Blue chips feel benefit of merger rule

IFRS 3 flaws are allowing blue-chips to use GAAP measures which flatter their
finances in the eyes of ratings companies.

Credit risk experts
Moodys Investor
conducted an in-depth study of Europe’s top oil companies which
highlighted a loophole in IFRS 3.

As it stands, IFRS 3 prevents the use of the ‘pooling-of-interests’ method of
accounting for business combinations.

Under this rule, the fair value cost of the acquired assets is not reported
on the balance sheet. This produces lower depreciation and amortisation expenses
and higher earnings than the purchase method now in operation.

When a company buys another, the pooling of interests allows it to record the
two companies net assets on the balance sheet. The purchase method requires
companies to record the price given to the vendor, which is likely to be a
greater figure than the net assets calculation.

Trevor Pijper, Moodys’ accounting specialist and report author said:
‘Although the pooling-of-interests method is no longer permitted, companies were
allowed to retain their local GAAP accounting when they transitioned to IFRS.’

But the IFRS rules are not mandatory for reporting business combinations
completed before the transition to IFRS.

If BP had used the purchase method for its 1998 acquisition of Amoco, BP’s
level of capital used in acquisitions would be $20bn (15%) higher at the end of
By the agency’s estimates, this would have led to BP’s return on capital falling
marginally below the 18% threshold required for the Aaa rating band it currently
enjoys from Moodys.

Fair value accounting has come in for serious criticism in recent years and
the requirement is a thorn in the side of BP. It is currently bracing itself for
negative investor reaction to a disappointing third quarter performance.

The accounting demands expose BP to massive swings on the worth of its oil
futures contracts and other related products.

The fluctuations battered its revenues in the final quarter of 2006 last year
to the tune of more than £200m,after having a similar positive impact in Q3,
sparking criticism from industry watchers on the accounting rules.


PwC questions Ocado’s accounts

Qualifying comments have been made on the audit of Ocado, the online grocery
store part-owned by the John Lewis Partnership. PricewaterhouseCoopers, the
auditors, made qualifying comments in the course its audit, referring to
‘uncertainty’ over the long-term future of the company’s funding and warned that
this could cast doubt on its ability to continue as a going concern.

The 2006 audit shows a £43m loss, only slightly up from the 2005 deficit of
£45.5m. But the group’s CFO Jason Gissing dismissed the caution from the auditor
as a standard caveat that had been in the accounts over the last six months,
press reports said. Gissing also denied that management felt gloomy about the
latest figures, saying the overall business was moving forward better than ever.

The company has indicated that the operating deficit should be down to £33m
by the end of 2007.

The John Lewis Partnership has insisted that Ocado, which hoped for a
flotation recently, must hold a good profit record before any flotation.

Freddie Mac pays up over fraud

US government-sponsored mortgage finance company Freddie Mac has agreed to
pay a fine of $50m (£25m) to the SEC to settle charges relating to massive
accounting fraud that occurred from 1998 to 2002. Four former Freddie Mac
executives also settled charges of negligent conduct with the chief regulator.

They agreed to pay civil penalties ranging from $65,000 to $250,000 each, the
SEC said. The settlement came without the company or the former executives
admitting or denying the charges. In March fellow government sponsored lender
Fannie Mae said it was likely to make an $11bn (£5.4bn) profit restatement.

More business owners positive on UK tax rules

About one third of privately owned businesses in the UK believe that the
country’s tax rules encourage business and entrepreneurship.

A study compiled by PricewaterhouseCoopers showed that the favourable
response to HM Revenue & Customs had increased from a fifth of respondents a
year ago.

The survey also found that 62% of the 423 companies polled felt that new
methods of communicating with the taxman had been very helpful.

The survey findings will be welcomed by HMRC officials, who have made a
concerted effort to improve relations with business.

IFRS for the US, says Herz

The US standard-setter’s chairman has hit out at companies that have been
demanding the right to choose which accounting standard to use – saying that he
expected all US companies to eventually follow a single accounting standard.
Financial Accounting Standards Board chairman Robert Herz added that he expected
this standard to be IFRS, not US GAAP. Herz was addressing financial officers
and executives on Friday at the Financial Executive’s Institute’s annual
financial reporting conference in New York. ‘I don’t believe in a two-GAAP
system,’ Herz said.

Accenture can’t put blame on sub-prime

Consulting giant Accenture has reported lower quarterly earnings than a year
ago, despite announcing record quarterly and full-year revenues. At the same
time the company said US sub-prime mortgage troubles among lenders had had no
impact on the company so far. Despite not being impacted, the company told
analysts at a conference call it would ‘continue to monitor the situation’.

Related reading

Fiona Westwood of Smith and Williamson.