IFRS update spring 2006 – eye to the telescope

In association with PwC

1 One to be wary of, if you like to keep an eye on your
, is the thorny issue of goodwill deductions. Goodwill is one of those
conceptual issues that easily foxes people, and with the introduction of IFRS
there’s a real risk of losing some tax benefits unless you stay on your toes.

Link: Access IFRS –
PwC’s IFRS resource centre

Under the old regime of UK GAAP, companies had to write down the goodwill
racked up during an acquisition. Goodwill is, of course, that tricky sum of
money you paid for a company over and above the value of its assets. If you paid
£100m for assets worth £70m, then the goodwill equates to £30m. You might
amortise that at £3m a year and would therefore have a deduction of £3m to set
against your tax bill.

So far, so good. But IFRS sticks a spanner in the works. The new regime
doesn’t allow goodwill write-downs.

Instead, the goodwill has to undergo an annual impairment test. If you find
the goodwill is worth less than it was when you acquired the business, you have
to write it off.

The trouble is that you might have made a very good choice and bought a
business that’s going great guns, so when you come to do the impairment test
there is no loss in value. As a result, there is nothing to set against tax.

But this lost opportunity can be sidestepped if you make a decision early.
You can elect, within two years of the acquisition, to write down 4% of the
acquisition’s value per annum, which, as a result, retrieves the tax benefit.
But it all depends on being aware and making a judgement about your purchases.

2 You may already have spotted this, but IFRS has not been
the great international unifying force it at first seemed. While, on the surface
at least, it seems to have moved accounts from different countries towards the
Holy Grail of comparability, it hasn’t done an awful lot to simplify tax

In fact, there are those who argue that IFRS has done nothing more than
deepen the confusion that surrounds tax handling across a number of European

This particular problem all hangs on whether you are allowed to apply IFRS at
‘entity’ level ­ in other words, at the level of your subsidiaries. In the UK
there’s a flexible approach. If you are a listed company you have to apply IFRS
to consolidated accounts, but it’s entirely up to the parent company whether to
apply the standards to their subsidiaries.

The picture is very different on the continent. In Spain, IFRS has to be
applied to subsidiaries, but in Germany and France the law does not permit this.

This means that if you are an FD in the UK, you can’t just apply IFRS across all
your European units and then work out your tax bill. The bill is going to depend
on what accounting system you have to apply in which country. It simply means
you have to understand what is needed in which country.

3 Another European development worth keeping an eye on is
how you calculate your tax base. There’s a drive on at the European Commission
to have all member countries make the calculation using the same methodology ­
otherwise known as tax base harmonisation. In the UK, IFRS has become the
standard for tax base calculation, but this is not the case in France and
Germany, which remain wedded to their old systems.

So, first make sure you know which tax base methodology applies to which
country, and keep an eye on the harmonisation project. Europe can have a nasty
habit of catching even the best FDs flat-footed.

4 Last, watch out for the slow, but sure, development of
interest in IFRS among tax authorities. Their fascination, of course, is with
how IFRS affects financial statements, and the knock-on effects on tax
declarations. In the UK, HM Revenue & Customs has apparently begun to do its
research, although there is little sign of interest in France and Germany right

According to PwC tax partner Gilliam Wild, the focus of attention seems to be
on the application of IFRS to company groups. Don’t expect continental tax
collectors to remain uninterested for long.

Link: For the latest news and analysis on IFRS, updated
every week, visit Access IFRS –
resource centre

Related reading

Fiona Westwood of Smith and Williamson.