Move to close share loophole

Move to close share loophole

An accounting loophole that allows companies to cover up losses made on share transactions is to be closed by international standard setters

The move from the IASB comes as it emerged that companies wanting to offload shares in under-performing businesses may be able to take advantage of the latest updates to IFRS3 to cover up losses on their stocks.

‘We are not stupid. We will put wording in the exposure draft to look at the programmed transactions and gaming opportunities,’ said Wayne Upton, IASB’s director of research.

Under phase II of the new standard, gains or losses on share disposals are reflected in income statements only if control of a company changes. Changes in minority interests, however, will be treated as transactions between shareholders and reflected directly in equity.

Mark Vaessen, head of KPMG’s international financial reporting group, said IFRS3 could see companies deliberately break up the disposals of loss-making stock.

‘If a company has a 51% shareholding it could sell a 49% stake initially, then sell off the remaining 2%,’ Vaessen said. ‘This is attractive as only the loss on the 2% will be reflected in income.’

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