IASB Improved Standards

The IASB is expected to publish shortly the twelve revised international standards, derived from its May 2002 'improvements' exposure draft. Subject to European adoption, they will be mandatory for companies that prepare accounts under the EU Regulation from 2005.

This article indicates some 'headline' differences between the forthcoming revised international standards and their current UK equivalents. The IASB is now close to settling all significant issues arising from its consultation and the points mentioned below include some arising from IASB decisions since exposure. References to the IASB standards are to the revised versions throughout.

A word of warning! No article like this can of course replace a careful reading of the new standards, when available, to see how the detail applies to your company.

IAS 1, Presentation of Financial Statements

IAS 1 requires disclosure of management's judgement in applying the most significant accounting policies and other key assumptions about future risks and uncertainties.

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). In other ways, IAS 1 is less prescriptive than the Companies Act in relation to the format of the balance sheet and income statement.

Under IAS 1, the statement of total recognised gains and losses ('STRGL') may be presented either as a statement of performance (similar to the STRGL) or as a subset within the statement of all changes in equity (including capital transactions with owners and distributions to owners that under FRS 3 are shown in the reconciliation of movements in shareholders' funds).

IAS 2, Inventories

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.

IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors

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.

IAS 10, Events after the Balance Sheet Date

IAS 10 and SSAP 17 both distinguish 'adjusting events' from 'non-adjusting events'. Adjusting events provide evidence of conditions that existed at the balance sheet date. Non-adjusting events are indicative of conditions arising after the balance sheet date. However, IAS 10 applies the distinction more robustly. Among the effects are:

Dividends to holders of equity instruments declared after the balance sheet date are not recognised as liabilities.

Dividends declared by subsidiaries after the balance sheet date are not recognised by the parent as income of the previous period.

IAS 16, Property, Plant and Equipment

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. The only 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. A transaction has commercial substance if it might give rise to a significant change in future cash flows. 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 requires increases in an asset's residual value, based on current prices, to reduce the ongoing depreciation charge. If the residual value equals or exceeds the asset's carrying value, the depreciation charge is reduced to zero. FRS 15 generally requires prices at the date of acquisition or latest valuation to be used; thus increases in residual values are generally reflected in disposal profits rather than in lower depreciation.

Revaluation losses may in some cases be reported differently. Some losses that are reported in the STRGL under UK standards are reported in the income statement under IAS. Some losses that are presented as changes in equity under IAS are charged in the profit and loss account under FRS 15.

Where a policy of revaluation is adopted, IAS 16 has fewer details relating to the basis of valuation than FRS 15.

IAS 17, Leases

When classifying a lease of land and buildings, IAS 17 requires the land and buildings elements 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 the classification, the 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. The likely effect is that some long-term property leases that are accounted for as operating leases under SSAP 21 would be classified partly as operating leases (land) and partly as finance leases (building) under IAS.

IAS 17 requires that lessors recognise income from finance leases using the net investment method (ie a before-tax method); SSAP 21 requires the net cash investment method (ie 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 Abstract 28 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 both lessees and lessors. In particular, 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.

IAS 21, The Effects of Changes in Foreign Exchange Rates

IAS 21 requires the profit and loss account of a foreign subsidiary to be translated at the average rate of exchange for the period. 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 to be dealt with in IAS 39, Financial Instruments: Recognition and Measurement.

IAS 24, Related Party Disclosures

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.

FRS 8 exempts subsidiaries that are 90 per cent 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. IAS 24 makes no such exemption.

IAS 27, Consolidated and Separate Financial Statements

IAS 27 exempts an intermediate parent company from preparing consolidated financial statements where its parent (in any location) publishes consolidated financial statements that comply with IFRS. Under FRS 2 and the Companies Act the exemption does not apply if the parent is established outside the EU.

IAS 28, Accounting for Investments in Associates

Where an associate makes losses, under IAS 28 a liability is recognised only if the investor has incurred obligations or made payments on behalf of the associate. 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.

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 profit and loss account.

IAS 33, Earnings per Share

IAS 33 requires that basic and diluted earnings per share be disclosed on the face of the profit and loss account 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.

IAS 40, Investment Property

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, 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 profit and loss account).

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.