TaxPersonal TaxCompany Reporting – Out with the old

Company Reporting - Out with the old

Accounting during a standards changeover and adopting an early FRS.

UITF 17: ‘Employee share schemes’ is failing to win any popularity. awards among directors upset at profits being hit by a cost that, in historical accounting terms at least, does not actually exist.

Advertising company Abbott Mead Vickers follows UITF 17 in respect of shares issued under its employee share scheme. The company charges its profit & loss account with #1m, representing the difference between the market value of the relevant shares and the option price paid by employees.

This nominal charge (no money has, or will, change hands) is offset by a credit to reserves, so total distributable funds remain unaffected.

Abbott Mead Vickers is not happy with this requirement and highlights on the face of the p&l account its effect on operating profit, profit before tax and earnings per share. It also proposes stripping the charge out of the eps measure used as part of the performance criteria for certain elements of the share scheme.

The company says it views the UITF 17 charge as an artificial one, and that its p&l account aims to give shareholders a more appropriate view of performance for the year.

And then there was ’11’

July saw the publication by the Accounting Standards Board of FRS 11: ‘Impairment of fixed assets and goodwill’, effective for accounting periods ending on or after 23 December 1998.

The future effect of a new standard is always open to debate, but the biggest changes brought about by FRS 11 will likely relate to the number of impairments recognised and the method of their calculation, rather than how they are treated in the accounts.

Building materials supplier Norcros recognises a #4m impairment in the carrying value of plant and machinery held by its Australian tiles business.

In the treatment that follows both FRS 11 and the existing regulatory regime, the company discloses this amount within cumulative depreciation for the year and classifies it as an exceptional operating cost charged in arriving at operating profit.

It is a similar story with tile company Quiligotti, which impairs freehold land and buildings that have been revalued upwards previously. Following both FRS 11 and existing requirements, the company does not charge the impairment to the p&l account, but reduces revaluation reserve instead.

FRS 11 requires the impairment of a revalued asset to be recognised as a valuation adjustment until the carrying amount of the asset reaches its depreciated historical cost, and thereafter in the p&l account (although there is a proviso that impairments are charged to the p&l account if they are caused by physical damage or deterioration in the quality of service provided).

When is an associate not an associate?

SSAP 1: ‘Accounting for Associated Companies’ provides neither a definition of, nor distinctive accounting treatment for, joint ventures. FRS 9: ‘Associates and Joint Ventures’, which supersedes SSAP 1 as from accounting periods ending on or after 23 June 1998, rectifies both of these shortcomings.

As a result, many companies are likely to reclassify some or all of their associates as joint ventures.

Thames Water does just that – reclassifying as joint ventures the majority of what it treated previously as associated undertakings. Norcros, however, goes the other way and reduces the status of an undertaking from an associate to a trade investment.

The SSAP 1 definition of an associate requires an investor to be in a position to exercise significant influence over its investment, whereas under the new FRS 9 definition significant influence must actually be exercised. Despite a 40% shareholding, the directors are of the opinion that Norcros does not exercise a significant influence.

This follows guidance given in FRS 9 as to how its definition of ‘significant influence’ is to be applied, although it is arguable to what extent such a major shareholder can have a truly passive role.

Confusion over FRS effective dates

FRS 10: ‘Goodwill and Intangible Assets’ has a long lead-in time – published in December 1997 – but not effective until accounting periods ending on or after 23 December 1998. This exacerbates a long-standing grey area concerning early adoption; when an FRS clashes with an existing standard it is set to supersede is adopted early, which takes precedence?

Clothing company SEET made two acquisitions during the year, one of which gave rise to negative goodwill. Although not stating formally that it has adopted early FRS 10, SEET’s treatment of negative goodwill follows its basic requirement to capitalise and amortise. But until FRS 10 becomes effective, SSAP 22: ‘Accounting for Goodwill’, which requires negative goodwill to be written off immediately to reserves, remains in force.

The ASB tells us that when a company chooses to adopt an FRS early, it should act as if the effective date of that FRS has been reached, and that any existing requirements set to be replaced, superseded or amended have been so.

This is a sensible approach, but we wonder if the situation is clear enough for the courts to take the same view. Perhaps it would be helpful if the ASB published some type of pronouncement clearing up any confusion once and for all, as it did for the early adoption of exposure drafts.

Stay of execution for power stations

The directors’ report, accounting policies note and a note of the accounts of British Energy all disclose that the lives of two of its nuclear power stations have been extended from 30 to 35 years. According to the company, the financial effect of this extension is an increase to pre-tax profits of #20m per annum and a one-off exceptional credit to the p&l account next year of #50m.

This is an edited version of the review published in Company Reporting, a monthly publication monitoring financial reporting practices in the UK. Details from 0131 558 1400.

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