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