UK v IFRS Comparison 2005 v5

7/31/2019 UK v IFRS Comparison 2005 v5

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Comparison between UK GAAP andInternational Financial ReportingStandards


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Comparison between UK GAAP and International Financial Reporting Standards

Contents

1Purpose of this document 1

2Accounting terminology 33Overall financial statements presentation 4

1.1General 41.2Balance sheet 51.3Profit and loss account/income statement 81.4Statement of Total Recognised Gains and STRGL/Statement of Changesin Equity SOCE/Statement of Recognised Income and Expense SORIE 121.5Cash flow statement 141.6Discontinued operations and assets held for sale 17

4Accounting policies General 241.7Selection of accounting policies 241.8Reporting substance 281.9Changes in accounting policy and correction of errors 32

5Assets 351.10Tangible fixed assets/Property, plant and equipment 351.11Investment property 451.12Intangible assets 501.13Impairment 591.14Stocks/Inventories 641.15Long-term contracts/Construction contracts 65

Grant Thornton UK LLP 2007. All rights reserved.

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6Liabilities 681.16Leases 681.17Provisions, contingent liabilities and contingent assets 741.18Taxation 75

7Income and expenditure 841.19Revenue 841.20Employee benefits (other than share-based payments) 911.21Share-based payment 101

8Financial instruments 1051.22Recognition and measurement of financial assets 1051.23Presentation, recognition and measurement of financial liabilities andequity 1111.24Recognition and measurement of derivatives 1161.25Hedge accounting 1201.26Disclosures 123

9Group accounts 1271.27Basic requirements for group accounts 1271.28Minority interests 1331.29Quasi-subsidiaries/Special purpose entities 1351.30Acquisition in stages and disposals 1371.31Business combinations 139

1.32Fair values in acquisition accounting 1431.33Treatment of goodwill 15110Associates and joint ventures 156

1.34Associates 1561.35Joint ventures and JANEs 162

11Other matters 1681.36Foreign currency translation 1681.37Government grants 1761.38Earnings per share 1781.39Post-balance sheet events 1861.40Segment reporting 1881.41Related party disclosures 191


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Introduction1 Purpose of this document

The European Union Regulation requires the use of EU-adopted internationalaccounting standards in the consolidated accounts of EU companies listed on aregulated market for accounting periods beginning on or after 1 January 2005.

Therefore full list groups are already preparing their consolidated financialstatements using IFRS. The Alternative Investment Market (AIM) requires theuse of IFRS (as adopted by the EU) for consolidated accounts for periodsbeginning on or after 1 January 2007 where the AIM listed entity isincorporated in the European Economic Area (EEA); some alternatives exist forentities incorporated outside the EEA. For UK AIM companies, and new full listregistrants, identifying the areas of difference between UK GAAP and IFRS iscrucial.

This document highlights the major areas of similarity and difference betweencurrent UK GAAP and IFRS. It is not intended to be an exhaustive list of similarities and differences or of IFRS requirements. Their purpose is to help toidentify areas of difference between UK GAAP and IFRS, and to aid in gainingan appreciation of the major requirements of IFRS and how these differ from

UK practice. Disclosure requirements are not addressed other than inexceptional cases where there are major differences between UK GAAP andIFRS which are central to accounting standards under either GAAP.

The term 'IFRS' is used to refer collectively to new IFRSs and to InternationalAccounting Standards (IAS) issued by the IASB's predecessor body andadopted by the IASB, as well as to Interpretations issued by the InternationalFinancial Reporting Interpretations Committee (IFRIC) and IFRIC's predecessorbody, the Standing Interpretations Committee (SIC).

This document compares UK GAAP with IFRS. For companies reporting underthe EU IAS Regulation, their financial statements are required to comply withIFRS as adopted by the European Union. From time-to-time these standardsmay be slightly different from 'full' IFRS, and this may cause problems indescribing the reporting framework. These issues are not dealt with in thisdocument.

The comparison is based on current standards issued at 1 March 2007 (withthe exception of IFRS 8 which whilst issued, is not mandatory until periodscommencing on or after 1 January 2009, and has not been considered in this


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Detailed comparison2 Accounting terminology

IFRS do not mandate the use of standard terminology or formats. However,the nomenclature on which the IASB (and its predecessor) have standardisedis, in many respects, closer to US GAAP than established UK terminology. Thefollowing table highlights some of the key differences in terminology. Theterminology is not mandated by IFRS however our view is that all UK GAAPwording should be replaced with the appropriate terminology.

UNITED KINGDOM IFRSBalance SheetFixed assets Non-current assets

Tangible fixed assets Property, plant and equipmentFinance costs Borrowing costsInvestments Financial assetsStocks InventoriesDebtors ReceivablesLong-term contracts Construction contractsCreditors PayablesCreditors: amounts falling duewithin one year

Current liabilities (although current/ non current classification refersto a number of criteria rather thanonly period due)

Creditors: amounts falling due aftermore than one year

Non-current liabilities (althoughcurrent / non current classificationrefers to a number of criteriarather than only period due)

Capital and reserves EquityCalled-up share capital Issued capitalProfit and loss account (in reserves) Accumulated profits/(losses)Profit and loss account/Income statement

Turnover RevenueProfit on ordinary activitiesbefore/after taxation

Profit before/after tax

Tax on profit on ordinary activities Income tax expenseProfit/Loss for the financial year Net profit/loss for the periodOther termsMerger Uniting of interestsAcquisition accounting Purchase method


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3 Overall financial statements presentationUK statutory formats for the balance sheet and profit and loss account arebroadly acceptable under IFRS. However, IFRS specify content rather thanexact formats. There are also some important presentational differences.

1.1 General

UNITED KINGDOM IFRSForm and content is specified byCompanies Act 1985 (CA85),accounting standards and UITFabstracts and, for listed companies,the FSA listing rules.

Form and content is specified byIFRS, including IAS still extant andSIC/IFRIC Interpretations.Additional requirements may bespecified by local statute,regulators or stock exchanges.

Financial statements comprise:

balance sheet profit and loss account statement of total recognised

gains and losses (STRGL) cash flow statement (not small

companies or 90% subsidiaries) accounting policies and notes.

Financial statements comprise:

balance sheet income statement a statement showing either:

all changes in equity; or changes in equity other than

those arising from capitaltransactions with owners anddistributions to owners,called a Statement of Recognised Income andExpense (SORIE), IAS 1.96

cash flow statement (noexemptions)

accounting policies andexplanatory notes, IAS 1.8.


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1.2 Balance sheet

UNITED KINGDOM IFRSRelevant statute: CA 1985 Relevant standard: IAS 1

Standard formats are set out inCA 1985, Schedule 4. Detailedsub-headings may be either on theface of balance sheet or in thenotes.

IAS 1 specifies items that must bepresented on the face of thebalance sheet, and lists additionalinformation that must be either onthe face or in the notes. UK companies which prepare their

accounts under IFRS are exemptfrom most of the Companies Actdisclosures. However, some of theCompanies Act disclosurescontinue to apply.

Companies have a choice betweenFormat 1, broadly equivalent tocurrent and non-current distinction,and Format 2, with no distinction onthe face of the balance sheet forcreditors, though Format 2 is rare.

IAS 1 requires current andnon-current items to be presentedas separate classifications on theface of the balance sheet (exceptwhere a presentation based onliquidity is reliable and morerelevant), IAS 1.51.

Format 1 specifies sub-totals to beshown on the face of the balancesheet for net current assets andtotal assets less current liabilities.

No subtotals are specified in IAS 1.

Tax liabilities need not be shownseparately on the face of thebalance sheet.

Deferred and current tax liabilitiesand assets must be shown asseparate line items on the face of the balance sheet. Deferred taxassets (liabilities) shall not beclassified as current assets(liabilities), IAS 1.70.


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UNITED KINGDOM IFRSFixed assets are defined in CA 1985as those held for continuing use inthe company's business, andcurrent assets are defined as anyassets not so held.

'Fixed assets' under UK GAAP and'non-current assets' under IFRS arenot equivalent terms.

IAS 1 defines current assets asthose that are:

expected to be realised withinnormal operating cycle, via saleor consumption. Where thenormal operating cycle is notclearly identifiable it is assumedto be 12 months, or

held primarily for trading; or

expected to be realised within12 months from the balancesheet date, or

cash or cash equivalents notrestricted in their use, IAS 1.57.

All other assets are non-current.

Creditors due within one year aredistinguished from those due aftermore than one year.

The definitions of current andnon-current liabilities are similar tothose for current and non-current

assets, IAS 1.60.Current liabilities also includethose liabilities where the entitydoes not have an unconditionalright to defer settlement beyond12 months after the balance sheetdate, IAS 1.63.


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UNITED KINGDOM IFRSIn addition to the creditors split,CA 1985 requires debtor balancesdue after more than one year to bedisclosed, and in some cases,separate presentation on the faceof the balance sheet is necessaryunder UITF 4.

If any asset or liability line itemcombines amounts expected to besettled or recovered:

within 12 months of balancesheet date and

more than 12 months after thebalance sheet date

the entity shall in addition to

giving the current/non-currentclassification disclose the amountdue after more than 12 months,IAS 1.52.

No UK GAAP equivalent. Where a non-current asset or adisposal group qualifies as held forsale (under IFRS 5), the assetsshould be presented separatelyfrom other assets and similarly forliabilities (both as separate singlelines).


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1.3 Profit and loss account/income statement

UNITED KINGDOM IFRSRelevant statute and standard: CA1985, FRS 3

Relevant standards: IAS 1, IFRS 5

Two main statutory formats:

nature of expenses function of expenses.

Two main expensecategorisations:

nature of expenses function of expenses.

IAS 1 does not specify exactformats but does specify itemsthat must be on the face of theincome statement, and additionalinformation that must be either onthe face of the income statementor in the notes.


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UNITED KINGDOM IFRSContinuing operations (withacquisitions as a separatecomponent) and discontinuedoperations are analysed fromturnover to operating profit and forcertain types of exceptional itemson the face of the profit and lossaccount below operating profit.

Discontinued operations definition

is such that sale or terminationmust have been completed bythree months after balance sheetdate.

Discontinued operations aredefined, in IFRS 5, more broadlyand disclosures are much moreextensive, including narrative andbalance sheet amounts.

The discontinued operationsdefinition, IFRS 5.32 is such thatthe operation is either "held forsale", defined in IFRS 5.6-12, or

has been disposed of. This couldinclude operations where there areplans to sell but disposal is notcompleted until some months afterthe balance sheet date. Thediscontinued operations resultsare disclosed via a single post-taxamount on the face of the incomestatement. A more detailedanalysis of this figure should begiven either on the face of theincome statement or in the notes.

Disclosure exemptions exist fornewly acquired subsidiariesmeeting the held for sale criteriaon acquisition, IFRS 5.32(c).

Acquisitions are distinguished as aseparate component of continuingoperations.

Separate disclosure in the incomestatement of amounts in respectof acquisitions is not mandated byIFRS.

Exceptional items are materialitems that need to be disclosed byvirtue of their size or incidence if the financial statements are to givea true and fair view.

Exceptional items are not formallydefined in IFRS, and there is noequivalent to the FRS 3 belowoperating profit exceptional items.Also, if an operating profit line ispresented then all items of anoperating nature should beincluded be included in it,IAS 1.BC13.


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UNITED KINGDOM IFRS Two types of exceptional item aredistinguished in FRS 3:

those on the face of the profitand loss account below operatingprofit

those under normal headings,separately disclosed in the notes,or exceptionally, on the face of profit and loss account under the

statutory heading to which itrelates.

Where items of income andexpense are material, the amountand nature of those items must bedisclosed either on the face of theincome statement or in the notes,IAS 1.86.

Additional line items, headings andsub-totals are presented wherenecessary for an understanding of

performance, IAS 1.69.

Extraordinary items are defined sothat, in practice, none exists underUK GAAP.

Extraordinary items are prohibitedanywhere within the financialstatements, IAS 1.85. However,under IFRS 5discontinued/held-for-sale itemsare presented post-tax.

A note of historical cost profits andlosses must be presentedimmediately following the profitand loss account or the STRGLwhere there is a material differencebetween reported profits andprofits on a purely historic costbasis.

No equivalent requirement in IFRS.

Except where FRS 26 is adoptedunrealised gains are not normallyincluded in profit and loss account.

For financial instruments (Section8 ) and investment property(Section 5 ), some "unrealisedgains", via fair value adjustments,

are included in the incomestatement.


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UNITED KINGDOM IFRSExcept where FRS 26 is adoptedgains and losses previouslyrecognised in the STRGL are notrecycled through either the profitand loss account or the STRGL onsale of the revalued item.

Old goodwill previously charged toreserves under SSAP 22 is taken tothe profit and loss account on

disposal of the business to which itrelates.

In IFRS, there are instances wheregains or losses transferred toequity are recycled to the incomestatement on subsequentrealisation, eg available for salefinancial assets and foreignexchange losses on netinvestment in subsidiaries.


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1.4 Statement of Total Recognised Gains and STRGL/Statement of Changes in Equity SOCE/Statement of Recognised Income andExpense SORIE


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UNITED KINGDOM IFRSRelevant standard: FRS 3 Relevant standard: IAS 1

A STRGL must be presented as aprimary statement, showing allgains and losses but not capitaltransactions with owners ordistributions to owners. The effectof a prior year adjustment is usuallyshown on one line.

The financial statements must alsopresent:

a reconciliation of shareholders'funds either as a primarystatement or as a note

a statement of movements inreserves (usually in the notes) forwhich comparatives are notrequired.

Either:

present a SORIE (broadlyequivalent to STRGL underUK GAAP) as a primarystatement, and present capitalmovements and distributions inthe notes, or

present a SOCE, which combinesrecognised income andexpenses with capitalmovements and distributions ina statement of changes inequity.

Certain items must be splitbetween the minority's andparent's interests. The effects of prior year adjustments must beshown for each component of equity.

The SORIE approach must be usedif the IAS 19 approach of recognising actuarial gains andlosses outside of profit or loss istaken (see Section 7 .)

Full comparatives are required forreserve movements, whetherpresented in a statement of

changes in equity or in the notes.

The amounts of total gains andlosses attributable to equityholders of the parent and tominority interests should bedisclosed separately, IAS 1.96(c).


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1.5 Cash flow statement

UNITED KINGDOM IFRSRelevant standard: FRS 1 Relevant standard: IAS 7

Exemption from FRS 1 for:

small companies 90% subsidiaries provided group

accounts are publicly available.

No exemptions under IFRS.

Cash is defined narrowly andexcludes cash equivalents.

'Cash' movement in cash flowstatement includes cashequivalents, ie short-term highlyliquid investments readilyconvertible into known amounts of cash and with an insignificant riskof changes in value, IAS 7.6 andIAS 7.7.

Standard categories are:

operating activities dividends from joint ventures and

associates returns on investments and

servicing of finance taxation capital expenditure and financial

investment acquisitions and disposals equity dividends paid management of liquid resources financing.

Standard categories are:

operating investing financing.

Interest and dividends areclassified consistently from year toyear under the most appropriateheading, IAS 7.31-34). Interestand/or dividends may be classedwithin operating activities.

Taxation cash flows are disclosedseparately under 'operating'unless they can be attributedspecifically to investing orfinancing cash flows, IAS 7.14(f),IAS 7.35 and IAS 7.36.


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UNITED KINGDOM IFRSFRS 1 allows either direct orindirect method but in any caserequires that the cash flowstatement or notes provide areconciliation of operating profit tothe cash flow from operatingactivities.

IAS 7.18 allows the cash flowsfrom operating activities to bedisclosed via either the directmethod, ie shows major classes of gross cash receipts and paymentsor the indirect method. Theindirect method adjusts profit,often taken to be post-tax profit orloss for the period, for non cashmovements and IAS 7.20 statesthere are two alternativepresentations for indirect method.

The reconciliation (of the profit orloss to the cash flows fromoperating activities) may bepresented in a note or on the faceof the cash flow statement.However, the illustrative examplein the appendix to IAS 7 shows thereconciliation on the face of thecash flow statement, and is

considered to the preferableposition for this reconciliation.

FRS 1 has no equivalent permissionfor cash flows relating to customersto be shown net. FRS 1.9 allowscash flows to be shown net only inthe case of financing transactionsthat are in substance the sametransaction and are due to shortmaturities and high turnover.

In some circumstances IAS 7allows cash flows to be reportedon a net basis, IAS 7.22-24, suchas rent funds collected on behalf of and paid over to the owners of properties.


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UNITED KINGDOM IFRSMaterial effects on the amountsreported under each of thestandard headings reflecting thecash flows of a subsidiaryundertaking acquired or disposed of in the period should be disclosed.

Acquisitions and disposals headingincludes amounts paid to acquirebusiness /proceeds from sale of

business.

IAS 7.39 requires cash flowsrelating to the purchase ordisposal of a business to beincluded in investing activities(with separate disclosure).

IFRS 5.33(c) requires disclosure of the amount of the cash flowsattributable to a discontinuedoperation to be disclosed for each

of the standard headings.IFRS do not mandate separatedisclosure of the impact of acquisitions on cash flows.

A reconciliation of cash flow tomovement in net debt, and analysisof changes in net debt, reconciledto the balance sheet, should beprovided.

Components of cash and cashequivalents must be disclosed andreconciled to the balance sheet.

There is no equivalent to the UK net debt disclosures.

The cash flows relating to foreignbranches and subsidiaries aretranslated under FRS 1 using thesame basis as the profit and lossaccount for that branch orsubsidiary (which could be closingor average rate).

IAS 7.25-28 require cash flows of foreign subsidiaries or branches tobe translated using rates at thetime of the cash flow orapproximations using weightedaverages.


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1.6 Discontinued operations and assets held for sale

UNITED KINGDOM IFRSRelevant standard: FRS 3 Relevant standard: IFRS 5

Definition of discontinuedoperationsOperations are classified asdiscontinued only where all of thefollowing conditions are met:

the sale or termination iscompleted within the accountingperiod or by the earlier of threemonths post-year end and thedate of approval of the accounts

if a termination, the formeractivities have ceasedpermanently

the sale or termination has amaterial effect on the nature andfocus of operations and

represents a material reduction inoperating facilities due towithdrawal from a market or amaterial reduction in turnoverfrom continuing markets

assets, liabilities, results andactivities are clearlydistinguishable physically,operationally and for reportingpurposes.

An operation is classified asdiscontinued, via IFRS 5.31-32:

at the date the operation meetsthe criteria to be classified asheld for sale; or

when the entity has disposed of the operation.

To be classed as discontinued, theoperation must also relate to aseparate major line of business orgeographical area of operations orbe a subsidiary acquiredexclusively with a view to resale.


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UNITED KINGDOM IFRSDefinition of held for saleNo direct equivalent to held-for-saleclassification in UK GAAP.

An asset or disposal group is heldfor sale when its carrying amountwill be recovered principallythrough a sale transaction ratherthan continued use, IFRS 5.6.

For an asset to be held for sale,sale must be highly probable andthe asset must be available for

sale in its present conditionsubject only to terms that areusual and customary for sales of such assets, IFRS 5.7. Theimplementation guidance issuedwith IFRS 5 also provides usefulillustrations.

Non-current assets to beabandoned are not classed as heldfor sale. Such assets, or disposalgroups, may qualify as adiscontinued operation, IFRS 5.13.


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UNITED KINGDOM IFRSFor an asset to be held for sale,the asset or disposal group mustbe available for immediate saleand sale must be highly probablewhich means, IFRS 5.8:

management are committed to aplan to sell

an active programme to locate abuyer and complete the plan has

been initiated the asset is actively marketed

and at a reasonable price the sale should be expected to

qualify for recognition as acompleted sale within one yearfrom the date of classification,the one year limit is extended if conditions in IFRS 5 App B apply.

The above criteria must be met atthe balance sheet date for anasset or disposal group to beclassified as held for sale.

Disclosure requirementsIn UK GAAP, discontinuedoperations disclosures are madewhen the definition of adiscontinued operation is met. Inpractice, the key timing issue isthat an operation is onlydiscontinued if the sale or

termination is completed withinthree months of the year end or thedate of approval of the financialstatements, if earlier.

In IFRS assets and disposal groupsare treated as held for sale whenat the balance sheet date theymeet the criteria (see above) forbeing held for sale. A discontinuedoperation is one which is held forsale or has been disposed of,

IFRS 5.32.

However, where the criteria aremet between the balance sheetdate and the date that theaccounts are signed certaindisclosures are required,IFRS 5.12.


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UNITED KINGDOM IFRSPresentation in performance statements


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UNITED KINGDOM IFRS The profit and loss account fromturnover to operating profit andbelow-operating-profit exceptionalitems must be analysed betweencontinuing and discontinuedoperations.

The analysis of turnover, operatingprofit and below-operating-profitexceptional items must be shown

on the face of the profit and lossaccount.

Other lines between turnover andoperating profit may be analysedon the face of the profit and lossaccount or in the notes.

The key disclosures required fordiscontinued operations are(IFRS 5.33):

on the face of the incomestatement a single amountcomprising the total of: the post-tax profit or loss of

discontinued operations, and the post-tax gain or loss

recognised on themeasurement to fair valueless costs to sell or on thedisposal of the assets ordisposal group constitutingthe discontinued operation

an analysis of the above singleamount (on the face or in thenotes) into: revenue, expenses and

pre-tax profit or loss of discontinued operations

the related income taxexpense of the above

the gain or loss recognisedon the measurement to fairvalue less costs to sell or ondisposal of the assets ordisposal group constitutingthe discontinued operationand

the related income taxexpense of the above

net cash flows attributable tooperating, investing andfinancing activities of discontinued operations.

(Note: disclosure exemptionsapply for disposal groups that arenewly acquired subsidiariesmeeting the definition of held-for-sale see IFRS 5.33.)

Other disclosures in the period of


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UNITED KINGDOM IFRSComparatives are restated tore-classify the results of operationsdiscontinued in the current year,FRS 3.30.

Income statement and cash flowcomparatives are restated so thatdiscontinued operations include alloperations that have beendiscontinued by the balance sheetdate, IFRS 5.34.

Balance sheet presentationNo UK GAAP equivalent. Balancesheet items relating to discontinued

operations are included in theirnormal categories.

Where a non-current asset or adisposal group qualifies as held for

sale, the asset or assetsconstituting that disposal group,should be presented separatelyfrom other assets. Similarlyliabilities that form part of adisposal group should bepresented separately from otherliabilities.

The main classes of assets andliabilities within the held for salebalances should be separatelydisclosed, either on the face of thebalance sheet or in the notes(there is an exemption from thisadditional disclosure in caseswhere the disposal group is anewly acquired subsidiary held forsale), IFRS 5.38-39.

In the balance sheet, assets andliabilities of a disposal group heldfor sale are presented separately

and not offset on the face of thebalance sheet., IFRS 5.38.

The balance sheet comparativesare not restated, IFRS 5.40.


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UNITED KINGDOM IFRSMeasurementIn UK GAAP no "special" rules existfor the measurement of assets heldfor sale (other than under FRS 2 forsubsidiaries held exclusively forresale). However, impairmentunder FRS 11 may be relevant.

IFRS 5 contains measurementrules and disclosures fornon-current assets, or disposalgroups, which are held for sale.

Certain types of non-currentassets are scoped out of IFRS 5where they are dealt with by otherstandards, IFRS 5.5. IFRS 5 does

not apply to those scoped outassets either individually or as partof a disposal group.

Where the held for sale criteria aremet, non-current assets, ordisposal groups, are measured atthe lower of carrying amount,before classification as held forsale, and fair value less costs tosell, IFRS 5.15.

IFRS 5.16-24 includes rules on thereversal and allocation of impairment losses.

No depreciation, or amortisation, ischarged on non-current assetsheld for sale, IFRS 5.25.

IFRS 5.26-29 deal with situationswhere assets or disposal groupspreviously classed as held for sale

no longer meet the necessarycriteria.


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UNITED KINGDOM IFRSSubsidiaries held exclusively for resaleUnder FRS 2.11 and FRS 2.25,subsidiaries held exclusively forresale are excluded fromconsolidation and are accounted foras current assets at the lower of cost or net realisable value.

Subsidiaries held exclusively forresale that meet the conditions forheld for sale are also discontinuedoperations. Hence, the balancesheet items are presented as asingle line of assets and single lineof liabilities, with the non-currentassets being stated at fair value(which is the carrying value attime of business combination) lesscosts to sell, IFRS 5.16.

4 Accounting policies General1.7 Selection of accounting policies

UNITED KINGDOM IFRSRelevant standard: FRS 18, andFRS 21 for going concern

Relevant standard: IAS 8, IAS 1and IAS 10 for going concern

Adopt accounting policiesconsistent with accountingstandards, UITF Abstracts and CA1985 that enable the financialstatements to give a true and fairview, FRS 18.14. SORPs also applyin certain businesses, FRS 18.58.

Select and apply accountingpolicies so that the financialstatements comply with allrequirements of each applicableIFRS/IAS, SIC/IFRIC Interpretationand any implementation guidance,IAS 8.7.


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UNITED KINGDOM IFRSState in the financial statementsthat applicable accountingstandards have been followed, CA1985. Give particulars of, andreasons for, any materialdepartures, FRS 18.15, FRS 18.62 &CA 1985 section 226 (5).

State that the financial statementscomply with IFRS via an explicitstatement of compliance, IAS 1.14.Financial statements should not bedescribed as complying with IFRSunless they comply in full with allrequirements of each applicableIFRS, IAS 1.14.

UK companies preparing their

financial statements under IFRSmust use EU adopted IFRS, andtherefore the accounting policiesshould state that the financialstatements "have been preparedin accordance with IFRS asadopted by the EU".

Select the most appropriate policywhere a choice exists in standardsor where an issue is not addressedspecifically by standards,FRS 18.17.

No 'most appropriate' requirementwhere choice exists in standards.

Under IAS 1.113, disclose in thesummary of significant accountingpolicies, or other notes, the

judgements that managementhave made in the process of applying the accounting policies.


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UNITED KINGDOM IFRSA true and fair override of CA 1985and accounting standards isrequired if and only if compliance isincompatible with giving a true andfair view. Accounting standardsand UITF Abstracts are overriddenonly on true and fair grounds inexceptional circumstances,FRS 18.15 and CA 1985 section226A.

IFRS are overridden only inextremely rare cases wherecompliance would be somisleading that it would conflictwith the objective of the financialstatements set out in theFramework and thus wheredeparture is needed to achieve afair presentation, IAS 1.17. Wherecompliance with IFRS would bemisleading but where the relevantregulatory framework prohibitsoverriding IFRS, disclosures mustbe given of the adjustmentsnecessary to achieve a fairpresentation, IAS 1.21.


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UNITED KINGDOM IFRSObjectives and constraints inselecting accounting policies arenot confined to situations where nospecific standard exists.

Objectives are, FRS 18.30:

relevance reliability comparability understandability.

Constraints are, FRS 18.31:

balancing different objectives balancing cost of providing

information against likely benefitsto users.

Where no specific requirementexists, management use judgmentto develop policies to ensurefinancial statements provideinformation that is:

relevant to decision-makingneeds of users; and

reliable, ie gives a faithfulrepresentation, reflects

economic substance and isneutral, prudent and complete,IAS 8.10.

In the absence of a specificrequirement, managementconsiders, in the following order:

IFRS and Interpretations dealingwith similar issues, IAS 8.11

the definitions, recognition andmeasurement concepts in theFramework, IAS 8.11

pronouncements of otherstandard-setters (that use asimilar conceptual framework tothe IASB) and accepted industrypractice, but not so as tooverride the previous twosources of guidance, IAS 8.12.

Same as IFRS. Going concern basis should beused unless management intendsto liquidate or cease trading, orhas no realistic alternative but todo so, even if management did notdetermine this until after thebalance sheet date, IAS 1.23 andIAS 10.14.


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UNITED KINGDOM IFRSFRS 18 identifies general principlesregarding:

accrual basis of accounting,FRS 18.26

comparability, FRS 18.39-40 understandability, FRS 18.41.

FRS 5 and CA 1985 addressoffsetting. FRS 25 contains

requirements for offsetting financialassets and financial liabilities, theseare the same as those in IAS 32.

IAS 1 identifies general principlesregarding:

accrual basis of accounting,IAS 1.25

consistency of presentation,IAS 8.13, IAS 1.27

materiality and aggregation,IAS 1.29

offsetting, IAS 1.32. IAS 32

contains more stringent offsetrules for financial assets andfinancial liabilities.

1.8 Reporting substance

UNITED KINGDOM IFRSRelevant standard: FRS 5 Relevant standard: no IFRS directly

addresses substance. However

reporting substance is prevalentthroughout IFRS and is embodiedin the Framework. In comparisonto FRS 5, relevant material iscontained in IAS 1, IAS 8, IAS 32,IAS 39, SIC-12 and SIC-27.

FRS 5 contains a generalrequirement to report transactionsin accordance with their substance.

IAS 8.10 requires that where thereis no specific requirement in IFRS,management should developaccounting policies that, inter alia,reflect the economic substance of events and transactions and notmerely the legal form.


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UNITED KINGDOM IFRSFRS 5 requires a linkedpresentation for certainnon-recourse financialarrangements.

An entity applying FRS 26 (asamended for periods commencingon or after 1 January 2007) willneed to apply the recognition andde-recognition provisions of that

standard and not those of FRS 5 . This means that a linkedpresentation for factored debts willnot be available for an entityapplying FRS 26. For periodscommencing prior to1 January 2007, the derecognitionrules amendment to FRS 26 is notmandatory.

Linked presentation is notpermitted under IFRS. IAS 1,IAS 32 and IAS 39 are expressed interms of assets and liabilities anddo not provide scope for linkedpresentation. IAS 39 has detailedderecognition rules for financialassets involving a five-stepprocess.


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UNITED KINGDOM IFRSFRS 5 has application notescovering:

consignment stock sale and repurchase agreements revenue recognition.

IAS 18 addresses consignmentstock, sale and repurchasearrangements and revenuerecognition (see also Section 7 )from the "seller's" perspective.

From the "buyer's" perspective,there is no specific guidance onconsignment stock other than thegeneral requirement to consider

substance over form, IAS 8.10, andthe IAS 39.14 requirement torecognise a financial liability whenthe entity becomes "party to thecontractual provisions of theinstrument". Therefore overall,the accounting is likely to besimilar to FRS 5, but managementwill need to consider, from abuyer's point of view, whether insubstance an entity has the risksand rewards of the associated

stock and liabilities (eg considerimplications of price changes, atwhich point in time interestcharges commence, etc).

FRS 5 has application notescovering:

factoring of debts securitised assets loan transfers.

These Application Notes are deletedfor entities that apply FRS 26 (asamended to include the IAS 39derecognition rules which aremandatory for periods commencingon or after 1 January 2007 wherean entity applies FRS 26).

IAS 39 covers financialinstruments. Its derecognitionrules are relevant for debtfactoring arrangements,securitisation of assets and loantransfers.


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UNITED KINGDOM IFRSA prior year adjustment isrecognised in the STRGL andadjusted against the openingreserve balance for the currentyear. Comparative figures arerestated, FRS 3.29 andFRS 3.60-63.

Unless an individual standardspecifies otherwise, or theimpracticability criteria apply, achange in accounting policy isaccounted for by adjusting therelevant opening equity balanceand prior period comparativeamounts, IAS 8.22.

Accounting policies should be

reviewed regularly to ensure thatthey remain the most appropriate.A change in policy is made onlywhere a new policy is judged moreappropriate, FRS 18.45.

A change in accounting policy

should be made if the change willresult in the financial statementsproviding reliable and morerelevant information abouttransactions, events andconditions, IAS 8.14.

Technically, a change of accountingpolicy from a cost model to arevaluation model for fixed assetsis accounted for as a change of accounting policy with the prioryear comparatives restated.FRS 15 offers no specialexemptions to obtaining valuationsat previous balance sheet dates.

The initial application of a policy torevalue assets under IAS 16,property, plant and equipment, orIAS 38, intangibles, is a change of accounting policy but is notaccounted for under IAS 8'schange of accounting policy rules.Instead IAS 16 and IAS 38 havemore specific rules which avoidretrospective application.

No direct equivalent. IAS 8.30 requires disclosure of standards issued but not yeteffective, together with reasonablyestimable effect.


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UNITED KINGDOM IFRSNo direct equivalent. IAS 8.8 notes that accounting

policies within IFRS need not beapplied when the effect of applying them is immaterial.However, IAS8.8 further statesthat it is inappropriate to make, orleave uncorrected, immaterialdepartures from IFRSs to achieve aparticular presentation of anentity's financial position,performance or cash flows.

Fundamental error Material errorA fundamental error is an error thatdestroys the truth and fairness andthus the validity of the prior periodsfinancial statements, FRS 3.63.

There is no concept of fundamental error in IAS 8.

Omissions or misstatements of items are material if they couldindividually or collectivelyinfluence the economic decisionsof users of the financialstatements, IAS 8.5.

Where a fundamental error relatingto a previous period is discovered,it is corrected by prior yearadjustment, FRS 3.7.

Material errors are corrected in thesame way as for accounting policychanges, IAS 8.42, ie retrospectiverestatement unlessimpracticability criteria apply.

Other items relating to prior periodsOther items relating to priorperiods, including changes inestimation techniques, are

accounted for prospectively,FRS 18.54.

Changes in estimates areaccounted for prospectively,IAS 8.36-37.


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5 Assets1.10 Tangible fixed assets/Property, plant and equipment

UNITED KINGDOM IFRSRelevant standard: FRS 15 Relevant standards: IAS 16, IAS 23

OverviewBasic requirements:

carry at cost less depreciation orat revalued amount lesssubsequent depreciation

where assets are revalued theexisting use basis of valuation isnormally used

may adopt an accounting policyof capitalising finance costs onassets under construction

depreciate over useful economiclife, residual values at prices attime of acquisition or most recentrevaluation

impairment review automaticallyrequired if asset depreciated overgreater than 50 years or if notdepreciated

renewals accounting allowed forlarge infrastructure assets

no equivalent to IFRS 5 for assetsqualifying as held for sale.

Basic requirements:

carry at cost less depreciation orat revalued amount lesssubsequent depreciation. IAS 16less specific on revaluation basisand frequency than FRS 15

where assets are revalued theyare revalued to the asset's fairvalue, which can be higher thanFRS 15's existing use basis

may adopt an accounting policyof capitalising borrowing costson assets under construction(note that an exposure draft has

been issued which amendsIAS 23 to require capitalisation of borrowing costs, subject tomeeting certain conditions.)

depreciate over useful life withresidual values at current prices

treatment of losses on revaluedassets may be treated differently

no similar automaticrequirement for impairmentreview where depreciationperiod exceeds 50 years

renewals accounting not allowed where fixed assets classed as

"held for sale" under IFRS 5, theheld for sale measurement rulesapply, eg no depreciation (seesection 3 ).


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UNITED KINGDOM IFRSInitial recognitionFRS 15.6 initial recognition at cost FRS 15.9-11 include details of thetypes of costs which can beincluded.

Initial recognition at cost,IAS 16.16-22 contain detailed ruleson qualifying costs. This list isvery similar to FRS 15, although inaddition to those in FRS 15,IAS 16's list of included andexcluded items is slightly moreextensive and should be reviewedin case detail reveals anydifferences in specificcircumstances.

FRS 15 does not specifically definecost and so does not cover theissue of extended credit terms.

IAS 16.23 notes that cost is thecash price equivalent at the dateof initial recognition and soextended credit terms would needto be taken into account.

FRS 15.10 specifically requires thatthe estimated cost of dismantlingthe asset and site restoration iscapitalised if it qualifies underFRS 12 as a provision. FRS 15 doesnot specifically discuss the situationwhere the obligation arises frominventory production.

IAS 16.16(c) requires cost on initialrecognition to include an estimateof the costs of dismantling and siterestoration. This applies when theentity has an obligation as aconsequence of using the item fora purpose other than production of inventory. IFRIC 1 may also needto be considered.

Where the obligation arises fromproduction of inventory then it isdealt with under IAS 2 and so willnot be carried as an asset beyond

time of sale of stock (IAS 16.18).

FRS 15.17 requires fixed assetsgifted or donated to be initiallyrecognised at their current value atthe date they are received.

IAS 16 does not include anyequivalent rules on donations.


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UNITED KINGDOM IFRSAsset exchangesFRS 15 does not deal withexchanges of assets but suchscenarios are likely to be coveredby FRS 5, which requires substanceover form.

IAS 16.24-26 deal with assetsreceived in an exchange, andwhether new assets arerecognised at their fair value orthe carrying amount of the assetgiven up. The emphasis is onsubstance over form.

Subsequent expenditure

FRS 15.34 requires that subsequentexpenditure to ensure that thetangible fixed asset maintains itspreviously assessed standard of performance should be recognisedin the profit and loss account as itis incurred. FRS 15.36 requiresthat subsequent expenditure iscapitalised if it relates toimprovement, replacement of aseparately depreciated componentor relates to a major inspection oroverhaul.

IAS 16.13 requires subsequentexpenditure on components to beadded to cost, and the replacedelement derecognised. Day-to-dayservicing costs are expensed.Costs of major periodic inspectionsshould be capitalised, IAS 16.14and previous inspection costsde-recognised, which may requireestimations where the necessaryinformation is not available.


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UNITED KINGDOM IFRSRevaluationsRevaluations are permitted, as analternative to cost, but are notrequired. Revaluations, must bedone on a class-by-class basis,FRS 15.42 and FRS 15.61:

underlying principle is value tothe business model

valuation normally at existing use

value, FRS 15.53. Specialisedproperties should be valued atdepreciated replacement costand properties which are surplusto requirements at open marketvalue less selling costs.FRS 15.59 applies similarprinciples to non-property relatedfixed assets

valuations are normally on afive-yearly cycle, with interimvaluations in year three and inother years where there is anindication of a material change,FRS 15.45

qualified valuers are required,and there must be someindependent input into fullvaluations, FRS 15.48-49. FRS 15also indicates the features of fulland interim valuations, FRS 15.47and FRS 15.49.

Revaluations are permitted, as analternative to the cost model, butare not required. Revaluationsmust be done on a class-by-classbasis, IAS 16.29:

revalue to fair value, usuallymarket value, if fair value can bemeasured reliably, IAS 16.31

revaluations must be sufficientlyregular that carrying value doesnot differ materially from fairvalue at the balance sheet date,IAS 16.31, IAS 16.34

IAS 16.32 clarifies that aproperty valuation is usuallydetermined from market basedevidence by appraisal and isnormally undertaken byprofessionally qualified valuers

valuation requirements aregenerally less detailed thanFRS 15.


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UNITED KINGDOM IFRSRevaluation gains should berecognised in the profit and lossaccount only to the extent, afteradjusting for subsequentdepreciation, that they reverserevaluation losses on the sameasset that were previouslyrecognised in the profit and lossaccount. All other revaluationgains should be recognised in thestatement of total recognised gainsand losses, FRS 15.63.

Revaluation increases are crediteddirect to equity via revaluationsurplus. The increase isrecognised in profit or loss to theextent that it reverses a previousrevaluation decrease of the sameasset previously recognised inprofit or loss, IAS 16.39.

Revaluation losses caused by clearconsumption of benefits, egphysical damage or deterioration inquality of service provided by theasset, must be recognised in theprofit and loss account for the year,FRS 15.65. Other losses, eg ageneral slump in the propertymarket, are usually recognised in

the STRGL, including a net lossbelow depreciated historical costwhere recoverable amount exceedsrevalued amount, FRS 15.65.

Revaluation losses are recognisedin equity to the extent of anyremaining credit balance in therevaluation reserve in respect of that asset. Other losses are anexpense in the income statement,IAS 16.40. Therefore unlikeFRS 15, a loss in excess of theexisting credit balance in the

revaluation reserve on that assetis always charged to the incomestatement.

FRS 15 is not specific onamortisation of revaluationsurpluses to retained earnings butIAS 16 treatment is similar tocommon practice in UK and isconsistent with CA 85 requirementson realised profits.

Some of the revaluation surplusmay be transferred to retainedearnings as an asset is used. Anyremaining surplus is transferred toretained earnings on derecognitionof the asset. Transfers to retainedearnings are not reflected in theincome statement, IAS 16.42.Essentially this is the same as UK practice although UK practice isnot set out in a standard.


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UNITED KINGDOM IFRSDepreciationDepreciate all assets, other thanfreehold land, except wheredepreciation is immaterial inaggregate due to very long lives orhigh residual values.

Depreciation is recognised as longas the asset's residual value doesnot exceed its carrying amount, inwhich case the depreciationcharge is nil. Land is generally notdepreciated, IAS 16.50-59.

Residual values are based on pricesprevailing at the date of the

acquisition or revaluation of theasset and do not take account of expected future price changes,FRS 15.2, although they arerequired to be reviewed annuallywhere material, FRS 15.95.

Estimates of residual values arereviewed annually and so are at

"current" values taking intoaccount inflation, IAS 16.6. Thiscould result in a higher residualamount and so a lowerdepreciation charge than FRS 15.

FRS 15 requires depreciation overan asset's useful economic life,although FRS 15.77 requires thedepreciation method used to reflectas fairly as possible the pattern inwhich the asset's economicbenefits are consumed by theentity and so in most cases will besimilar to useful life under IAS 16.

IAS 16 requires depreciation overuseful life which may be less thanits economic life, IAS 16.57.

No equivalent to IFRS 5 in terms of cessation of depreciation whereheld for sale.

Depreciation ceases in accordancewith IFRS 5, if the asset qualifiesas held for sale, see section 3 .

Component depreciation explicitlyrequired by FRS 15.83.

Each component of an item of property, plant and equipment

with a cost that is significant inrelation to the total cost of thatitem shall be depreciatedseparately, IAS 16.43.


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UNITED KINGDOM IFRSFRS 15.97-98 allow renewalsaccounting in certain specificcircumstances, primarily for largeinfrastructure assets with assetmanagement plans which areindependently assessed byqualified experts. Under renewalsaccounting depreciation is basedon estimates of annual expenditurerequired to maintain operatingcapacity.

IAS 16 does not address renewalsaccounting and does not allow anyalternative to the principle thatdepreciation expense isdetermined by reference to theasset's depreciable amount.

An annual impairment test isrequired where assets other thanfreehold land are not depreciatedor where an asset's remaining lifeexceeds 50 years, FRS 15.89.

No requirement for annualimpairment reviews. IAS 36contains rules on impairment andmay require an impairment reviewif an indication of impairmentexists.

Borrowing costsFRS 15 covers only tangible fixedassets.

IAS 23 applies to property, plantand equipment, intangible assetsand inventory.

FRS 15.19 allows a choice of policyof either expensing or capitalisingborrowing costs. This is a matter of accounting policy and so, onceselected, the policy should beapplied consistently.

IAS 23.11 allows capitalisation of borrowing costs as an alternativeto the preferred method of expensing all borrowing costs.

This choice is a matter of accounting policy and so if adopted should be appliedconsistently. Note that at time of writing, an exposure draft has

been issued, which is likely tomean that in the future (estimatedfrom 2009), IAS 23 will beamended to mandatecapitalisation of borrowing costs.


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UNITED KINGDOM IFRSFRS 15 includes a number of constraints on what borrowingcosts can be capitalised, includingthat costs must be directlyattributable, FRS 15.21.

IAS 23 includes a number of constraints on capitalisation,including that costs must bedirectly attributable, IAS 23.13.

FRS 15 only allows capitalisationonce actual borrowing costs havebeen incurred and actions to bringthe asset into working condition for

its intended use must be inprogress, FRS 15.25.

IAS 23 allows capitalisation onceactual borrowing costs have beenincurred and activities in preparingthe asset for use are in progress,

IAS 23.20-22.

Capitalisation must be suspendedduring extended delays inconstruction, FRS 15.27, and ceasewhen the asset is ready for use,FRS 15.30.

Capitalisation must be suspendedduring extended delays inconstruction, IAS 23.23-24 andcease once the asset is ready foruse, IAS 23.25-26.

Under FRS 15.23-24, capitalisationof overdraft borrowing costs orother general borrowing costs areallowed using the weightedaverage method. FRS 15.19clarifies that finance costscapitalised cannot exceed theoverall borrowing costs, andtherefore notional allocationswhere an entity does not haveborrowings are not allowed.

IAS 23 allows capitalisation of overdraft borrowing costs,IAS 23.5, capitalisation of otherancillary costs, IAS 23.5, andcapitalisation of an allocation of anentity's overall borrowings usingthe weighted average methodalthough these cannot exceed theoverall borrowing costs incurred bythe entity, IAS 23.17. Thereforenotional allocations where anentity does not have borrowingsare not allowed.

FRS 15.32 states that if the amountrecognised when a tangible fixedasset is acquired or constructedexceeds its recoverable amount, itshould be written down to itsrecoverable amount.

If an asset's book value aftercapitalisation exceeds itsrecoverable amount or netrealisable value then a write downis necessary, IAS 23.19. This iscarried out in accordance with therelevant standard, being IAS 2 orIAS 36.


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UNITED KINGDOM IFRSFirst-time adoption of IFRS


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1.11 Investment property

UNITED KINGDOM IFRSRelevant standard: SSAP 19 Relevant standard: IAS 40

DefinitionSSAP 19 defines investmentproperty as being held forinvestment potential, with rentalincome being negotiated at armslength. Investment property

excludes owner occupied propertyor property let to another groupcompany (for the purpose of individual and group accounts).

IAS 40.5 defines investmentproperty as held to earn rentals orfor capital appreciation or both.

This definition is supplemented byIAS 40.7-15. The basic definition

covers property owned or heldunder a finance lease, see belowfor property held under anoperating lease.

IAS 40.7 and IAS 40.9(c) excludesowner occupied property frombeing investment property.Property let between groupcompanies can be investmentproperty in the letting company'sseparate financial statements butnot the consolidated financialstatements which contain bothparties, IAS 40.15.

Property under construction cannotbe investment property underSSAP 19.

Land held for an undetermined useis not referred to in the SSAP 19definition or investment property.

Property under construction forfuture use as an investmentproperty is accounted for underIAS 16 until complete, althoughIAS 40 applies on redevelopmentsof property previously identified asinvestment property, IAS 40.9.

Land held for a currentlyundetermined use is classed asinvestment property, IAS 40.8.


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UNITED KINGDOM IFRSSSAP 19 does not provide guidanceon mixed-use property.

IAS 40.10 deals with situationswhere a property comprises a mixof parts for investment and others,eg admin, production or supply. If portions can be sold separatelythen portions can be accounted forseparately.

IAS 40.11-14 contains guidancewhere other services are provided

to the occupants of the property.For example, where a hotel owningcompany subcontracts out themanagement of the hotel.

Accounting treatmentInvestment properties are revaluedto open market value. Annualrevaluations are not required butare commonplace whereinvestment properties aresubstantial. Investment propertiesare not depreciated except wherethey are held on leases, see below.

IAS 40 permits two approachesone of which must be adopted forthe entire portfolio, IAS 40.30:

fair value, with annualremeasurement to fair value andrevaluations recognised in profitor loss

cost model, ie carry at cost lessdepreciation, under IAS 16principles.

Changing from one model to theother is permitted only if it resultsin more appropriate presentation.

This is considered highly unlikelyin the case of moving from the fair

value model to the cost model,IAS 40.31.

Note that if the cost model isadopted, disclosure of fair value isstill required, IAS 40.79(e).


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UNITED KINGDOM IFRSLeasehold properties may beclassified as investment properties.SSAP 19.10 requires that propertiesheld on lease should bedepreciated over the maximumperiod of the term of the lease,where the unexpired term is 20years or less.

A property held under anoperating lease is not ordinarilyrecognised as an asset by thelessee, applying IAS 17. However,it may be classified and accountedfor as an investment propertyproviding certain criteria are met.

The key requirement being thatthe lease must be accounted foras if it were a finance lease,IAS 40.6.

This can be done on aproperty-by-property basis, inrespect of properties held underoperating leases, but requires thatthe fair value model be selected asthe accounting policy for allinvestment property, IAS 40.6.

Gains and losses on investmentproperty revaluations generally gothrough the STRGL.

Where the fair value approach isadopted, gains and losses oninvestment property revaluationsgo through the income statementfor the year, IAS 40.35.

Where a property isself-constructed, and transferredfrom inventory to investmentproperty, or in the case of anothertransfer from inventory toinvestment property, the resultingmovement to fair value is

recognised in profit or loss,IAS 40.63-65. However previouslyowner-occupied properties whichare now to be transferred toinvestment property are revaluedunder IAS 16 first, ie gains toequity, IAS 40.61.


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UNITED KINGDOM IFRSValuation basisSSAP 19 requires open marketvalue for the valuation basis.

Fair value is the amount at whichthe asset could be exchangedbetween willing, knowledgeableparties in an arm's lengthtransaction. IAS 40.36-52 provideguidance on applying fair value. Inmost cases fair value will besimilar to open market value.However the valuation criteriashould be reviewed as they aremore prescriptive than SSAP 19.In particular, fair value takesaccount of existing tenancies,IAS 40.40.

SSAP 19.6 does not require thevaluation to be made by a qualifiedor independent valuer. Howeverwhere the investment property is asubstantial proportion of a majorenterprise then the valuation wouldnormally be carried out by anexternal valuer every five yearsand annually by a person holding arecognised professionalqualification.

IAS 40.32 states an entity isencouraged but not required todetermine fair value via anindependent professionallyqualified valuer.

SSAP 19 does not contain guidanceon an investment property's valueat initial recognition value.

IAS 40.20-24 contains guidance oninitial cost, linking into IAS 16where self-constructed. IAS 40applies similar principles to IAS 16.

IAS 40.25-26 covers the initial costof investment properties held onlease. The initial cost is based onthe lower of the fair value of theproperty and the present value of the minimum lease payments.


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UNITED KINGDOM IFRSNo guidance in SSAP 19 on assetsreceived in an exchange.

IAS 40 contains guidance where anasset is received in an exchange;the guidance is similar to that inIAS 16.

Transfers in or outSSAP 19 does not contain detailedguidance on transfers in or out of investment properties. UITF 5 doescontain guidance for assets

previously held as current assetstransferred to investment property. The asset needs to be recorded atthe lower of cost and net realisablevalue at the date of managementchange of intent. Any write downsare reflected in the profit and lossaccount.

IAS 40.57 covers transfers in andout of investment property. Inparticular, IAS 40.57(b) andIAS 40.58. Where an entity

decides to redevelop an existinginvestment property with a view toshort term sale, the property istransferred to inventory at fairvalue. There is no similarrequirement if managementsimply decide to redevelop theproperty for the long term or tosell an investment property in itsexisting state.

Held for saleUK GAAP has no special valuationbasis for assets held for sale.

See discontinued section ( 3 ) onassets held for sale, IFRS 5. Thisapplies only where the cost modelis used. Other investmentproperties are scoped out of IFRS 5.

Disclosure and first-time adoption The IAS 40 disclosures forinvestment property are moreextensive than SSAP 19, see

IAS 40.70-79.

Not relevant. Where an entity opts for the fairvalue model, this applies from thedate of transition. When the costmodel is adopted, the transitionalprovisions apply, IAS 16 andIFRS 1.


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1.12Intangible assets

(Note: this section does not cover goodwill. Goodwill is covered in Section 9 ,business combinations.)

UNITED KINGDOM IFRSRelevant standards: FRS 10,SSAP 13, UITF 24, UITF 29

Relevant standard: IAS 38, IFRS 3,SIC-32

Basic requirements:

carry acquired intangibles at costless amortisation

accounting policy option tocapitalise development costs

other internally generatedintangibles are recognised in verylimited cases, where they have areadily ascertainable marketvalue

revaluation is permitted only inlimited cases

non-amortisation is permitted.

Basic requirements:

carry acquired intangibles atcost less amortisation. Thedefinition of intangibles is suchthat more intangible assets,particularly on businesscombinations, are likely to berecognised

internally-generated intangiblesrepresenting development mustbe capitalised if the conditionsare met; the definitions of the

development stage are moreextensive than those in SSAP 13 revaluation is permitted only in

limited cases non-amortisation is permitted.

Definition and recognitionIntangible assets, other thandevelopment costs, are recognisedonly if they are capable of beingdisposed of separately from abusiness, FRS 10.2.

Definition of intangible assets doesnot require separability where theasset arises from contractual orlegal rights, IAS 38.12.


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UNITED KINGDOM IFRSUnder FRS 10 the recognitioncriteria are such that:

the intangible asset definitionrequires both that the asset isseparable and the entity hascontrol of the asset, normallythrough custody or legal rights

the cost, or fair value allocation ina business combination, is

reliably measurable, FRS 10.9-10.FRS 10.12 notes that the fairvalue on acquisition will bedifficult to determine in a numberof instances, unlike IAS 38 whichstates that it will normally bedeterminable.

The IAS 38 recognition criteria areextensive but will, in some cases,result in recognition of intangibleswhich were not previouslyrecognised under UK GAAP:

to qualify for recognition theintangible must be identifiable,ie either separable or arisingfrom contractual or legal rights,

IAS 38.12 to qualify as an asset the entitymust have control, IAS 38.13-16provides guidance on control

cost must be measurablereliably, IAS 38.21

must be probable that futureeconomic benefits will flow,IAS 38.21. This condition isalways considered met in thecase of a purchase of anintangible or if acquired in abusiness combination, IAS 38.33and IAS 38.25.


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UNITED KINGDOM IFRSDevelopment costs may becapitalised if detailed criteria inSSAP 13 are met.

SSAP 13 is generally less specificthan IAS 38 in terms of what costscan be capitalised within thedevelopment cost although it doescontain some guidance inSSAP 13.6-7.

Intangible assets arising fromdevelopment and other internallygenerated intangibles must becapitalised if detailed criteria inIAS 38 are met:

the general intangiblesrecognition criteria must all bemet, ie identifiable viaseparability or via legal or

contractual rights, costascertainable, probableeconomic benefits

IAS 38 is more prescriptive anddefines in more detail thanSSAP 13 the research anddevelopment phases,IAS 38.54-62. Expenditure mustbe expensed prior todevelopment phase. Once allcriteria are met, then the cost of the development phase must becapitalised

the cost capitalised is the costfrom the date the recognitioncriteria are first met.Reinstatement of previouslyexpensed costs is not allowed,IAS 38.71 and IAS 38.65.

IAS 38.66-67 gives further specificguidance on costs which should,and others which cannot, be

capitalised. For instance,identified inefficiencies, initialoperating losses, training costs areall specifically excluded fromcapitalisation.


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UNITED KINGDOM IFRSFor initial measurement of separately purchased intangibles:

FRS 10.9 requires they arecapitalised at cost

see above for the generalrecognition criteria

no automatic assumption thateconomic benefit criterion willalways be met.

For initial measurement of separately purchased intangibles:

see above for the generalrecognition criteria

IAS 38.25 means that theeconomic benefit criterion isalways assumed to be met.

This may give a different result to

FRS 10, eg in the case of thepurchase of the legal rights to adrug which is awaiting regulatoryapproval. Under FRS 10, if economic benefits are notexpected to be probable then theamount paid would be written off.Under IAS 38 the uncertainty isassumed to be factored into thepurchase price and the price paidwould be capitalised.

Internally generated intangibles,other than development costscovered by SSAP 13, may not becapitalised unless the asset has areadily ascertainable market value,FRS 10.14. This is defined toexclude all unique assets such asbrands.

Internally generated brands,mastheads, publishing titles,customer lists and items similar insubstance are specificallyprohibited from being capitalisedas intangible assets (IAS 38.63).


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UNITED KINGDOM IFRSAcquisition on a business combinationFRS 10.10 notes that an intangibleasset acquired as part of a businesscombination should be capitalisedseparately from goodwill, providedits value on initial recognition canbe measured reliably.

FRS 10.10 restricts the valueattributed to intangibles acquired

on a business combination, unlessthe asset has a readilyascertainable market value, to anamount that does not create orincrease negative goodwill.

To be recognised, an intangiblemust be separable.

For initial measurement andrecognition of intangibles acquiredvia business combinations:

probability of economic benefitcriterion always assumed to bemet, IAS 38.33

IAS 38.33-41 set out specificguidance on recognition and

measurement on businesscombinations IFRS 3 requires an intangible to

be recognised separately if itmeets the IAS 38 criteria and itsfair value at the time of acquisition can be measuredreliably, IFRS 3.37

IAS 38 definition of intangibleasset leads to more intangibles.Unlike FRS 10 an intangibleincludes an asset which is notseparable if it arises from legalor contractual rights

IAS 38.5 states that where in themeasurement of fair value oninitial recognition there is arange of possible outcomes, theuncertainty is taken into accountin the fair value assessment,rather than demonstrating aninability to measure the fairvalue.

IAS 38.5 includes a rebuttablepresumption that the fair valueof an intangible can bemeasured reliably at the time of the business combination. Thisis supported by IAS 38.38.


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UNITED KINGDOM IFRSFar fewer intangibles are typicallyrecognised separately on abusiness combination underUK GAAP. Many of those listed inIFRS 3 would not qualify forrecognition under FRS 10 ongrounds of a lack of separability.

IFRS 3 illustrative examples showa number of intangibles that arerecognised provided they can bemeasured reliably. This may leadto recognition of more intangiblesthan was the case under UK GAAP.For example this could lead to thefollowing being recognised:

franchises

royalty agreements lease agreements customer lists and customer

relationships (under certaincircumstances)

order or production backlog.

IFRS 3 contains a extensive list, inits Illustrative Examples, which is auseful aide memoir. This areamay pose significant practicalproblems.

Acquired brands are oftenrecognised as individual intangiblesseparately from goodwill, ratherthan being disaggregated intounderlying components (as thecomponents are not usuallyseparable).

IAS 38 requires a greater degreeof disaggregation of acquiredintangibles, except where theindividual components are notreliably measurable or thecomponents have similar usefullives, IAS 38.37.


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UNITED KINGDOM IFRSRevaluationA policy of revaluation is permittedonly for intangible assets that havea readily ascertainable marketvalue, FRS 10.43. FRS 10 requiresrevaluation of the whole class andregular revaluations thereafter.

An entity can choose ongoingmeasurement via either the costmodel or the revaluation model,IAS 38.72.

Where the revaluation model isselected, all intangibles in a classmust be revalued unless there isno active market for those assets,

otherwise those assets would betreated under the cost model.

Definition of active market inIAS 38.75 is similar to the "readilyascertainable market value" underFRS 10, but IAS 38 also requiresthat the market prices are publiclyavailable. This is similar to FRS 10which requires an active marketmade up of regular transactions ina homogenous market.

AmortisationAmortisation:

20-year maximum life is arebuttable presumption

life may be longer, or evenindefinite, FRS 10.17

annual impairment test where lifeexceeds 20 years from initialrecognition or is indefinite,FRS 10.37.

Amortisation:

there is no rebuttable 20-yearmaximum life presumption

life is finite or indefinite; noteindefinite does not mean infiniteIAS 38.91

annual impairment tests arerequired for intangible assetsnot yet available for use or withan indefinite useful life,IAS 38.108.

The IASB has issued usefulillustrative examples with IAS 38which demonstrate the use of indefinite lives.


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UNITED KINGDOM IFRSFirst-time adoption

Not relevant. Intangibles other than thosearising on business combinations:

generally required to restate atthe date of transition

if development costs werewritten off pre-transition, butmet the IAS 38 criteria forcapitalisation, an asset should

be reinstated in the openingbalance sheet. The value cannottake account of hindsight, iecapitalisation should commencefrom the date when therecognition criteria were firstmet, IFRS 1 IG46-47

development assets in thebalance sheet under UK GAAPwill need to be similarlyassessed under IAS 38 criteria asat the date of transition.

For business combinations, afirst-time adopter may elect not torestate combinations whichoccurred prior to the date of transition, in which case IFRS 1Appendix B applies. It is assumedbelow that this election is taken:

any previously capitalisedintangibles under old GAAP

which do not meet the IAS 38criteria at the date of transitionwould be added to goodwill,IFRS 1.B2(c)

IFRS 1.B2(f) requires intangiblesacquired in pre-transitionbusiness combinations, notrecognised under previousGAAP, to remain in goodwillunless the IAS 38 criteria would


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UNITED KINGDOM IFRShave required recognition in theindividual balance sheet of theacquiree at the date of acquisition.

1.13Impairment

UNITED KINGDOM IFRS

Relevant standard: FRS 11 Relevant standard: IAS 36

Basic requirements:

perform impairment reviewwhere indications of impairmentexist

review at level of individual assetif practicable, if not at level of income-generating unit (IGU),FRS 11.24

write down to recoverableamount if below carrying value recoverable amount is higher of

value in use and net realisablevalue

value in use is the futurediscounted cash flow from assetor IGU.

Basic requirements:

perform impairment reviewwhere indications of impairmentexist

review at level of individualasset if possible, if not at level of cash-generating unit (CGU),IAS 36.66

write down to recoverableamount if below carrying value recoverable amount is higher of

value in use and fair value lesscosts to sell

value in use is the futurediscounted cash flow from assetor CGU.


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UNITED KINGDOM IFRSFRS 11 applies to all goodwill andfixed assets, with specificexceptions, see FRS 11.5. Keyexclusions include:

investment properties costs capitalised under Oil

Industry Accounting CommitteeSORP

fixed assets within the scope of

FRS 13.

Investments in subsidiaries,associates and joint ventures arecovered by FRS 11.

UK GAAP also has Companies Actrules that apply to losses onpermanent diminutions of fixedassets.

If adopted, FRS 26 convergesUK GAAP with IAS 39 on impairmentof financial instruments.

The list of excluded items isgreater but the effect is thatIAS 36 has a very similar scope toFRS 11.

Financial assets within IAS 39 aredealt with via impairment ruleswithin that standard.

IFRS 6 contains special provisions

relating to impairment of mineralexploration costs.

An excess of carrying value of netassets over market capitalisation of the entity is not specificallyidentified as an impairmentindicator in FRS 11, FRS 11.10.

IAS 36 identifies as an indicator of possible impairment an excess of the carrying value of net assetsover market capitalisation of theenterprise. Otherwise indicatorsare very similar to FRS 11, seeIAS 36.12-14.


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UNITED KINGDOM IFRSImpairment reviews required:

if indicator of impairment exists where goodwill or intangibles

amortised over more than 20years annual review at yearend, FRS 10.37

for goodwill and intangibles infirst full year after businessacquisition, FRS 10.34.

Impairment reviews required:

if an indicator of impairmentexists

annually for goodwill,IAS 36.10(b)

annually for intangible assetswith an indefinite life or if notyet available for use,IAS 36.10(a)

The annual impairment review forgoodwill and intangibles need notbe carried out at the year end,IAS 36.10 and IAS 36.96.

FRS 11.18 notes that in many casesthe detailed value in use calculationwill not be necessary because asimple estimate will be sufficient todemonstrate the value in use iseither above the carrying value,therefore no impairment; or belownet realisable value, thereforerecoverable amount will be basedon net realisable value.

IAS 36.24 allows an intangible'srecoverable amount to be basedon a preceding period'sassessment, providing certainstrict criteria are met. IAS 36.19confirms a value in use calculationis not necessary if fair value lesscosts to sell already demonstratesthe asset is not impaired.IAS 36.23 notes that, in somecases, estimates andcomputational short-cuts mayprovide reasonableapproximations.

The discount rate for value in usecalculations is a pre-tax rate that is

an estimate of what the marketwould expect on an equally riskyinvestment, FRS 11.41. FRS 11.45notes a risk free discount rate maybe used if the cash flows areadjusted for the risk.

The discount rate for value in usecalculations is a pre-tax rate

reflecting current marketassessments of the time value of money and the risks specific to theasset. A discount rate reflectingonly the time value of money canbe used if the cash flows areadjusted for the risk, IAS 36.55(b)and IAS 36.32. Appendix A toIAS 36 illustrates this approach.


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UNITED KINGDOM IFRSImpairment losses in an IGU shouldbe allocated in the following order,FRS 11.48:

goodwill intangible assets pro rata to other tangible assets.

Impairment losses in a CGU shouldbe allocated in the following order,IAS 36.104:

goodwill allocated to the CGU pro rata to other assets.

Reversals of impairment allowed ontangible fixed assets so long as

they relate to a change in economicconditions, as opposed to thesimple passage of time or theoccurrence of a forecasted cashoutflow, FRS 11.56-58.

IAS 36 contains similar rules onthe reversal of impairment of

property, plant and equipmenttangible fixed assets,IAS 36.114-116. Unlike FRS 11,these rules also apply toimpairment reversal for intangibleassets.

Reversals of impairment losses onintangible assets and goodwill areallowed only in restrictedcircumstances, FRS 11.60.

Reversals of impairment losses onintangible assets are recognisedunder the same circumstances asthose for property, plant andequipment, therefore IAS 36 is lessrest

UK v IFRS Comparison 2005 v5

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