The struggle for compliance

Though attention has revolved around paper shredding, the technical issue of how to account for Enron’s special purpose vehicles is the true nub of Enron’s problems. Technical accounting issues can, however enormously affect the way the health of a company appears on paper.

Whether it is dealing with the esoteric, such as FRS 17, or wrestling with the pitfalls of amortising goodwill, a company’s bottom line is at stake depending on how the numbers are treated.

The magazine Company Reporting offers monthly comment on the most recently published reports and accounts. This week we extract details of some of the ongoing struggles that finance directors and companies are coping with to comply with reporting standards and accurately reflect the performance of their companies.

Here, Pizza Express and tussle with accounting for joint ventures. Allders grapples with pensions while Carlton Communicnations readjusts its revenue recognition.

Auditor: PricewaterhouseCoopers
Joint ventures: On the face of its balance sheet, in the fixed assets section, PizzaExpress discloses a net asset in joint ventures of £0.5m. Following along the lines of FRS 9 associates and joint ventures and in amplification of this net amount, PizzaExpress discloses a share of gross assets of £0.5m and gross liabilities of zero.

Last year, PizzaExpress disclosed a share of gross assets of £1.5m less a share of gross liabilities of £2.0m giving a net liability of £0.5m, which was disclosed within the fixed assets section of the balance sheet.

This presentation of a net liability did not follow the lines of FRS 9 which states that where an interest in net liabilities arises the amount recorded should be shown as a provision or liability.

Auditor: PricewaterhouseCoopers
Revenue recognition: In its accounting policies note, Carlton Communications discloses that, on the adoption of FRS 18, it has changed its revenue recognition policy in relation to programme and film rights. Carlton discloses that the revised policy is to recognise revenue at the point the right sold is available for exploitation.

Carlton also discloses that the effect on continuing operations of this policy is to reduce operating profit for the year by £0.4m. In addition to the accounting policy change, Carlton has improved the level of disclosure in relation to revenue recognition.

Intangible assets: In its accounting policies note, Carlton discloses programme material is written off fully on first transmission accept for certain film rights which are written off over a number of transmissions.

Carlton discloses that in the past all film rights were written off on first transmission. The effect of this change has increased profit by £2.5m.

Auditor: Deloitte & Touche
Pensions: Allders adopts the first round of transitional arrangements of FRS 17 retirement benefits this year. Given in addition to the SSAP 24 accounting for pension costs disclosures, the extra details include: the nature of the scheme; the date of the last full actuarial valuation; contributions made this year and agreed for future periods; the rates of inflation, salary increases, pensions in payment, deferred pensions and rate used to discount the scheme liabilities; the rate of return from equities, bonds and other assets; a balance sheet reconciliation; and analysis of reserves.

Income statement format: Allders’ primary financial statements do not include a statement of total recognised gains and losses this year. In the previous year’s accounts, it highlighted only a comparative figure.

FRS 3 reporting financial performance requires this statement to be provided with ‘the same prominence’ as the other primary financial statements.

Employee share schemes: In its investments note, Allders discloses that it purchased 1.25 million of its own shares at a cost of £1.5m, for use by its employee benefit trust. They are shown, as required by UITF 13 accounting for ESOP trusts, on the face of the balance sheet. However, the requirement to supply information regarding the main features of the EBT has been left unsatisfied. Allders states only that dividends on these shares are waived, alongside the number and market value of shares held.

Tangible fixed assets: Allders expands its tangible fixed assets policy note to include details of how it carries out its rolling revaluation program. It states that revalued assets are held at their current value and are revalued at least every five years, with an interim valuation in the third year of the cycle. Reviews are carried out in years one, two and four. Any material change in value leads to an interim valuation.

Auditor: KPMG
Income statement format: On the face of its p&l account, Chrysalis makes use of a multi-column format to highlight the results of its new media business. Chrysalis discloses that during the year it has disposed of the majority of its new media activities, writing down all new media investments to zero, to concentrate on a single subsidiary. Chrysalis discloses a loss before interest and tax for new media activities amounting to some £22m and a profit before interest and tax for core businesses of 8.2m.

On the face of its p&l account, Chrysalis does not disclose a breakdown of turnover and operating profit split into continuing and discontinued operations and acquisitions and hence does not follow along the lines of FRS 3 reporting financial performance. In a note to the accounts, Chrysalis discloses that an acquired entity recorded turnover of £8.2m, an operating profit of #153,000 and a loss after interest and before tax of £32,000.

Goodwill: On the face of its balance sheet, Chrysalis discloses negative goodwill separate from another intangible asset classification entitled media rights and positive goodwill. In previous years all intangibles including negative goodwill were included under one intangible assets category.

Although the presentation of negative goodwill on the face of the balance sheet is an improvement from last year, Chrysalis still does not follow FRS 10, which states negative goodwill should be recognised and disclosed separately on the face of the balance sheet, immediately below the goodwill heading and followed by a subtotal showing the net amount of the positive and negative goodwill. In total, on the face of the balance sheet negative goodwill amounts to £187,000 and other intangible assets amount to some £28m including positive goodwill of some £19.5m, not disclosed separately.

Auditor: Ernst & Young
Joint ventures: In a note to the accounts, discloses that, in the previous year it set up a joint venture into which its input was technical know how and the right for the joint venture to use’s licensed trademark with the other joint venture partner paying cash to the joint venture. discloses further that the cost of the assets that it gave to the joint venture were zero, therefore giving rise to a carrying value of the investment of nil but that the cash contributed by the other joint venture partner led to having a share of net assets in the joint venture amounting to some £288,000, which was offset by an equivalent amount of negative goodwill. discloses that, on the implementation of UITF 31 exchanges of businesses or other non- monetary assets for an interest in a subsidiary, joint venture or associate, it has altered its policy for negative goodwill in joint ventures.

Following along the lines of UITF 31 the carrying value of the joint venture in the prior year has been increased by some £246,000 and accruals have been increased by £62,000 for the estimated costs of supporting the site and the loss for the year has been increased by £42,000 being the reversal of the amortisation of the negative goodwill that was credited in the prior year. also has an unrealised gain of £226,000 which arose on the establishment of the joint venture and that has been included in the prior year consolidated statement of total recognised gains and losses (STRGL). The effect on the current year’s financial statements is to increase the loss for the year by £72,000 as the amortisation of negative goodwill no longer exists. In the current year, also recognises a gain on the establishment of further joint ventures in the STRGL amounting to £202,000.

Company Reporting is published monthly by Edinburgh-based independent research organisation Company Reporting Ltd. For more details, visit

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