The week in finance

Virgin Mobile has explained why it failed to meet one of the legal conditions
for the form of ‘merger accounting’, which it used for its recent restructuring.

The group said in its interim report for the six months to 30 September that
it had met the ‘overriding requirement’ of the Companies Act to present a true
and fair view.

But it added: ‘The transaction does not meet one of the conditions for merger
accounting under the Companies Act 1985, namely that the fair value of any
non-equity consideration must not exceed 10% of the nominal value of equity
shares issued.’

There has long been controversy over merger accounting because many experts
believe genuine combinations of equals are hard to identify and rare to the
point of extinction. Consequently, it is often argued that the dual system of
merger and acquisition should be replaced by one in which acquisition accounting
is applied in all cases.

But Virgin bucked the trend towards the latter view in the company’s interim
report. It said its directors considered that the ‘alternative approach of
acquisition accounting, with the restatement of separable assets and liabilities
to fair values, the creation of goodwill and inclusion of post-reorganisation
results only, would not give a true and fair view of the group’s results and
financial position’.

The news demonstrated that the final nail is not yet in the coffin of merger
accounting, despite being outlawed in IFRS3 from 31 March 2004.

Transactions completed after that date will have to be restated under
acquisition accounting rules once companies have made the switch to
international standards.

However, the IASB has not got round to drawing up a standard for internal
reconstructions like Virgin’s – termed ‘common control transactions’ – which are
not covered by IFRS3.

Annette Kimmitt, senior project manager looking after business combinations
at the IASB, said: ‘The reason that they are excluded is that the board will
look at those kinds of transactions further down the track. Certainly at the
moment they do merger accounting in the UK for internal reconstructions.’

Other companies that have recently used merger accounting include Mean
Fiddler, Group 4 Securicor and ITV.

Pre-tax profits at Virgin Mobile were down to £30m from £39m for the same
period last year, while turnover rose 18% to £256m. The company has boosted its
customer base almost 50% to 4.6 million. Shares rose to 212p at the news, but
had fallen to 203.5p by Tuesday lunchtime.


Restatements continue under IFRS, with some companies opting to
comply earlier than necessary.

GUS is expecting increased volatility in its balance sheet and profit and loss
account as a result of the move to IFRS. The retail group expects the greatest
impact on net assets and profit to come from changes to the accounting treatment
of goodwill amortisation and impairment, other intangibles, financial
instruments, share-based remuneration, pension costs, tax and deferred tax. ‘The
move to IFRS will not change how the group is managed and will have no impact on
cashflow,’ it said.

National Grid Company has adopted FRS20 on share-based payment. The standard
requires that, where shares or rights to shares are granted to third parties
including employees, a charge should be recognised in the profit and loss
account based on the fair value of the shares at the date the grant of shares or
right to shares is made. It has also adopted Urgent Issues Task Force (UITF) 38.

Land Securities Group’s audit committee will launch a two-month review of
proposed IFRS accounting policies and the format of its report and accounts next
week. It will present the results to analysts in February 2005 and in June 2005
will re-present results to analysts of results for the year to 31 March 2005 in
IFRS, with reconciliation to current GAAP.

British Empire Security & General Trust has played down the likely impact of
IFRS on the company. ‘Preliminary figures suggest that reductions in asset value
from moving to bid rather than midmarket prices on our investments will not be
material to the overall value of your company, with possible offsets arising
from asset revaluations at some of our investee companies as they also move to
the new reporting regime,’ it said.

SSL International’s results for the six months to September 2004 comply with
the provisions of FRS5 (reporting the substance of transactions), FRS17
(retirement benefits) and UITF Abstract 38 (accounting for ESOPs) and the
company, which manufactures Durex condoms, has restated prior-year results. FRS5
has no impact on operating profit, retained profits or net assets, but reduced
sales in 2003 by £6.3m from the originally reported sales of £210.2m. The
introduction of FRS17 has resulted in an increase in operating profit of £2.7m,
an increase in finance costs of £1.4m and a decrease in net assets at 30
September 2004 of £46.6m. Adopting UITF Abstract 38 has resulted in a decrease
in net assets of £0.5m.

Cardpoint, the provider of electronic payment transactions, will adopt IFRS
early, it said this week. The company, which is the market leader in the
independent cash machine sector, said: ‘Whilst the London Stock Exchange intends
to mandate IFRS for AIM companies for periods beginning on or after 1 January
2007, Cardpoint plc intends to adopt IFRS at the same time as fully listed
companies. The first accounting period where IFRS will be applied will be for
the year ending 30 September 2006.’

Fountains, the environmental services provider, said it would keep its IFRS
implementation options under review, despite the fact that AIM-quoted companies
are not now required to implement IFRS until accounting periods beginning on or
after 1 January 2007. This means Fountains has no requirement to implement IFRS
until the year ending 30 September 2008. The group said that in an initial
review of the impact of the new standards it had ‘not identified any issues of
fundamental importance to the group’s results in the future’.

Education Development International has adopted FRS17 with effect from 1
October 2003 and restated its prior-year results. If FRS17 had not been adopted
for the period ended 30 September 2004, the operating profit would have been
£986,000 instead of the 2003 reported loss of £4.8m. Techmark

The Innovation Group is looking to report on compliance with the combined code
on corporate governance ‘as soon as possible’. The company, which specialises in
providing technology-based business services to the insurance industry, said:
‘Although TiG is only required to report on compliance with the revised combined
code in respect of next year, we have been making every effort to comply with it
as soon as possible. For the year under review, the group complied with all the
provisions of the combined code.

Cambridge Antibody Tech Group expects to be most affected in its transition
to international financial reporting standards by IFRS2, share-based payment,
which requires the fair value of equity based compensation to be recognised in
the group’s P&L. The group will adopt IFRS for the financial year ending 30
September 2006 onwards.

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