FRS 15: ‘Tangible fixed assets’ may well have backed down a little on non-depreciation, but its stance against cherry-picking revaluation regimes is as strong as expected. Its publication may well speed up the move back to historical cost that we have been witnessing of late. Our database shows that 58% of companies now have a stated policy of modified historical cost, compared to 69% in 1995. This month, both Securicor and leisure company Cannons join the trend.
Although Securicor’s accounting policies note states that it prepares its accounts under the historical cost convention, its fixed assets schedule still includes land and buildings held at valuations undertaken during or prior to 1986. While this may seem strange, FRS 15 (which is not effective until accounting periods ending on or after 23 March 2000) includes a transitional option whereby companies reverting to historical cost can retain fixed assets at previously revalued amounts as long as this is made clear.
It is not ideal to have revalued assets sitting in the balance sheets of companies that have reverted to historical cost. Cannons takes a different stance and restates all of its assets to historical cost as a change of accounting policy.
This approach, permitted also by FRS 15, certainly is the clearer of the two. In the coming months, it is probable that we shall see more companies reverting to historical cost; we will continue to monitor closely how companies account for the transition.
True and fair override
One of the requirements of FRS 10: ‘Goodwill and intangible assets’ runs contrary to the Companies Act 1985, forcing companies like engineer Chemring to invoke the true and fair override.
Chemring has adopted early FRS 10 and capitalised retrospectively #18m of goodwill written off previously to reserves. As the company cannot determine a useful economic life for its goodwill (due, according to the accounting policies note, to the inherent durability and complex nature of the company’s operations), it is unable to calculate an amortisation charge.
Where goodwill is regarded as having an indefinite life, FRS 10 requires that no amortisation be charged, providing the goodwill is reviewed for impairment at the end of every accounting period.
In following FRS 10, Chemring has no option but to invoke the true and fair override to bypass the Companies Act 1985 requirement that goodwill treated as an asset be subject to systematic depreciation.
Intangible asset valuation techniques vary widely from company to company, so it is no bad thing that FRS 10 is attempting to introduce some consistency into the process.
Perhaps surprisingly, the standard permits the revaluation of intangibles, but under strict conditions only.
In 1996, Partridge Fine Arts carried a trademark at 50% cost. During the year, the company sold half of it for #84,000 and promptly revalued the remaining half at an identical amount. This year, in keeping with FRS 10, the revaluation has been reversed. FRS 10 permits an intangible asset to be revalued only where a ‘readily ascertainable market value’ exists (a term that is defined quite strictly).
Partridge Fine Arts tells us that the original revaluation did not reflect market value so much as agreed value, and it seemed appropriate to revert to original cost.
The age of impairment dawns
As more companies adopt FRS 11: ‘Impairment of fixed assets and goodwill’, enforced impairment reviews and the death of the ‘temporary’ diminution get-out clause will lead to an increased recognition of impairment charges.
Paper company Inveresk has adopted early FRS 11 and charges its profit & loss account with a #3m impairment to its de-inked pulp plant. The finance review discloses that the plant is unable to show an economic return at current prices and the impairment recognises that there is no reasonable expectation of future net cash flow over its remaining life.
Despite not adopting FRS 11, manufacturer Stadium finds itself conducting an impairment review due to the early adoption of FRS 10. Goodwill arising on an acquisition was increased by a provision against outstanding consideration arising from the sale of a division.
However, uncertainty as to the recoverability of the debt was taken as an indication that the carrying value of goodwill may have been impaired.
An impairment review, comparing the value in use of income generating units to the net assets acquired, resulted in a #2m charge to the p&l account.
FRRP acts on FRS 10
Last year, Reuters took the bold step of adopting FRS 10 early, being the first company we had seen do so. As a result, it not only suffered a #51m amortisation charge, but has also found itself on the receiving end of an adverse Financial Reporting Review Panel finding.
The FRRP took issue with Reuters’ practice of locating goodwill amortisation immediately after operating profit, rather than including the charge in arriving at it. This year, the company falls into line with the FRRP’s way of thinking. We can only hope that this episode will not dampen Reuters’ usual enthusiasm for placing itself at the forefront of emerging practice.
While companies are happy to praise the input of their employees and stress the priority they give to health and safety issues, they are less keen to back up such sentiments with hard facts. Indeed, only 2% of companies quantify their accident rates.
Joining this elite group, Inveresk expands the health and safety section of its managing director’s report and discloses that all of its UK mills have been required to submit action plans to reduce by 50% the number of lost time reportable accidents.
The company reports further that the number of such accidents has fallen from 35 in 1997 to 30 in 1998.
Transparent non-audit fees
Companies are beginning to disclose more information as to the nature of non-audit work, with this month both Reuters and Transport Development providing an analysis of non-audit fees.
Reuters analyses its non-audit fees of #10m across taxation advice (#2.5m), management consultancy (#3.5m) and litigation support, due diligence and other audit related work (#34m). Additionally, the total is split between its UK and overseas elements. Transport Development provides a similar analysis. The Companies Act 1985 requires disclosure of remuneration paid to auditors for non-audit work, and these examples represent a distinct improvement on the usual totals-only response.
Reviewing how income statements have evolved since the landmark publication of FRS 3: ‘Reporting financial performance’, and looking forward to its pending revision, we find that companies have embraced the layered approach of FRS 3, using it most commonly to highlight the effect of exceptional items. The statement of total recognised gains and losses has not gained the prominence envisaged by the Accounting Standards Board, and we expect it to be combined with the p&l account when FRS 3 is revised. This feature is an edited version of the review published in ‘Company Reporting’ magazine, a monthly title monitoring financial reporting practices in the UK. Details from: 0131 558 1400.
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