assets held for distribution to owners are measured at the lower of the carrying amount and fair value less costs to distribute.

As there is no specific guidance under UK GAAP. In practice, the assets would continue being measured at their carrying amounts until they are transferred to the owners.

Depreciation Depreciation ceases when an asset is classified as held for sale and measured under the IFRS 5 rules.

Generally depreciation of assets only ceases upon disposal or at the end of their useful economic lives.


Similarities


IFRS UK GAAP

Changes to a plan of sale

The entity shall measure a non-current asset that ceases to be classified as held for sale (or ceases to be included in a disposal group classified as held for sale) at the lower of:

Its carrying amount before the asset (or disposal ►group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale; andIts recoverable amount at the date of the ►subsequent decision not to sell.

Any adjustment is reflected in profit and loss (unless previously carried at revaluation in which case the adjustment is treated as a revaluation increase or decrease).

When an interest in an associate or JCE ceases to be held for sale, it is accounted for using the equity method/proportionate consolidation method (as appropriate) from the date of its classification as held for sale, with amendments to prior financial statements.

There are no similar requirements under UK GAAP.

Where an asset has been previously impaired, a change to a plan of sale may result in a change to the recoverable amount.

If a subsidiary or business (treated as an interest for resale in the acquisition accounting) is not in fact sold within approximately one year of the date of the acquisition, it should be consolidated normally, with adjustments to fair values based on individual assets and liabilities and corresponding adjustments to goodwill.


Ernst & Young has developed a number of publications that contain details and discussions on IFRS matters, all of which can be downloaded from our website www.ey.com/ifrs, including:

International GAAP® 2011This is the 2011 edition of our comprehensive, in-depth guide to interpreting and implementing International Financial Reporting Standards (IFRS) written by Ernst & Young’s IFRS professionals around

the world. The guide is an essential tool for anyone involved in applying, auditing, interpreting, regulating, studying or teaching international financial reporting. It offers insights on how to approach issues in the complex, global world of international financial reporting, where IFRS has become the financial reporting system in more than 100 countries.

International GAAP® Disclosure ChecklistOur International GAAP® Disclosure Checklist captures the full list of disclosure requirements to help companies comply with IFRS in their IFRS financial statements.

The future of financial reporting in the UKAre you ready?This publication highlights the proposed changes to financial reporting in the UK, the key considerations and likely implications of the changes to UK companies.

International GAAP® illustrative financial statementsThis publication is an illustrative set of financial statements (both interim and annual) incorporating the new disclosures that arise from the changes required to standards effective.

This is supplemented by illustrative financial statements that are aimed at specific sectors and industries including Good Bank (International) Limited, Good Investment Ltd, Good Insurance (International) Limited and Good Petroleum (International) Limited.

IFRS OutlookThis bi-monthly publication addresses matters such as Ernst & Young’s views on activities of the IASB and IFRS Interpretations Committee, the political environment surrounding the current state of standard setting or the broader implications of IFRS.

IFRS DevelopmentsErnst & Young creates this newsletter to announce significant decisions on topics that have a broad audience, application or appeal.

Applying IFRSThis publication contains analyses of proposals, standards or interpretations to enable you to better understand the effect they may have and how to apply them.

IFRS resources

IFRS Outlook

Effective dates — when will proposed new IFRS standards apply? 2

What we think of the new proposed approach for impairment of financial assets 5

Our views on the hedge accounting proposals 8

IFRS update 11

Resources 12

We welcome your feedback on IFRS Outlook. Please contact us at [email protected].

Ruth Picker Global Leader of IFRS Services

In this issue ...Effective dates — when will proposed new IFRS standards apply?The IASB and the US FASB continue to focus on a number of projects, including revenue recognition, financial instruments, leases and insurance contracts, with a view to issuing revised standards during the second half of 2011. With the new standards on the horizon, the Boards requested feedback on when and how the new standards should be applied. Read about our views on the effective dates of the new standards and the feedback the IASB received from other stakeholders.

What we think of the new proposed approach for impairment of financial assetsThe IASB and US FASB jointly proposed a new common approach for determining when credit losses should be recognised on certain financial assets. Find out what our views are on this proposed approach.

Our views on the hedge accounting proposalsThe IASB recently issued an ED that proposed a fundamental shift away from the way entities have conventionally applied hedge accounting under IFRS. Learn about our views on the proposals.

IFRS updateFind out which projects the IASB and the IFRS Interpretations Committee are currently discussing.

ResourcesLook here for an up-to-date list of our recent publications, including Good Construction Group (International) Limited 31 December 2010, an illustrated set of consolidated financial statements of a fictitious group of construction companies, and Joint Project Watch, which provides a snapshot of the key developments on the various joint projects of the IASB and the US FASB.

Insights on International GAAP®

ey.com/IFRSMarch/April 2011


Who to contact Please talk to your regular Ernst & Young contact if you have any questions relating to IFRS reporting in the UK and Ireland. Alternatively, please email the Future of UK GAAP (FoUKG) team on [email protected].

Ernst & Young LLP

Assurance | Tax | Transactions | Advisory

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© Ernst & Young LLP 2011. Published in the UK. All Rights Reserved.

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