UK GAAP vs. IFRS The basics Spring 2011

UK GAAP vs. IFRS
The basics
Spring 2011
Contents
Introduction
1
Inventories
2
Construction contracts
3
Income taxes
5
Property, plant and equipment
8
Leases
10
Revenue recognition
12
Employee benefits
14
Government grants
16
Foreign exchange
17
Borrowing costs
19
Consolidated and separate financial statements
20
Interests in associates and joint ventures
23
Impairment of assets 26
Provisions, contingent liabilities and contingent assets
28
Intangible assets
29
Financial instruments: recognition and measurement
30
Investment property
33
Business combinations
35
Non-current assets held for sale and discontinued operations
38
Introduction
The UK’s Accounting Standards Board (ASB) has issued an
Exposure Draft FRED 43 Application of Financial Reporting
Standards outlining its plans for the future of financial reporting
in the UK and the Republic of Ireland. If approved, the standard
will introduce a three-tier approach which will require entities
that have previously reported under Generally Accepted
Accounting Principles in the UK and Ireland (referred to in this
document as UK GAAP) to adopt either EU Adopted IFRS (IFRS)
or the proposed Financial Reporting Standards for Medium–sized
Entities (the FRSME).
Entities that meet the ASB’s definition of ‘publicly accountable’
will be required to report under IFRS. Large and medium-sized
entities that are non-publicly accountable entities (and publicly
accountable entities that are prudentially regulated and meet
all three small-size criteria) will have the option to adopt IFRS
or the FRSME. Small non-publicly accountable entities are
permitted to apply the FRSSE, but have the option to adopt IFRS
or the FRSME.
As part of the change process, UK entities will need to determine
the appropriate framework to transition to, as well as determine
the impact of the change to their financial reporting, tax status,
business processes and operations in general.
This document highlights the areas where there are likely
to be significant recognition and measurement differences
between the requirements under the current IFRS standards
and interpretations and the existing requirements and practices
under UK GAAP. It does not address issues of presentation
or disclosure of transactions and balances in the financial
statements. In addition the following areas (driven by IFRS
standards) have been scoped out of this analysis as they only
affect specific entities or activities, or they are not applicable to
most private UK companies — Accounting by Retirement Benefit
Schemes (IAS 26), Agriculture (IAS 41), Insurance Contracts
(IFRS 4), Exploration for and Evaluation of Mineral Resources
(IFRS 6) and Service Concession Arrangements (IFRIC 12).
Please note that this is not an exhaustive list of all the
potential differences that exist between UK GAAP and IFRS.
Many differences depend on the specific nature of an entity’s
operations and industry, the nature and extent of its transactions
and where choices are available, the specific accounting
policies previously applied under UK GAAP and those to be
adopted under IFRS. In addition, this document does not
address transition issues arising from application of IFRS 1
First Time Adoption of IFRS. Therefore it should not be used as
a tool for determining all the impacts of transitioning to IFRS.
Accordingly, this document should be viewed as a starting point
for determining accounting differences, typically during the
diagnostic phase of a conversion project, and not an all-inclusive
comprehensive impact assessment checklist.
This document is based on the IFRS standards in issue as at
31 March 2011. Note that the IASB continues to issue new, and
amend existing, IFRS standards and interpretations. This is
both as part of the joint FASB/IASB project for the convergence
of IFRS with US GAAP as well as stand-alone IASB projects to
improve or issue new pronouncements to serve the needs of
the users of financial information. Therefore in future periods,
some of the key differences highlighted in this document may
cease to apply or additional differences may arise as a result of
changes to existing standards. Please refer to the IASB website
at www.iasb.org for the status of IASB projects.
In addition, the EU continues its endorsement process of issued
IASB standards and therefore additional differences can arise
between those standards issued by the IASB and those that
are available for adoption by companies in the UK. Please refer
to the European Financial Reporting Advisory Group (EFRAG)
website (www.efrag.org) for the status on endorsement of IFRS
standards in the EU.
We hope you find this document useful.
May 2011
UK GAAP vs. IFRS The basics
1
Inventories
Similarities
IAS 2 Inventories (‘IAS 2’) and SSAP 9 Stocks and Long-term
Contracts (‘SSAP 9’) use the principle that the primary basis of
accounting for inventories is cost unless the net realisable value
(‘NRV’ which represents the best estimate of the net amounts
inventories are expected to realise) is lower than cost, in which
case the inventories are written down to NRV. Generally, costs of
inventories comprise all costs of purchase, costs of conversion,
based on the entity’s normal level of activity, and other costs in
bringing the inventories to their present location and condition.
Both GAAPs allow the use of standard costing methods or retail
methods provided that the method used gives a result which
approximates to cost.
Significant differences
IFRS
UK GAAP
IAS 2 excludes construction work in progress; financial
instruments; biological assets and agricultural produce
at the point of harvest. Its measurement rules exclude
inventories measured at NRV in accordance with
established practice in certain industries (e.g., minerals
and mineral products) and inventories of commodity
broker-traders measured at fair value less costs to sell.
SSAP 9 covers both stocks and long-term contracts,
there are no specific exclusions.
Inventories of a service provider should include the
cost of services for which the revenue has not been
recognised.
UK GAAP does not provide explicit guidance on
inventories of service providers.
Classification
of spare parts
and service
equipment
Major spare parts and servicing equipment qualify
as property, plant and equipment (P,P&E) if an entity
expects to use them in more than one period or they
can only be used in conjunction with a specific item of
P,P&E.
While there is no specific guidance in UK GAAP,
company law distinguishes between fixed assets,
that are intended for use on a continuing basis in the
company’s activities, and current assets. Practice
varies with some entities capitalising these assets as
tangible fixed assets and others as stocks.
Components
of cost
IAS 2 is more prescriptive in respect of the components
of cost of inventories including the capitalisation of
overheads and other indirect costs. IAS 2 generally
excludes selling costs, most storage costs, abnormal
production costs and general administrative overheads.
SSAP 9 is less prescriptive than IAS 2 and permits under
certain circumstances the inclusion of selling costs, but
takes a similar approach to other costs.
Borrowing costs are capitalised if the inventories
meet the definition of qualifying assets and are not
manufactured or otherwise produced in large quantities
on a repetitive basis.
There is no requirement to capitalise borrowing
costs under UK GAAP, although it is permitted under
company law.
Where inventories are purchased on deferred payment
terms, such arrangements are deemed to include a
financing element to be accounted for separately and
hence an interest expense recognised over the period
of the financing.
There is no specific guidance under UK GAAP therefore
practice varies.
Scope
Inventory
purchased
on deferred
payment terms
An entity that routinely sells items of P,P&E that it had
Transfer of
rental assets to previously held for rental to others, should transfer
inventory
such assets to inventories at their carrying amount
when they cease to be rented and held for sale. Any
proceeds on transfer being recognised as revenue
under IAS 18 Revenue Recognition (‘IAS 18’).
There is no specific guidance under UK GAAP.
Generally, the carrying amounts of fixed assets would
not be transferred to inventories unless its nature had
clearly changed.
For the purpose of the statement of cash flows, cash
payments to manufacture or acquire assets held for
rental to others and subsequently held for sale, and
cash receipts from rentals and the subsequent sale of
such assets are cash flows from operating activities.
Cash flows associated with the disposal of fixed assets
are classified as ‘capital expenditure and financial
investment’.
2
Disposals of fixed assets are reported separately as an
item below operating profit.
UK GAAP vs. IFRS The basics
Construction contracts
Similarities
IAS 11 Construction Contracts (‘IAS 11’) and SSAP 9 Stocks
and Long-term Contracts (‘SAAP 9’) prescribe the percentage
of completion method of accounting for contracts when the
outcome of a contract can be estimated reliably, although
differences exist in the way the method is applied under the two
standards. SSAP 9’s requirements on long-term contracts need
to be read in conjunction with guidance on revenue recognition in
FRS 5 Application Note G Revenue Recognition (‘FRS 5
App G’) and UITF 40 Revenue Recognition and Service Contracts
(‘UTIF 40’). Accounting should be performed on a contract-bycontract basis, although in certain circumstances it is necessary
to combine or segment construction contracts in order to reflect
their substance.
Both standards require that an entity should recognise a loss
on a contract when it is probable that losses will be incurred in
respect of a construction/long-term contract.
Similarly, when the outcome of a contract cannot be estimated
reliably, no profit should be recognised.
Contract costs generally comprise all direct and indirect costs
that are attributable to, and reimbursable under, the contract.
Pre-contract costs incurred before recognition criteria are met
are expensed and cannot be reinstated. Where the effect of the
time value of money is material, the payments to be received
under the contract are discounted.
Significant differences
IFRS
Definition of
construction
contract
UK GAAP
A construction contract is a contract specifically
negotiated for the construction of an asset or a
combination of assets that are closely interrelated or
interdependent in terms of their design, technology
and function or their ultimate purpose or use.
IFRIC 15 Agreements for the Construction of Real
Estate clarifies that a buyer should be able to specify
major structural elements of the design of a real
estate construction and/or specify major structural
changes during construction.
Construction contracts include contracts for rendering
of services (e.g., project managers and architects)
directly related to the construction of the asset and for
the demolition/restoration of assets or restoration of
the environment following demolition of assets.
Contracts
with multiple
elements
An entity is required to identify separate components
of an agreement, including contracts for construction
of real estate, directly related services, and the delivery
of other goods or services.
Components for the delivery of other goods and
services are accounted for under IAS 18.
Combining and
segmenting
construction
contracts
A long-term contract is a contract entered into for
the design, manufacture or construction of a single
substantial asset or the provision of a service (or of
a combination of assets or services which together
constitute a single project) where the time taken
substantially to complete the contract is such that the
contract activity falls into different accounting periods.
Contracts with a duration shorter than one year are
accounted for as long-term contracts if they are
sufficiently material to distort turnover and attributable
profit. Services provided on an ongoing basis, e.g., help
desk support, maintenance or cleaning services, are
not accounted for as long-term contracts.
Contracts involving a combination of assets and
services that constitute a single project are required
to be accounted for as long-term contracts except
where the criteria below are met, in which case the
components are accounted for separately.
►► A contract that covers a number of assets should be ►► Where a contractual arrangement consists of
various components that operate independently
segmented if separate proposals and negotiations
of each other and a reliable fair value can be
were held for each asset and the costs and revenues
attributed to each component, such components
of each asset can be identified.
are recognised separately.
►► A group of contracts should be combined if the
►► Conversely, the commercial substance of two or
contracts were negotiated as a single package, are
more separate contracts may require them to be
so closely interrelated that they are in effect part
accounted for as a single transaction (bundling).
of a single project with an overall profit margin,
and are performed concurrently or in a continuous
►► For service contracts, where there are
sequence.
distinguishable phases of a single contract, it may
be appropriate to account for the contract as two or
►► Where a contract provides for the construction of
more separate transactions provided the value of
an additional asset at the option of the customer,
each phase can be reliably estimated.
the construction of the additional asset is treated
as a separate construction contract if it differs
significantly in terms of technology or function from
the original assets, or its price is negotiated without
regard to the original contract price.
UK GAAP vs. IFRS The basics
3
Construction contracts
Significant differences (cont’d)
IFRS
Percentage
of completion
method
UK GAAP
This method is applied on a cumulative basis to
determine the current estimates of contract revenue
and contract costs. When the outcome of the contract
cannot be reliably measured, revenue is recognised
only to the extent it is probable contract costs are
recoverable, provided no loss is foreseen.
Profit for the period is derived once contract costs and
revenues have been recognised as appropriate. As a
result, IFRS does not seek to achieve a uniform profit
margin in a contract that is not a cost plus contract.
Turnover should be determined based on an entity’s
right to consideration in accordance with the stage of
completion.
Attributable profit is recorded on a prudent basis based
on stage of completion depending on the expected
outcome, degree of uncertainty surrounding the
outcome and any unknown inequalities in profitability
at different stages of the contract.
Contract costs are the derived amount once revenue
and attributable profit are determined.
Contract costs are recognised in the periods in which
the work is performed except for costs relating to
future activity, which are deferred as an asset.
Method of
determining
stage of
completion
Various methods of determining the stage of
completion are allowed including:
►► Proportion of contract costs incurred compared to
total estimated contract costs;
►► Surveys of work performed; and
►► Completion of a physical proportion of the contract
work provided the entity can measure the work
performed by the contractor reliably
Contract
revenue
Contract revenue comprises the initial amount of
revenue agreed in the contract and variations in
contract work, claims and incentive payments to the
extent they are probable and reliably measurable.
Revenue is measured at the fair value of the
consideration received or receivable. Where payments
are deferred, revenue will be their present value.
There are no specific methods prescribed, but SSAP 9
requires that the method used to determine the stage
of completion should reflect the entity’s right to
consideration. In practice similar methods are used.
Use of the proportion of costs basis is only appropriate
where the contractor is able to demonstrate
that costs incurred provide the best evidence of
performance under the contract terms and the right to
consideration.
Revenue should reflect a seller’s right to consideration
at the fair value of the work performed to date
compared to the total fair value of consideration under
the contract, based on values at the inception of the
contract.
SSAP 9 is more prudent than IAS 11 in its approach to
claims and variations.
Differences may arise in the measurement and timing
of recognition of revenue compared to that under IFRS.
Contract costs
Contract costs comprise direct contract costs,
costs attributable to contract activity in general
allocated to the contract and any other costs
specifically chargeable to the customer under the
terms of the contract, including where appropriate
borrowing costs.
SSAP 9 is less prescriptive in the component of costs
and in some instances permits inclusion of selling costs.
There is no requirement to capitalise borrowing costs
although the capitalisation of interest on borrowings
financing the production of the asset is permitted
under company law.
Contract costs exclude selling costs, general
administration costs, and research and development
costs unless where specifically reimbursable under the
contract, but may be reduced by any incidental income
not included in the contract revenue.
Pre-contract
costs
4
Costs incurred in securing the contract that relate
directly to the contract are included as part of the
contract costs if they can be separately identified and
measured reliably and it is probable that the contract
will be obtained.
Directly attributable pre-contract costs (relating to
securing the specific contract) may be capitalised
only where it is virtually certain that the contract will
be awarded and that the contract will result in future
net cash flows with a present value no less than the
asset recognised.
UK GAAP vs. IFRS The basics
Income taxes
Similarities
IAS 12 Income Taxes (‘IAS 12’) addresses the accounting for
current and deferred taxes under IFRS while FRS 16 Current Tax
(‘FRS 16’)and FRS 19 Deferred Tax (‘FRS 19’) provide guidance
under UK GAAP on the accounting for current tax effects and
expected future tax consequences of events that have been
recognised (i.e., deferred tax).
Current tax is measured at the amount expected to be paid or
recovered from the tax authorities and deferred tax is measured
using the tax rates and laws expected to apply when the asset is
realised or settled (or when the timing difference reverses under
UK GAAP) using tax rates and laws enacted or substantively
enacted at the end of the reporting period.
Both IAS 12 and FRS 19 require deferred tax liabilities to be
recognised in full subject to certain limited exceptions, although
these are not identical.
Similarly, they restrict the recognition of deferred tax assets
(arguably FRS 19 has stricter criteria) and require entities
to reassess the recoverability of deferred tax assets at each
reporting date.
Current and deferred tax is included in profit or loss except to the
extent it relates to gains and losses recognised outside the profit
or loss account or the tax arises from a business combination.
Tax relating to items recognised in Other Comprehensive Income
(OCI)/Statement of Total Recognised Gain and Losses (STRGL) is
also recognised in OCI/STRGL.
Any deferred tax assets of an acquired entity and/or an acquirer
which become recoverable as a consequence of an acquisition
transaction may be recognised and measured in accordance with
the relevant tax standards. Deferred tax assets of the acquiree
are recognised in the fair value exercise whereas deferred tax
assets of the acquirer are recognised in profit or loss.
Subsequent reassessments of the acquiree’s deferred tax assets
are recognised in profit or loss, unless they qualify as hindsight
adjustments, relating to conditions at the acquisition date.
Significant differences
IFRS
Calculation of
deferred tax
UK GAAP
Deferred taxation is based on temporary differences,
i.e., differences between the carrying amount of an
asset or liability in the statement of financial position
and its tax base (subject to certain exceptions).
Deferred tax is based on timing differences (i.e.,
differences between an entity’s taxable profits and
its results as stated in the financial statements,
that arise from the inclusion of gains and losses in
tax assessments in different periods to those when
recognised in the financial statements) that have
originated but not reversed as at the balance sheet
date (subject to certain exceptions).
In addition to the areas highlighted here, other
significant differences may arise from the difference
between the timing difference and temporary
difference approach e.g., in respect of foreign currency
translation, intra-group transactions or in relation to
certain structured products.
Recognition of
a deferred tax
liability
Investment in
subsidiaries,
branches,
associates and
interests in joint
ventures
A deferred tax liability is recognised for all taxable
temporary differences except to the extent that it
arises from the initial recognition of goodwill, or the
initial recognition of an asset or liability in a transaction
which is not a business combination and at the time of
the transaction, affects neither accounting profit nor
taxable profit (tax loss).
Deferred tax is recognised on timing differences that
have originated but not reversed by the balance sheet
date, but not on permanent differences.
A deferred tax liability is recognised for all taxable
temporary differences associated with such
investments, except to the extent that the parent,
investor or venturer is able to control the timing of the
reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the
foreseeable future.
A deferred tax provision is required only to the extent
that dividends payable by a subsidiary, associate or
joint venture have been accrued at the balance sheet
date or a binding agreement to distribute the past
earnings in future has been made.
Specific rules apply for certain types of timing
differences e.g., capital allowances, which can lead to
differences from IFRS.
Any provision is made net of double taxation relief.
A deferred tax asset for deductible temporary
differences arising from investments in subsidiaries,
associates and branches and joint ventures is
recognised to the extent that it is probable that the
temporary difference will reverse in the foreseeable
future and taxable profit will be available against which
the temporary difference can be utilised.
UK GAAP vs. IFRS The basics
5
Income taxes
Significant differences (cont’d)
IFRS
Recognition of
a deferred tax
asset
UK GAAP
A deferred tax asset is recognised to the extent that it is
probable that there will be taxable profit against which
a deductible temporary difference can be used, unless
the deferred tax asset arises from the initial recognition
of an asset or liability that is not from a business
combination and at the time of the transaction, affects
neither accounting profit nor taxable profit.
Further guidance is provided on the assessment of the
recoverability of unused tax losses and credits.
Deferred tax assets are only recognised to the extent
that they are regarded as recoverable i.e., it is more
likely than not that there will be suitable taxable profits
from which the future reversal of the underlying timing
differences can be deducted.
Additional guidance is provided on the requirements
for the recognition of deferred tax assets due to
unrelieved tax losses.
Discounting
Discounting of deferred tax balances is not permitted.
Discounting is permitted but not required.
Measurement
of tax
The calculation of deferred tax should take into account
the manner in which the entity expects to recover or
settle the carrying amount of its assets and liabilities.
Therefore a P,P&E item is recovered through use to
the extent of its depreciable amount (cost less residual
value), and through sale at its residual value.
The manner in which an entity recovers or settles an
asset or a liability is not relevant.
The deferred tax liability or asset arising from
revaluation of a non-depreciable asset should be
measured on the basis of the tax consequences that
would follow from the recovery of the carrying amount
of the asset through sale. A non-depreciable asset
differs from an asset which is not depreciated but
is by its nature depreciable, such as an investment
property.*
Deferred tax should be recognised on timing
differences arising when an asset is continuously
revalued to fair value with changes in fair value being
recognised in profit or loss.
The tax deduction for share-based payments may
differ from the cumulative remuneration expense e.g.,
if the tax deduction is based on the intrinsic value of
the share option at the date of exercise. In that case,
the tax is based on the expected deduction available
in future periods or, if unknown (as is the case in the
UK), an estimate based on the year-end share price and
pro-rated for the period to date compared to the full
vesting period.
In general, the timing difference approach compares
the future tax deduction expected, based on the yearend share price with the amount of the tax rate applied
to the related cumulative remuneration expense.
The current or deferred tax (assuming recoverable)
in respect of this tax deduction is included in profit or
loss for the period, except that any excess of current
or deferred tax over the amount of the tax rate applied
to the amount of the related cumulative remuneration
expense is recognised directly in equity.
All tax relating to share-based payment deductions is
recognised in profit or loss.
Deferred tax on
revalued assets
Tax benefit
in respect of
share-based
payments
Specific rules are included on capital allowances,
revaluations and rollover relief.
For other non-monetary assets, deferred tax is only
recognised if there is a binding agreement to sell the
revalued asset and the reporting entity has recognised
the gains and losses expected to arise on sale unless, if
at the balance sheet date, it is more likely than not that
the gain will be rolled over.
Deferred tax assets on timing differences are only
recognised if they are recoverable. Any excess of
the expected future tax deduction over the tax
attributable to the cumulative remuneration expense is
a permanent difference which is not recognised.
*IAS 12 was amended in 2010, effective 1.1.2012 (if adopted by the EU). The amendment introduces a rebuttable presumption
that deferred tax on an investment property carried at fair value is determined on the basis that it is recovered through sale. The
presumption is rebutted if the investment property is depreciable and the business model is to consume substantially all its benefits over
time rather than through sale.
6
UK GAAP vs. IFRS The basics
IFRS
Tax impacts
on business
combinations
UK GAAP
If a temporary difference arises because of a
business combination, it is recognised as part of
the accounting for that business combination and
affects the calculation of the goodwill arising on the
business combination.
Deferred tax is recognised on fair value adjustments on
the acquiree’s assets and liabilities in the same way as
if the adjustments had been gains or losses recognised
before the acquisition. Unlike IFRS, deferred tax
is not normally recognised on positive revaluation
adjustments to P,P&E or intangible assets.
A deferred tax asset may be recognised in respect of
tax-deductible goodwill, even on initial recognition of a
business combination.
No deferred tax arises on initial recognition of
goodwill, although if it is tax deductible, deferred
tax on any future timing differences between the tax
deduction and amortisation/impairment may need
to be recognised. Further differences may also arise
in relation to deferred tax on legacy tax deductible
goodwill eliminated against reserves.
UK GAAP vs. IFRS The basics
7
Property, plant and equipment
Similarities
IAS 16 Property, Plant and Equipment (‘IAS 16’) and FRS 15
Tangible Fixed Assets (‘FRS 15’) have similar definitions of
property, plant and equipment (‘P,P&E) or tangible fixed assets
(under UK GAAP), and require that such assets are initially
recorded at cost and subsequently carried either using the
cost model (i.e., at cost less accumulated depreciation and
accumulated impairment losses) or revaluation model (i.e., at
fair value as at the date of latest revaluation less accumulated
depreciation and accumulated impairment losses). Revaluation
gains are recognised in OCI/STRGL except to the extent they
reverse previously recognised losses. The policy selected must
be applied to the entire class of assets.
for its intended use. Capitalisation of start-up and similar
pre‑production costs is not permitted unless these are necessary
to bring the asset to its required location and condition for
use. However, the cost of dismantling and removing an asset
and restoring the site on which it is located, which is incurred
on acquisition of or use of the asset (other than and produce
inventories), should be included.
The cost of an asset includes its purchase price, including
duties and non-refundable purchase taxes, and costs directly
attributable to bringing it to the location and condition required
Subsequent expenditure relating to an asset may be capitalised
only if certain recognition criteria, included in each standard,
are met.
The depreciation method used should reflect the pattern in
which the asset’s future economic benefits are expected to be
consumed by the entity. Both standards permit non-depreciation
if an asset’s residual value is equal to or exceeds its carrying
amount.
Significant differences
IFRS
Scope
Cost
UK GAAP
IAS 16 excludes from its scope; assets classified as held
for sale, biological assets, exploration and evaluation
assets, and mineral rights and reserves.
FRS 15 applies to all tangible fixed assets except
investment properties (but applies to investment
properties in the course of construction).
Entities using the cost model for investment properties
use the cost method as prescribed in IAS 16.
UK GAAP does not have the concept of either assets
held for sale or biological assets.
Cost is the amount of cash or cash equivalents paid
and the fair value of the other consideration given
to acquire an asset at the time of its acquisition or,
where applicable, the amount attributed to the asset
when initially recognised in accordance with specific
requirements of other standards. If payment for the
asset is deferred beyond normal credit terms, interest is
recognised over the period of credit.
FRS 15 does not contain this definition of cost of fixed
assets.
Borrowing costs related to a qualifying asset must be
capitalised.
Capitalisation
of subsequent
costs
Cost of major
inspection and
overhaul
There is no specific guidance for treatment where
payment is deferred but in practice, where the payment
is material, it may be discounted.
Capitalisation of directly attributable finance costs is
permitted, but not required.
Subsequent costs should meet the same recognition
criteria for capitalisation as the initial expenditure on
the asset, i.e., when it is probable that future economic
benefits associated with the item will flow to the entity
and the cost of the item can be measured reliably.
Subsequent expenditure is capitalised only when
it improves the condition of the asset beyond its
previously assessed standard of performance.
If part of an asset is replaced, the old part is
derecognised (even if not previously depreciated
separately), and the new part is capitalised provided the
recognition criteria are met.
The cost of replacing or restoring a component is
expensed as incurred if the component has not been
treated separately for depreciation purposes.
Expenditure to maintain the asset’s previously assessed
performance standard is expensed.
Costs of a major overhaul/inspection should only
The cost of a major inspection is capitalised and
depreciated provided that the P,P&E recognition criteria be capitalised where the subsequent expenditure
restores the economic benefits of the assets that have
are met.
been consumed by the entity and already reflected in
The costs of parts replaced in an overhaul would
depreciation.
be accounted for in the manner discussed under
capitalisation of subsequent expenditure above.
Any remaining carrying amount of any previous
major inspection is derecognised at the same time
even if it had not been depreciated separately.
8
Cost is defined in the CA 2006 to include purchase price
(and acquisition expense) or the production cost (being
the purchase price of raw materials and consumables,
and directly attributable production costs).
The cost capitalised should be depreciated over the
period to the next overhaul/inspection.
The remaining carrying amount of previous overhaul/
inspections is derecognised.
UK GAAP vs. IFRS The basics
IFRS
Revaluation
model
UK GAAP
Assets are revalued to ‘fair value’, determined from
market-based evidence for land and buildings or ‘market
value’ for plant and equipment, which is generally the
open market value (OMV).
The ‘value to the business’ model used requires
revaluations to ‘current value’ i.e., assets are measured
at the lower of replacement cost and recoverable
amount.
Where there is no market-based evidence, due to the
specialised nature of the asset or if it is rarely sold, an
estimation using an income or depreciated replacement
cost approach may be used.
FRS 15 is more prescriptive in the basis of valuation of
both specialised and non-specialised properties and
other assets and the processes required for valuation
e.g., use of independent valuers. These bases may
differ from fair value under IFRS.
Initial application of the revaluation policy is a period
change and not a change in policy to be treated
retrospectively.
A change to a revaluation model is a change in
accounting policy and requires retrospective
restatements.
Revaluation
losses
A revaluation loss is recognised in profit or loss, except
to the extent that it reverses an increase previously
recognised in OCI.
Revaluation losses are recognised in the profit and
loss account if they result from a clear consumption
of economic benefits. All other losses are recognised
in STRGL until the asset’s carrying amount reaches
its depreciated historical cost, and then in the profit
and loss account, except to the extent that the asset’s
recoverable amount is greater than its revalued
amount. It is possible to have debit balances in the
revaluation reserves.
Depreciation of
assets
Each part of an item of P,P&E that has a cost that is
significant in relation to the cost of the item must be
depreciated separately. Parts may be grouped if they
have a similar useful life and depreciation method or if
insignificant.
Assets should be analysed into major components with
substantially different useful economic lives, but there
is no requirement to separately depreciate parts of an
asset.
Renewals accounting is not permitted under IFRS.
Depreciation of an asset ceases when the asset is either
classified as held for sale or derecognised.
In some industries (e.g., water industries) renewals
accounting is applied in accounting for tangible fixed
assets within a system or network.
Depreciation ceases at the end of the useful life or on
disposal of the asset.
If no depreciation is charged (as immaterial) or the
remaining useful life of asset exceeds 50 years, a
mandatory annual impairment review is required.
Reassessment
of depreciation
methods and
residual values
Depreciation methods and residual value should be
reassessed at least annually.
Measurement
of residual
values
Residual value is the amount that an entity would
currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset
were already of the age and in the condition expected at
the end of its useful life.
Depreciation methods are changed if there is
a significant change in the expected pattern of
consumption.
Reassessment of residual values is only required for
material residual values to take account of the effects of
technological changes.
A change in depreciation method is permitted only if it
gives a fairer presentation, no requirement for annual
review.
Residual value is the net realisable value of an asset
at the end of its useful economic life, based on prices
prevailing at the date of acquisition or revaluation of
the asset and does not take account of future price
changes.
UK GAAP vs. IFRS The basics
9
Leases
Similarities
Accounting for leases under IAS 17 Leases (‘IAS 17’) and SSAP
21 Lease Accounting and Hire Purchase Contracts (‘SSAP 21’) is
driven by the lease classification which is based on the extent to
which the risk and rewards of ownership are transferred under
the lease agreement. Both standards classify leases as either
finance leases (i.e., one that transfers substantially all the risks
and rewards incidental to ownership) and operating leases, with
different accounting treatments for each.
UK GAAP, SSAP 21 addresses the classification of standalone
lease transactions. FRS 5 Reporting the Substance of
Transactions (‘FRS 5’) requires leases to be classified
in accordance with their substance and for some lease
arrangements, e.g., for sale and leasebacks with repurchase
options, FRS 5 includes more specific guidance. This section is a
comparison of the requirements in IAS 17 and SSAP 21.
A lessee records a finance lease by recognising an asset and
a liability, measured at the lower of the present value of the
minimum lease payments or the fair value of the asset. The
minimum lease payments are apportioned between repayment
of the lease liability and interest payments so as to produce
a constant rate of interest on the remaining lease liability. An
asset held under a finance lease is accounted for in the same way
as other assets of the same category. Operating lease rental/
income is recognised on a straight-line basis over the lease term,
unless another systematic basis is more representative of the
time pattern of benefits.
A manufacturer-dealer lessor does not recognise a selling profit
on an operating lease of an asset (until the asset is ultimately
sold) and restricts the selling profit on a finance lease of an asset
to that which would apply if a market interest rate was charged.
Significant differences
IFRS
Lease
classification
UK GAAP
IAS 17 includes a number of situations that individually
or in combination would lead to a lease being classified
as a finance lease. There is no 90% test rule.
UK GAAP would consider a similar list of indicators, but
has a rebuttable presumption that transfer of risks and
rewards occurs if the present value of the minimum
lease payments discounted at the interest rate implicit
in the lease, amounts to substantially all (normally 90%
or more) of the fair value of the leased asset.
Lease classification is made at the inception of the lease Inception is the earlier of the time the asset is brought
into use and the date from which rentals first accrue.
which is the earlier of the date of the lease agreement
and the date of commitment by the parties to the
principal provisions of the lease.
Embedded
derivatives
Embedded derivatives are required to be separated
(and measured at fair value through profit or loss)
unless they are closely related to the host contract.
For entities that have not adopted FRS 26 Financial
Instruments: Measurement (‘FRS 26’), there is no
requirement to separate out the embedded derivatives
that are not closely related to the host contract.
Leases of land
and buildings
When a lease includes land and buildings elements,
the classification of each element as a finance or
operating lease is assessed separately. An important
consideration is that land normally has an indefinite
economic life.
There are no detailed rules regarding the allocation
between land and buildings elements.
The minimum lease payments are allocated between
land and buildings in proportion to the relative fair
values of the interests in each element.
In the context of the UK property market, only those
leases of land and buildings that are of such length that
they allow the lessee to redevelop the site are likely to
include a significant value for the land element.
An arrangement is, or contains, a lease if the fulfilment
of the arrangement is dependent on the use of, and
conveys a right to use, a specific asset or assets.
There are no similar requirements to those under IFRIC 4.
Determining
whether an
arrangement
contains a lease
10
IFRIC 4 Determining whether an Arrangement Contains
a Lease (‘IFRIC 4’) provides further guidance in
determining whether these criteria are met at inception
of a lease.
UK GAAP vs. IFRS The basics
IFRS
Lessee
accounting —
finance lease
Lessor
accounting —
finance lease
UK GAAP
A leased asset is recognised at the lower of the fair
value of the asset or the present value of the minimum
lease payments, discounted at the interest rate implicit
in the lease or, if this is not available, the entity’s
incremental borrowing rate.
A leased asset is recognised at the present value of the
minimum lease payments, discounted at the interest
rate implicit in the lease (or at the borrowing rate on a
similar lease), or at the fair value of the assets if it is a
sufficiently close approximation of the present value of
the minimum lease payments.
The interest rate implicit in the lease is the discount
rate that at lease inception equates the sum of the
present value of the minimum lease payments and
unguaranteed residual value to the lessor to the fair
value of the leased asset plus initial direct costs of the
lessor.
The interest rate implicit in the lease excludes the
impact of initial direct costs of the lessor.
Contingent rentals are expensed as incurred.
There is no guidance on treatment of contingent rent.
The net investment is the gross investment in the
lease i.e., the minimum lease payments and any
unguaranteed residual value accruing to the lessor,
discounted at the interest rate implicit in the lease.
Net investment in the lease is the gross investment
in the lease less gross earnings allocated to future
periods.
Initial direct costs are included in the initial
measurement of a finance lease receivable and are
factored into the calculation of the interest rate implicit
in the lease.
Initial direct costs may be deferred or expensed
immediately.
Finance income is recognised on a pattern reflecting a
constant periodic rate of return on the net investment
in the finance lease.
The total gross earnings are allocated to accounting
periods to give a constant rate of return on the lessor’s
net cash investment (includes other cash flows e.g., tax)
in the lease.
Operating
leases — lease
incentives
Lessees and lessors should recognise the cost or
benefit of lease incentives over the lease term, usually
on a straight-line basis unless some other basis is more
representative.
Lease incentives are recognised over the shorter of the
lease term and a period ending on a date from which it
is expected the prevailing market rental will be payable,
usually on a straight-line basis unless some other basis
is more representative.
Sale and
leaseback
transactions
IAS 17 rules apply to sale and leasebacks when the
leaseback includes a ‘right of use’ to the asset.
SSAP 21 rules apply to sales and leasebacks but the
substance of the arrangement would be considered
under FRS 5.
Where a sale and leaseback transaction results in an
operating lease and the transaction is at fair value,
any profit or loss is recognised immediately. If the
transaction is below or above fair value, the loss or gain
is deferred and amortised over the period in which the
asset is expected to be used.
If the transaction results in a finance lease, any excess
of sales proceeds over the carrying amount of the
asset is deferred and amortised over the lease term.
Alternatively the lease payable may be treated as a
secured loan.
The guidance is similar, except that the period of
deferral is the shorter of the lease term or the period to
the next rent review.
For a sale and finance leaseback, no profit should be
recognised on entering into the arrangement and
no adjustment should be made to the carrying value
of the asset. The finance received from the lessor
is recognised as a liability in accordance with its
substance as a loan.
In addition to the differences highlighted above, and despite the basic similarities between the two standards, there are some further
differences of detail in the requirements (including key definitions) and some areas where practice has developed in the UK (including
where there are no explicit requirements in the standards) e.g., contingent rentals, the treatment of initial direct costs, grant-financed
assets held under a lease, and any reassessments or modifications to leases.
UK GAAP vs. IFRS The basics
11
Revenue recognition
Similarities
The requirements of IAS 18 Revenue Recognition (‘IAS 18’), on
the recognition of revenue arising from the sale of goods and
provision of services, are generally similar to those of FRS 5 App
G, although the underlying approach differs and IAS 18 includes
more extensive guidance.
Under both IAS 18 and FRS 5 App G revenue should be
measured at the fair value of the right to consideration after
deducting any amounts collected on behalf of third parties
(e.g., taxes and amounts collected on behalf of a principal in
an agency relationship) and any discounts given to customers.
Where the time value of money is material, the fair value is
determined by discounting future expected receipts using an
imputed rate of interest.
Significant differences
IFRS
Scope
UK GAAP
IAS 18 addresses the sale of goods, rendering of
services and the use of an entity’s assets yielding
interest, royalties and dividends.
In addition to the general principles of revenue
recognition, IAS 18 provides specific guidance on
measurement of revenue arising under a wide range
of different business scenarios, some of which overlap
with those discussed in FRS 5 App G.
Exchange
transactions
FRS 5 App G sets out basic principles and provides
guidance on specific situations, including long-term
contractual performance, separation and linking of
contractual arrangements (including software and
maintenance, inception fees and vouchers), bill and
hold arrangements, sales with rights of return and
presentation of turnover as principal or agent.
A transaction where goods or services are exchanged UK GAAP does not include guidance on exchange
transactions, therefore practice may vary. Generally,
or swapped for goods or services of a similar nature
the principles under UITF 26 Barter Transactions for
and value does not generate revenue.
Advertising (‘UITF 26’) may be applied in practice.
Where they are exchanged for dissimilar goods or
services, the transaction generates revenue which
should be measured at the fair value of the goods
received, (or if not reliably measurable, the fair value
of goods or services given up) adjusted by any cash and
cash equivalents transferred.
For barter transactions involving advertising, SIC 31
Revenue – Barter Transactions Involving Advertising
Services provides similar guidance to UITF 26.
Recognition of
revenue from
sale of goods
The scope of FRS 5 App G is narrower and addresses
only the supply of goods and services to a customer.
UITF 26 states that no turnover should be recognised
unless there is persuasive evidence of the value at
which the advertising could be sold for cash in a similar
transaction.
However, the CA 2006 restriction, in respect of
recognition of unrealised profits, discourages the
recognition of gains on barter transactions in the profit
and loss account.
►► Transfer of significant risks and rewards of
ownership;
Revenue arising in an exchange transaction with
a customer, e.g., on the sale of goods, should
be recognised when the entity has the right to
consideration in exchange for its performance.
►► Transfer of the continuing managerial involvement
and control of goods;
Basic principles underlying revenue recognition are
generally similar, but FRS 5 App G is less prescriptive.
Revenue shall only be recognised when all the criteria
regarding the following have been met:
►► The amount of revenue can be measured reliably;
►► It is probable that the economic benefits will flow to
the entity; and
►► The related costs of the transaction can be
measured reliably.
Additional guidance regarding accounting for the sale
of goods is provided with detailed examples in the
IAS 18.
12
UK GAAP vs. IFRS The basics
IFRS
Customer
loyalty
programmes
UK GAAP
Award credits granted as part of a sales transaction
are considered a separately identifiable component of
the sales transaction and therefore the consideration is
allocated to the award credits, measured by reference
to their fair values.
Guidance on measuring fair value does not specify
whether the fair value or relative fair value of the award
credit should be used, but the proportion of vouchers
expected to be redeemed should be considered.
Consideration in respect of the award credit is deferred
and recognised as revenue on subsequent redemption
or when the obligation to supply the award is fulfilled.
Transfers of
assets from
customers
IFRIC 18 Transfers of Assets from Customers (‘IFRIC
18’) specifies that where an entity receives an item of
P,P&E (or cash for the acquisition or construction
of such an item) that must be used to connect the
customer to a network and/or to provide ongoing
access to a supply of goods or services; the credit
arising on initial recognition of that asset represents
revenue.
There is less detailed guidance under UK GAAP.
Where vouchers are issued revenue should be reported
at the consideration received or receivable less the fair
value of the awards, having regard to the proportion of
the vouchers expected to be redeemed, only where the
fair value is significant in the context of the transaction.
Free vouchers distributed independently of a sales
transaction do not give rise to a liability, unless
products would be sold at a loss, resulting in an onerous
contract.
There is no similar guidance under UK GAAP. The ASB
did not implement IFRIC 18 into UK GAAP.
Recognition of the revenue will depend on the nature of
the services to be provided to the customer.
Interest,
royalties and
dividends
Revenue from
rendering of
services
Interest is recognised using the effective-interest
method in IAS 39 Financial Instruments: Recognition
and Measurement (‘IAS 39’).
Interest income is generally recognised at a constant
return on the carrying amount of the asset, except
where FRS 26 (same as IAS 39) is applied.
Royalties are recognised on an accruals basis in
accordance with the substance of the relevant
agreement.
FRS 5 App G does not provide specific guidance in
respect of royalties. In practice the general revenue
recognition principles would apply.
Dividends are recognised when the shareholders’ right
to receive payment is established.
Dividends are generally recognised as revenue when
there is a right to consideration.
Where the outcome cannot be measured reliably,
revenue is recognised only to the extent of costs
recognised that are considered to be recoverable, i.e.,
no profit is recognised. If it is not probable that the
costs will be recoverable, the costs are expensed.
The amount of revenue should reflect any uncertainties
as to the amount the customer will pay.
When a specific act is much more significant,
recognition of revenue is postponed until that act is
executed. Costs are expensed.
Where the right to consideration does not arise until
the occurrence of a specified future event or outcome
outside the seller’s control, revenue is not recognised
until that event occurs.
UK GAAP vs. IFRS The basics
13
Employee benefits
Similarities
IAS 19 Employee Benefits (‘IAS 19’) and FRS 17 Retirement
Benefits (‘FRS 17’) provide similar guidance in distinguishing
between and accounting for employee pension schemes as
defined contribution schemes and defined benefit schemes.
Under both GAAPs, the periodic post-retirement benefit cost
under defined contribution plans is based on the contribution
payable for the accounting period. The accounting for defined
benefit plans has many similarities as well. The defined benefit
obligation is the present value of benefits that have accrued to
employees through services rendered to that date, based on
actuarial methods of calculation.
Significant differences
IFRS
UK GAAP
IAS 19 applies to accounting for all employee benefits,
except for share-based payments which are in the
scope of IFRS 2 Share-based Payments (‘IFRS 2’).
FRS 17 only deals with retirement benefits.
Employee benefits include all forms of consideration
given by an entity (or others on its behalf) in exchange
for services rendered by employees, and include shortterm employee benefits, post-employment benefits,
other long-term employee benefits and termination
benefits.
There is no specific guidance under UK GAAP for other
employee benefits, which are generally accounted for
in a manner similar to other operating expenses i.e., on
an accruals basis.
Short-term
compensated
absences
Short-term accumulating compensated absences,
e.g., accrued holiday pay, are recognised as a liability
and measured at the additional amount that the entity
expects to pay as a result of unused entitlement that
has accumulated at the end of the reporting period.
There is no similar requirement under UK GAAP, where
practice varies as to whether accrued holiday pay is
recognised.
Defined
contribution
schemes —
discounting
Where contributions payable to a defined contribution
plan do not fall wholly due within 12 months after
the end of the period in which the employees render
services, they should be discounted at a rate based
upon high-quality bond market yields.
There is no similar specific requirement under UK
GAAP, therefore practices vary.
Recognition of
actuarial gains
and losses
An entity has the option to recognise actuarial gains
and losses immediately either through profit or loss or
OCI or by deferral using the corridor approach.
All actuarial gains and losses are recognised in the
STRGL in the period in which they arise.
Frequency of
valuations and
using experts
In determining the present value of defined benefit
obligations and the fair value of plan assets, the use of
a qualified actuary is encouraged but not required.
Full actuarial valuations by a professionally qualified
actuary must be obtained at least every three years,
and in the interim periods the actuary must review the
most recent actuarial valuation and update it to current
conditions.
Defined benefit
plans — group
schemes
An entity participating in a group plan should be able to
obtain information about the plan as a whole (measured
using IAS 19 actuarial assumptions). Group plans are
not treated as multi-employer schemes under IFRS.
Where more than one employer participates in a
defined benefit scheme (i.e., multi-employer, group
scheme or state scheme), FRS 17 permits defined
contribution accounting (with appropriate additional
disclosures) if the employer’s contributions are set
in relation to the current service period only, or the
contributions are affected by a surplus or deficit and
the employer is unable to identify its share of the
underlying assets and liabilities in the scheme on a
consistent and reasonable basis.
Scope
If the group has a contractual agreement or stated
policy for charging the net defined benefit cost of the
plan to individual group entities, each entity recognises
the net defined benefit cost so charged in its financial
statements.
If there is no such agreement or policy, the net defined
benefit cost is recognised in the separate or individual
financial statements of the group entity that is legally
the sponsoring employer of the plan. The other group
entities recognise a cost equal to their contribution
payable in the period in their financial statements.
14
FRS 20 (equivalent to IFRS 2) applies to share-based
payments.
For group schemes, this opens the possibility that in
certain circumstances, no individual entity in the group
recognises the defined benefit obligations, although in
the group financial statements containing the entities,
it is recognised.
UK GAAP vs. IFRS The basics
Recovery of
surplus and
minimum
funding
requirement
Defined
benefit plans
— settlements
and
curtailments
IFRS
UK GAAP
Where a surplus exists an entity must assess whether
the asset is recoverable. If recoverable, the asset is
measured at the lower of:
The employer should recognise an asset to the extent
that it is able to recover a surplus either through
reduced future contributions or through refunds from
the scheme.
i. The asset determined under IFRS (i.e., fair value of
plan assets plus unrecognised past service costs
and actuarial losses (less gains) less the present
value of plan obligations; and
ii. The sum of the present value of any future
refunds or reductions in future contributions, any
unrecognised net actuarial losses (corridor method
only), and unrecognised past service costs.
IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction
(‘IFRIC 14’) clarifies when refunds or reductions in
future contributions are regarded as available in terms
of the recoverability of the asset, and how a minimum
funding requirement might affect the availability of
reductions in future contributions or give rise to a
liability.
An entity recognises gains or losses on curtailment
or settlement of a defined benefit plan when the
curtailment or settlement occurs, based on the
values of plan assets and obligation remeasured using
actuarial assumptions at that time.
Where linked with a restructuring, a curtailment
is accounted for at the same time as the related
restructuring.
Other longterm employee
benefits (other
than pension)
The projected-unit method is used to determine the
liability in respect of other long–term employee benefits
(i.e., benefits which fall due 12 months after the end
of the period in which employees rendered the related
services). All actuarial gains and losses are recognised
immediately in profit or loss.
There is no guidance on the treatment of minimum
funding requirements or the requirement to consider
minimum funding requirements in determining the
amounts recoverable from employer contributions.
Losses arising on a settlement or curtailment not
allowed for in the actuarial assumptions are measured
at the date on which the employer becomes committed
to the transaction.
Gains arising on a settlement or curtailment not allowed
for in the actuarial assumptions are measured at the
date on which all parties whose consent is required are
irrevocably committed to the transaction.
There are no specific rules in relation to other longterm employee benefits. General practice is to provide
for the estimate of the future liabilities and spread the
cost over the vesting period.
In addition to the key differences highlighted above, there are slight differences in terminology between the two standards and related
guidance (e.g., the definition of expected return or discount rate) which could lead to a different treatment in certain circumstances.
UK GAAP vs. IFRS The basics
15
Government grants
Similarities
IAS 20 Government Grants (‘IAS 20’) and SSAP 4 Accounting for
Government Grants (‘SSAP 4’) provide guidance in respect of
government grants and other forms of government assistance.
Both standards restrict the recognition of grant income in profit
or loss until there’s reasonable assurance of receipt of the grant
and the entity’s fulfilment of associated conditions. If the grant
relates to immediate support or compensation for past expenses,
it is recognised immediately. Grants are recognised in profit
or loss on a systematic basis in the periods in which an entity
recognises, as expenses, the related costs for which the grants
are intended to compensate.
Significant differences
IFRS
Scope
UK GAAP
IAS 20 excludes from its scope government assistance
provided for an entity that is in the form of benefits
available in determining taxable profits (or losses) or
which are determined or limited based on an income tax
liability, associated with government ownership of the
entity, or related to biological assets accounted for at
fair value less costs to sell under IAS 41. In general, IAS
20 should not be applied by analogy to non-government
grants.
The scope of SSAP 4 is wider, it includes agricultural
grants and may be applied as best practice for
accounting for grants and assistance from sources
other than government.
SSAP 4 does not address below market interest rate
loans.
Government grants include a below market interest
rate loan.
Criteria for
recognition
Government grants are not recognised until there is
reasonable assurance that the entity will comply with
the conditions attached and that the grants will be
received.
Government grants are not recognised in profit or loss
until the conditions for receipt have been complied
with and there is reasonable assurance that it will be
received.
Non-monetary
grants
An entity may chose to record the grant at fair value or
nominal value of the non-monetary asset received.
Non-monetary grants are measured at the fair value of
the assets transferred.
Presentation of
a grant related
to an asset
On the balance sheet an entity may choose to offset the
grant against the carrying amount of the related asset
or recognise the grant separately as deferred income
and amortise over the useful life of the related asset.
In principle, UK GAAP allows both the treatments
allowed under IFRS. However, the Companies Act 2006
prohibits the deduction of a grant amount from the
carrying amount of an asset.
Conversely, where a grant becomes repayable, the
entity can either increase the asset’s carrying amount
or reduce any deferred income in respect of the grant.
Where a grant becomes repayable, an entity is not
permitted to increase the carrying amount of the
related asset.
16
UK GAAP vs. IFRS The basics
Foreign exchange
Similarities
FRS 23 The Effects of Changes in Foreign Exchange Rates (‘FRS
23’) implements IAS 21 The Effects of Changes in Foreign
Exchange Rates (‘IAS 21’) guidance into UK GAAP. However,
FRS 23 is only applicable to UK companies that apply FRS 26.
All other companies apply SSAP 20 Foreign currency translation
(‘SSAP 20’) which is the basis for the comparison given below.
Similar to IAS 21 (FRS 23), SSAP 20 requires an entity to
determine its main currency, i.e., local currency (IAS 21/FRS
23 uses the term functional currency) and provides guidance
as to how this should be determined. Both standards provide
guidance as to how entities should translate their transactions
and balances denominated in any other currencies (i.e., foreign
currencies) as well as the results and balance of their foreign
operations. A foreign currency transaction is translated into the
functional/local currency and initially recognised at that amount.
Subsequently, foreign currency balances are translated at
closing rates for monetary assets and liabilities (with exchange
differences reflected in profit or loss), historical rate for nonmonetary items measured at historical cost, and the exchange
rate ruling on the date when the fair value was determined for
non-monetary assets carried at fair value (where revaluation
gains are recognised in OCI/equity so are the related gains
exchange differences).
Significant differences
IFRS
Determining
functional
currency
UK GAAP
Functional currency is the currency of the primary
economic environment in which the entity operates and
that mainly influences labour, material and other costs
of providing goods and services.
IAS 21 provides a list of factors to be considered when
determining functional currency.
Translation
of foreign
currency
transactions
Foreign currency balances are translated at closing rate
for monetary assets and liabilities; historical rate for
non-monetary items measured at historical cost; and
for non-monetary assets carried at fair value, at the
exchange rate when the fair values were determined.
IFRS does not permit the use of a contracted rate or
a forward rate under a related or matching forward
contract. Derivatives e.g., forward contracts and
hedging relationships are dealt with under IAS 39.
Translation to
a presentation
currency
An entity translates income and expenses for each
income statement (i.e., including comparatives) at
exchange rates at the dates of the transactions (or an
approximation thereof) and assets and liabilities (i.e.,
including comparatives) at the closing rate at the date of
that balance sheet.
Local currency (under SSAP 20) is the currency of the
primary economic environment in which the entity
operates and generates net cash flows.
SSAP 20 guidance on determining an entity’s local
currency is less prescriptive than IAS 21/FRS 23.
A similar requirement, but the use of contracted or
forward rates is permitted.
A transaction that is to be settled at a contracted rate is
translated at that rate, and where a trading transaction
is covered by a related or matching forward contract,
the rate of exchange specified in that contract may be
used.
There is no concept of presentation currency.
Financial statements are generally prepared in the
entity’s ‘local’ currency.
Exchange differences are recognised in OCI under a
separate component of equity.
Foreign
operation
A foreign operation is an entity that is a subsidiary,
associate, joint venture or branch of a reporting entity,
the activities of which are based or conducted in a
country or currency other than those of the reporting
entity.
A foreign enterprise includes a subsidiary, associated
company or branch whose operations are based in a
country other than that of the investing company or
whose assets and liabilities are denominated mainly in a
foreign currency.
Groups of assets and liabilities accounted for in foreign
currencies will not be viewed as a foreign operation.
A foreign branch is either a legally constituted
enterprise or a group of assets and liabilities accounted
for in foreign currencies.
UK GAAP vs. IFRS The basics
17
Foreign exchange
Significant differences (cont’d)
IFRS
Translation
of a foreign
operation with
a non-hyperinflationary
currency
UK GAAP
On translation of a foreign operation with a nonhyperinflationary currency into a presentation currency
of the parent for the purposes of the group financial
statements, similar procedures apply as for the
translation into the presentation currency above.
Goodwill and any fair value adjustments arising on
the acquisition of a foreign operation are treated as
assets and liabilities of the foreign operation. They are
expressed in the functional currency of the foreign
operation and are translated at the closing rate upon
subsequent consolidation by the investor.
Two methods of translation are allowed:
►► The closing-rate method whereby the profit and loss
account of a foreign operation may be translated
using average or closing rates. All assets and
liabilities on the balance sheet are translated at the
closing date. Exchange differences are recognised
in reserves.
►► The temporal method which is similar to the
translation of the entity’s own foreign currency
transactions and balances (see above) is used where
the foreign enterprise is closely interlinked with the
investing company such that its results are more
dependent on the investor’s economic environment.
There is no specific guidance under SSAP 20 in respect
of goodwill and fair value adjustments in respect of the
foreign operations acquired.
Net
investment
in a foreign
operation
– monetary
items
In the consolidated financial statements, exchange
differences on monetary items which are part of the
net investment in the foreign operation (i.e., long term
receivables and loans for which settlement is neither
planned not likely to occur in the foreseeable future) are
recognised in OCI in a separate component of equity and
are recognised in the income statement on disposal of
the net investment.
In the separate financial statements of the reporting
entity and the foreign operations, the exchange
differences are recognised in profit or loss.
Hedges of net
investment
in a foreign
operation
Net investment hedging can only be applied in
the consolidated financial statements. The usual
designation, documentation and effectiveness testing
requirements apply.
To the extent the hedge is effective, exchange
differences on the hedging instrument are taken to a
separate component of equity. Any ineffectiveness is
recognised immediately in profit or loss.
In the financial statements of the parent, a loan would
be accounted for as a fair value hedge of the investment
in the subsidiary. Any exchange differences on the loan
are taken to profit or loss, but this will be offset by any
exchange gain or loss on the investment.
Disposal of
a foreign
operation
The cumulative exchange differences that were
previously deferred in a separate component of
equity shall be reclassified to profit or loss when the
gain or loss on disposal is recognised. On disposal
of a subsidiary, with loss of control, any exchange
differences relating to non-controlling interests are
derecognised but not recognised in profit or loss
account.
Exchange differences on long term loans or
intercompany deferred trading balances which are
intended to be as permanent as equity are treated as
part of the net investment in the foreign enterprise and
are recognised in reserves in the consolidated financial
statements.
In the individual financial statements of the investing
company, such exchange differences are taken
to reserves, although an alternative treatment
is to report such items at historical rate (as if a
non-monetary item).
Where certain conditions are met, the cover method
permits the exchange differences on foreign currency
loans used to finance or to hedge the exchange risk
on its investment in foreign enterprises (including
permanent as equity loans and deferred trading
balances) to be taken to reserves.
This method is also applicable in the parent’s
individual entity accounts where a company uses
foreign currency borrowings to finance or hedge
its foreign equity investments and meets certain
conditions.
There is no requirement for cumulative exchange
differences to be identified in a separate component
of equity, nor to be reclassified to profit or loss on
disposal, unless where FRS 23 is applied. Where FRS 23
is applied, the rules on recycling exchange differences
differ from those under IAS 21 in certain respects.
IAS 29 (FRS 24 under UK GAAP) Financial Reporting in Hyper-inflationary Economies (‘IAS 29’) and UITF 9 Accounting for Operations
in Hyper-inflationary Economies (‘UITF 9’) deal with the translation of results and balances of an entity whose functional currency is a
hyper-inflationary currency. There are different rules under IAS 29 and UITF 9 for the translation of results and balances of a foreign
operation whose currency is the currency of a hyper-inflationary economy. .
18
UK GAAP vs. IFRS The basics
Borrowing costs
Similarities
IAS 23 Borrowing Costs (‘IAS 23’) addresses the treatment
of borrowing costs directly attributed to the acquisition,
construction or production of a qualifying asset (i.e., an asset
that necessarily takes a substantial period of time to get ready
for its intended use or sale). Accounting Regulations under the
Companies Act 2006 (‘CA 2006’) allow capitalisation of finance
costs. FRS 15 addresses the capitalisation of finance costs
relating to tangible fixed assets where an entity takes the option
to capitalise finance costs as permitted under CA 2006. Thus
under IFRS, entities must capitalise borrowing costs that meet
certain criteria while under UK GAAP capitalisation is optional.
IFRS and UK GAAP address the treatment of borrowing costs on
specific and general borrowings. Where general borrowings are
used, an appropriate capitalisation rate based on the weighted
average of the relevant actual borrowing costs should be
used. In both cases similar guidance is provided on the timing
of commencement of capitalisation of borrowing costs, its
suspension during extended periods in which active development
is suspended and when an entity should stop capitalisation (when
substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete).
Although the rules on capitalisation when applied under IFRS
and UK are similar, there may be differences in the detailed
application, some of which are highlighted below.
Significant differences
IFRS
UK GAAP
Scope
A qualifying asset may be any asset (including property,
plant and equipment, intangible assets, investment
properties and inventories) except that capitalisation is
not mandatory for a qualifying asset measured at fair
value or inventories that are manufactured or otherwise
produced, in large quantities on a repetitive basis.
The scope of FRS 15 only applies to tangible fixed
assets although similar guidance may be applicable to
other assets where capitalisation would be permitted
under the CA 2006.
Capitalisation
of borrowing
costs
All borrowing costs directly attributable to the
acquisition, construction or production of a qualifying
asset are capitalised.
Capitalisation of finance costs is a policy choice as
permitted under CA 2006.
Where specific borrowings are used, actual borrowing
costs incurred, less any investment income on
temporary investment of funds, are capitalised.
While investment income is not explicitly deducted in
determining finance costs to be capitalised, FRS 15
requires that finance costs to be capitalised are the
actual costs incurred in respect of the expenditure on
the asset.
The capitalisation rate is the weighted average of the
borrowing costs applicable to borrowings outstanding
in the period other than borrowings made specifically
for the purpose of obtaining a qualifying asset.
The capitalisation rate is based on the weighted average
rates applicable to general borrowings outstanding
in the period. General borrowings under FRS 15,
however, explicitly exclude borrowings for other specific
purposes, e.g., acquiring other tangible assets or loans
to hedge foreign investments.
Capitalisation
rate
Borrowing costs capitalised shall not exceed the
borrowing costs incurred in the period.
In practice, finance costs are often expensed.
UK GAAP vs. IFRS The basics
19
Consolidated and separate
financial statements
Similarities
IAS 27 Consolidated and Separate Financial Statements (‘IAS
27’) and FRS 2 Accounting for Subsidiary Undertakings (‘FRS
2’) provide similar guidance on the preparation of consolidated
financial statements. While the detailed conditions for exemption
from preparing consolidated financial statements differ
between FRS 2 (which are based on the CA 2006) and IAS 27,
for companies preparing financial statements under EU adopted
IFRS (rather than as issued by the IASB), the requirements to
prepare consolidated financial statements are as set out in
company law.
The determination of whether or not entities are consolidated by
a reporting entity is based on control, although some differences
exist in the definition of control. This difference in definition will
often not result in a practical effect.
Under both IAS 27 and FRS 2 a subsidiary’s financial statements
should be prepared using consistent accounting policies and as of
the same date as the financial statements of the parent unless it
is impracticable to do so. The basic consolidation procedures are
also similar under the two standards.
Significant differences
IFRS
UK GAAP
Scope
IAS 27 specifies the treatment to be applied in
consolidated financial statements and in accounting for
investments in subsidiaries, jointly controlled entities,
and associates in the individual financial statements of
the parent of the group, investor or venturer.
FRS 2 applies to consolidated financial statements and
to the individual financial statements of a parent that
has taken the exemption not to prepare consolidated
financial statements. The treatment of investments in
subsidiaries, associates and joint ventures is addressed
under the CA 2006.
Control
Control is the power to govern the financial and
operating policies of an entity so as to obtain benefits
from its activities.
Subsidiary undertakings include undertakings where
an investor has actual exercise of dominant influence or
control over the undertaking.
Where potential voting rights exist that are currently
exercisable or convertible, an investor is required to
consider all facts and circumstances but is not required
to consider the intention of management and the
financial ability to exercise or convert such rights.
There is no additional guidance therefore where
potential voting rights exist, the general definition
of a subsidiary would be considered (i.e., not just
currently exercisable but also the intention and ability
to exercise).
A special-purpose entity (SPE) is consolidated when
the substance of the relationship is that the SPE is
controlled by the entity.
A quasi-subsidiary undertaking is a company, trust,
partnership or other vehicle which (though not fulfilling
the definition of a subsidiary undertaking) is directly or
indirectly controlled by the reporting entity and gives
rise to benefits no different from those that would arise
if the vehicle was a subsidiary.
Specialpurpose
entities
Control may exist even if the entity owns little
or no equity in the SPE and may arise through
predetermination of the SPE’s activities (operating on
autopilot).
SIC 12 Consolidation — Special Purpose Entities (‘SIC
12’) provides further guidance on determining whether
an entity has control over an SPE.
Exclusion of
subsidiaries
from
consolidation
20
Consolidated financial statements should include all
subsidiaries of the parent.
Where a subsidiary is classified as held for sale, it is still
consolidated, however IFRS 5 measurement rules apply.
A quasi-subsidiary undertaking should be consolidated
(unless it is held exclusively for resale and has not
previously been consolidated).
Subsidiaries must be excluded from consolidation where
severe long-term restrictions substantially hinder the
exercise of the rights of the parent over the assets or
management of the subsidiary, or the parent’s interest
is being held exclusively with a view to resale (provided
the subsidiary has not been consolidated previously).
UK GAAP vs. IFRS The basics
IFRS
Employee
Share Option
Plans/
Employee
Benefit Trusts
(ESOPs/ EBTs)
UK GAAP
A sponsoring company should consolidate an ESOP/EBT
that it controls.
In practice, some entities include the ESOP/EBT within
the individual financial statements of the sponsoring
company in addition to consolidation in the group
financial statements.
The sponsoring company of an ESOP/EBT should
recognise the assets and liabilities of the trust in its own
financial statements whenever it has de facto control of
those assets and liabilities.
If the shares held by the ESOP are those of the group’s
parent, they should be accounted for as treasury
shares.
Consolidation
— coterminous
periods
If it is impracticable to use subsidiary financial
statements prepared at the same reporting date, noncoterminous subsidiary financial statements may be
used provided they are prepared within three months
of the parent’s reporting date, are for the same length
of period and appropriate adjustments are made
for significant transactions or events between the
subsidiary’s and parent’s reporting dates.
The use of non-coterminous subsidiary financial
statements (subject to similar appropriate adjustments
for significant transaction/events) is permitted but only
where the subsidiary’s reporting period end is within
three months before the parent’s reporting date.
Noncontrolling
interest (NCI)
NCI is the equity in a subsidiary not attributable
to owners of the parent. It comprises the amount
of NCI identified in a business combination, plus
the NCI’s share of changes in equity since the
business combination.
Minority interest (MI) is the interest in a subsidiary
undertaking included in the consolidation that
is attributable to the shares held by, or on
behalf of, persons other than the parent and its
subsidiary undertakings.
NCI is a wider concept than minority interest and
would include share options or the equity component
of convertible loans issued by a subsidiary. However,
the proportion of profit or loss and changes in equity
allocated to NCI are determined based on present
ownership interest.
There is no option to fair value MI at the time of
acquisition and changes in equity allocated to MI are
determined based on present ownership interest.
The policy adopted by an entity on initial recognition
of NCI (i.e., fair value of the NCI interests or the
NCI’s proportionate share of the fair value of the
identifiable net assets) would determine the amount
of NCI in subsequent periods. The choice is made on a
transaction by transaction basis.
Losses
attributable
to NCI
Total comprehensive income is attributed to the owners
of the parent and to the NCI, even if this results in the
NCI having a deficit balance.
Losses in excess of the MI’s share in the subsidiaries
are attributable to the MI except that the group should
make a provision to the extent it has any commercial
or legal obligation to provide finance that may not be
recoverable in respect of those losses.
UK GAAP vs. IFRS The basics
21
Consolidated and separate
financial statements
Significant differences (cont’d)
IFRS
Reduction in
ownership
without losing
control (partial
disposals)
UK GAAP
The carrying amounts of the controlling and noncontrolling interests are adjusted to reflect the changes
in their relative ownership interests in the subsidiary.
Any difference between such amount and the fair value
of the consideration paid or received is recognised
directly in equity and attributed to the owners of the
parent.
The proportionate share of the cumulative exchange
differences recognised in OCI is reattributed to the
NCI in the foreign operation where the subsidiary is a
foreign operation. Similar adjustments are needed for
other elements of OCI.
Loss of control
of a subsidiary
A gain or loss is recognised as the net effect of:
The difference between the carrying amount of the
subsidiary’s net assets (including any unamortised
goodwill) attributable to the group’s interest before
and after the reduction, together with any proceeds
received, are recognised in the group profit or loss.
Where FRS 23 is not applied, exchange differences
related to foreign operations are not recycled. Where
FRS 23 is applied the requirements for recycling
differ to those in IAS 21. Recycling of other elements
recognised in the STRGL is not explicitly addressed.
The gain or loss on disposal is calculated by comparing:
►► The carrying amount of the subsidiary’s net assets
including goodwill;
►► The carrying amount of the group’s share of the
net assets of the subsidiary undertaking (including
unamortised goodwill and goodwill previously
►► The carrying amount of any non-controlling interest;
eliminated against reserves) before disposal; with
►► Fair value of any investment retained as at date of
►► Any remaining carrying amount attributable to the
loss of control; and
group’s interest after the cessation together with
►► Any gains and losses reclassified to profit or loss
any proceeds received.
from OCI (including exchange differences).
Where FRS 23 is applied, the requirements for recycling
foreign exchange differences differ to IAS 21 notes.
Accounting for
investments in
the separate
financial
statements
Interests in subsidiaries, jointly controlled entities
(JCEs) and associates are carried either at cost (except
if classified as held for sale) or in accordance with IAS
39 rules.
Each category of investments (e.g., all subsidiaries),
should be treated consistently.
Where investments in JCEs and associates are carried
at fair value under IAS 39 (permitted for certain
investment entities) in the consolidated financial
statements, they must also be accounted for in the
same way in the separate financial statements.
22
In the parent’s individual accounts, CA 2006 allows
investments to be carried at:
►► Cost less impairment;
►► Valuation (using the alternative accounting rules,
with revaluation changes taken to reserve); or
►► I► n accordance with FRS 26 where applied (mainly
as available-for-sale financial assets given that
fair value through profit or loss classification is
permitted only in rare circumstances).
UK GAAP vs. IFRS The basics
Interests in associates and
joint ventures
Similarities
Interest in associates
Interest in joint ventures
IAS 28 Associates (‘IAS 28’) and FRS 9 Associates and Joint
Ventures (‘FRS 9’) provide similar guidance on the accounting
for an investor’s interest in an associate. Generally, both use the
equity method whereby the investment in an associate should
initially be recognised at cost, and adjusted thereafter for the
post-acquisition changes in the investor’s share of net assets of
the investee.
IAS 31 Interests in Joint Ventures (‘IAS 31’) and FRS 9 provide
guidance on accounting for investors’ interests in various forms
of jointly controlled arrangements which may or may not be in
the form of a legal entity (i.e., company, partnership etc.).
Any profit or loss on a transaction with an associate is recognised
only to the extent of an unrelated investor’s interest in the
associate (i.e., the investor’s share is eliminated). Distributions
received from an investee reduce the carrying amount of the
investment.
Both standards require that the most recently available
financial statements of the associate prepared using consistent
accounting policies are used in applying the equity method.
On disposal of the investment or where the investor’s interest
ceases to be an associate and becomes an investment under
IAS 39, the gain or loss arising is recognised in the income
statement.
Under both standards the accounting treatment is prescribed
based on the type of joint venture. An investor in a joint venture
applies the gross equity method under UK GAAP (similar to
equity method with expended disclosures on the face of the
primary finances statements). Under IFRS, an investor in a jointly
controlled entity, may choose to apply the equity method.
In accounting for the venturer’s interest in jointly controlled
operations (i.e., not in an entity) under both standards, the
general rule is that each venturer accounts for the assets that
it controls, the liabilities it incurs and its share of the income
and expenses of the jointly controlled operations. However
differences may exist in the detailed application of the rules to
specific joint arrangements. In both cases, the most recently
available financial information prepared using consistent
accounting policies is used.
The carrying amount of the interest in associates is presented as
one line on the statement of financial position (or balance sheet)
and the investor recognises its share of the profit or loss in the
investor’s profit or loss as one line item.
Significant differences
IFRS
Scope
UK GAAP
The requirements to apply the equity method for
an interest in an associate, or the equity method or
proportionate consolidation for a joint venture do
not apply:
Equity accounting is only required in consolidated
financial statements, but FRS 9 requires information
using equity method where the investor does not
prepare consolidated accounts.
►► If the interest is classified as held for sale;
There is no exemption from equity accounting when
an interest in an associate or a joint venture is held
for sale.
►► Where the investor is also a parent exempt from
consolidation (or is not a parent but meets the same
criteria for exemption); or
►► If the interest is held by a venture capitalist, mutual
funds, unit trust funds and similar entities and the
interest is measured at fair value through profit
and loss.
Investment funds account for all investments held as
part of their investment portfolio, in the same way
(i.e., at cost or market value using a true and fair
override) including where there is significant influence
or joint control.
UK GAAP vs. IFRS The basics
23
Interests in associates and
joint ventures
Significant differences (cont’d)
IFRS
Definition of an
associate
UK GAAP
An associate is an entity (other than a subsidiary or a
joint venture) over which the investor has significant
influence.
An associate is defined as an entity (other than a
subsidiary) in which the investor has a participating
interest and exercises significant influence.
There is no requirement for the investor to hold a
participating interest.
A participating interest held in shares is a beneficial
interest held in another entity on a long-term basis for
the purpose of securing a contribution to the investor’s
activities by the exercise of control or influence arising
from, or related to, that interest.
Significant influence is presumed to exist if the investor
owns (directly or indirectly) 20% or more of the voting
rights of an entity.
Types of joint
ventures
Accounting for
JCEs
The effect of exercisable or convertible rights to shares
held by the investor should be considered, but not
management’s intention and/or the entity’s financial
ability to exercise such rights or options.
It is presumed under company law that a holding of 20%
or more of the shares will be a participating interest,
and a holding of 20% or more of the voting rights will be
presumed to exercise a significant influence, unless the
contrary is shown.
The investor’s share of the associate and any changes
are determined based on present ownership interests
and do not reflect the possible exercise or conversion of
potential voting rights.
In determining the most appropriate investor’s share,
options or interests convertible to shares may be taken
into account depending on the conditions attached
to them, and the substance of the rights held by the
investor.
The three categories of joint ventures are:
FRS 9 identifies the following two main categories:
►► Jointly controlled operations (JCO);
►► Joint ventures (JV); and
►► Jointly controlled assets (JCA); and
►► Other joint arrangements which include:
►► Jointly controlled entities (JCE).
►► A joint arrangement that is not an entity; and
Activities that have no contractual agreement to
establish joint control are not joint ventures.
►► A structure with the form but not the substance
of a JV.
JCEs are accounted for using either:
i. The equity method (same as for associates); or
ii. Proportionate consolidation, whereby the venturer
recognises its share of each of the assets that
it controls jointly, liabilities for which it is jointly
responsible, and the income and expenses of the
jointly controlled entity.
JVs are accounted for using the ‘gross equity method’
only, which is the same as the equity method for
associates (including amortisation of related goodwill)
except for the gross presentation in the balance sheet
and profit and loss account.
Proportionate consolidation is not permitted.
The procedures for proportionate consolidation are
similar to consolidation of subsidiaries.
Goodwill
amortisation
Goodwill is not amortised under the equity method.
Loss-making
associates and
JCE
Under the equity method, once an investor’s interest
in a JCE (including long term interests that are in
substance part of the interest) or associate is reduced
to zero, it does not recognise its share of further losses
unless where there is a legal or constructive obligation
or the investor has made payments on behalf of the
associate.
Where proportionate consolidation is applied for a
JCE, goodwill is not amortised but is subject to annual
impairment testing.
The carrying amount of the investment in the JV or
associate is adjusted in each period by any amortisation
or writing off of goodwill related to the investment.
The investor should continue to use the equity/gross
equity method even if this results in an interest in net
liabilities, unless there is sufficient evidence that an
event has irrevocably changed the relationship between
the investor and its investee, marking its irreversible
withdrawal from its investee as its associate or JCE.
Under the proportionate consolidation method, the
investor’s share of JCE’s losses is recognised in full.
24
UK GAAP vs. IFRS The basics
IFRS
Gains or loss on
an investment
ceasing to be
an associate
of JCE
UK GAAP
An investor recognises, as a gain or loss, the difference
between:
The profit or loss is calculated as:
►► The sum of the fair value of the retained investment
plus any proceeds from the disposal; and
►► The sum of the carrying amount of the investor’s
share of net assets when the significant influence or
joint control ceases and any unamortised goodwill.
►► The carrying amount of the investment at the date
when significant influence or joint control ceased.
Gains or losses previously recognised in OCI, including
foreign exchange differences, are reclassified to the
income statement.
Impairment of
associates and
JCEs
►► The sales proceeds; less
There is no specific requirement to transfer gains and
losses (e.g., exchange differences) from equity to profit
or loss. Where FRS 23 is applied the rules for recycling
exchange differences are different to IFRS rules.
If an investor’s proportionate ownership interest is
reduced, but there is no loss of significant influence or
joint control, the proportionate interest is reclassified
through OCI.
There is no similar requirement under UK GAAP.
After application of the equity method, including
recognising any additional losses where applicable, the
investor applies the indicators in IAS 39 to determine
whether further impairment is required.
Investments in associates and JVs are reviewed for
impairment when circumstances exist that indicate
the investment may be impaired under FRS 11
Impairment of Fixed Assets and Goodwill (‘FRS 11’)
rules. If impaired, such goodwill is written down to its
recoverable amount.
If there are impairment indicators (under IAS 39) the
entire investment is tested for impairment separately
(including goodwill), using the rules in IAS 36, for
each investment unless the JCE or associate does not
generate cash flows largely independent of those of the
other assets of the entity.
Value in use may be determined either by considering
the entity’s share of the net present value of the JCE or
the associate’s cash flows, or the present value of the
expected dividend cash flows (in both cases together
with the expected proceeds from ultimate disposal).
Where FRS 26 is applied, financial assets that are not
part of the investment in the associate (e.g., loans to
associates) are tested for impairment separately. The
rules under the CA 2006, otherwise, apply to such
balances depending on whether they are classified as
current assets or fixed asset investments.
UK GAAP vs. IFRS The basics
25
Impairment of assets
Similarities
IAS 36 Impairment of Assets (‘IAS 36’) and FRS 11 Impairment
of Fixed Assets and Goodwill (‘FRS 11’) specify the timing
and process for impairment testing as well as the treatment
of impairment charges. However, the impairment of certain
types of assets, e.g., financial assets (IAS 39/FRS 26) and
biological assets (IAS 41) are addressed in those standards.
This comparison covers the IAS 36 and FRS 11 impairment
rules only. Both standards require that assets should be tested
for impairment when events or changes in circumstances
indicate that the carrying amount of the assets (or the cash
generating unit/income generating unit of which the assets
are part) may not be recoverable. They also specify the
circumstances in which a mandatory impairment review is
required (not identical). They provide similar guidance on the
indicators of potential impairment. Where impairment exists,
both standards require that the carrying amount of the assets
(or group of assets) should be written down to the recoverable
amount, determined as the higher of the value in use and fair
value less costs to sell or net realisable amount under UK GAAP).
Cash flow projections used for impairment review should be
based on the most recent management forecasts based on
reasonable and supportable assumptions generally over a
period of no longer than five years, unless a longer period can
be justified.
Significant differences
IFRS
Timing of
impairment
reviews
UK GAAP
An assessment as to whether impairment indicators
exist must be performed at the end of each reporting
period. If impairment indicators exist, an impairment
review should be performed.
Fixed assets and goodwill are reviewed for impairment
when events or changes in circumstances indicate that
the carrying amount of the fixed asset or goodwill may
not be recoverable.
Annual impairment testing is required for goodwill
and for an intangible asset with an indefinite life or an
intangible asset not yet available for use.
Annual impairment reviews are required where the
useful economic life of an intangible asset or goodwill
exceeds 20 years from initial recognition, or is
indefinite. Annual impairment reviews are also required
for tangible fixed assets where no depreciation is
charged (as immaterial) or where the remaining life
exceeds 50 years.
For intangible assets or goodwill with useful lives of 20
years or less from initial recognition, ‘first year review’
is required, at the end of the first year after acquisition.
Cash vs.
Incomegenerating
units
A cash-generating unit (CGU) is the smallest identifiable
group of assets that generates cash inflows that are
largely independent of the cash flows from other assets
or groups of assets.
An income-generating unit (IGU) is a group of assets,
liabilities and associated goodwill that generates
income that is largely independent of the reporting
entity’s other income streams.
Allocating
goodwill to
CGUs
Each unit or group of units to which goodwill is
allocated shall represent the lowest level within the
entity at which the goodwill is monitored for internal
management purposes and not be larger than an
operating segment as defined in IFRS 8 Segment
Reporting (‘IFRS 8’) before aggregation.
If they were acquired as part of the same investment
and relate to similar parts of the business, units may
be combined in assessing recoverability of the related
goodwill.
The amount of goodwill is measured on the basis of
the relative values of the operations disposed of and
retained unless another method better reflects the
goodwill associated with the disposed operation.
With the exception of the treatment of an acquired
operation merged with an existing operation
(see below), there is no explicit guidance on how
goodwill relating to the disposed operation, or on a
reorganisation is determined.
Disposals and
reorganisations
of CGUs
containing
goodwill
26
The requirements are similar when an entity
reorganises its reporting structure so as to change the
composition of the units to which goodwill is allocated.
Where assessed on a combined basis, the IGUs are
reviewed individually first, and then the combined unit
is reviewed to assess recoverability of goodwill.
UK GAAP vs. IFRS The basics
IFRS
UK GAAP
Acquired
business
merged with
existing
business
There is no requirement to calculate any notional
internally generated goodwill within the existing
business. The goodwill acquired is allocated as above.
Cash flows used
in the value-inuse test
Future cash flows should be estimated for the asset (or
CGU) in its current condition and should exclude cash
flows expected to arise from a future restructuring, to
which an entity is not yet committed for improving or
enhancing performance.
A notional carrying amount of internal goodwill existing
at the date of the ‘merger’ is determined and added
to the carrying amount of the combined IGU for the
purpose of performing impairment reviews.
Any impairment identified subsequent to the merger
is allocated pro-rata to the existing and the acquired
businesses and only the portion relating to the
acquired goodwill (and any intangible or fixed assets) is
recognised in the financial statements.
Foreign currency cash flows are estimated in the
currency in which they are generated and discounted
using a discount rate appropriate to that currency, and
then the present value is translated at the spot rate at
the date of the value-in-use calculation.
For newly acquired IGUs, FRS 11 permits the costs and
benefits of future reorganisations and related capital
expenditure anticipated at the time of performing the
first full year review, and which are consistent with the
budgets and plans at the time, in that and subsequent
impairment reviews, to the extent that the investment
or reorganisations are still to be incurred. Failure to
undertake these per planned schedule, however, may
indicate impairment and that these should be reserved
for the cash flow forecasts.
There is no specific guidance on foreign currency cash
flows.
Allocation of an
impairment loss
for a CGU/IGU
Reversal of
impairment
losses
Impairment loss is allocated first to reduce the carrying
amount of any goodwill allocated to the CGU and
then to the other assets pro-rata on the basis of their
relative carrying amounts.
Impairment losses are allocated first to goodwill, then
to intangible assets capitalised in the unit and then prorata to other tangible fixed assets.
The carrying value of each asset must not be reduced
below the higher of its fair value less costs to sell, its
value in use or zero.
An intangible asset with a readily ascertainable market
value (which will rarely be the case) or whose net
realisable value can be measured reliably should not be
written down below its net realisable value.
An impairment loss is only reversed if there has been
a change in the estimates used to determine the
recoverable amount as a result of a reversal of the
factors that caused the original impairment. Reversal
of goodwill impairment losses is not permitted.
Impairment losses on goodwill and intangible fixed
assets are reversed if, and only if, there is an external
event reversing the impairment in an unforeseen
way or the loss arose on an intangible with a readily
ascertainable market value.
For assets other than goodwill, the reversal of an
impairment loss is recognised as a gain in income
unless the asset is carried at a revalued amount in
accordance with another standard, in which case it is
treated as a revaluation increase in accordance with
that standard.
If the recoverable amount of an asset increases
because of a change in economic conditions or
expected use of the asset, the reversal of impairment
is recognised in profit or loss to the extent that the
original impairment loss (adjusted for subsequent
depreciation) was recognised in profit or loss.
The reversal is allocated pro-rata to the assets, other
than goodwill.
For a revalued asset, any remaining balance of a
reversal is recognised in the STRGL.
UK GAAP vs. IFRS The basics
27
Provisions, contingent liabilities and
contingent assets
Similarities
FRS 12 Provisions, Contingent Liabilities and Contingent Assets
(‘FRS 12’) implements guidance under IAS 37 Provisions,
Contingent Liabilities and Contingent Assets (‘IAS 37’) in UK
GAAP. FRS 12 is virtually identical to IAS 37. Both standards
require an entity to recognise a provision if, and only if, a present
obligation (legal or constructive) has arisen as a result of a past
event (the obligating event), payment is probable (‘more likely
than not’) and the amount can be estimated reliably.
The amount recognised as a provision should be the best
estimate of the expenditure required to settle the present
obligation at the balance sheet date; that is, the amount that an
entity would rationally pay to settle the obligation at the balance
sheet date or to transfer it to a third party.
In reaching its best estimate, the entity should take into account
the risks and uncertainties that surround the underlying events.
Restructuring provisions should include only direct expenditures
caused by the restructuring, not costs that are associated with
the ongoing activities of the entity.
Contingent liabilities and contingent assets should not be
recognised, but should be disclosed unless the possibility of an
inflow or outflow of economic resources is remote. When the
realisation of income is virtually certain, then the related asset is
not a contingent asset and its recognition is appropriate.
Significant differences
IFRS
Future
operating
losses
UK GAAP
Provisions should not be recognised for future
operating losses.
Generally provisions for future operating losses are not
permitted.
However, FRS 3 Reporting financial performance
includes an exception that where a decision has
been made to sell or terminate an operation, any
consequential provisions should reflect the extent
to which obligations have been incurred that are not
expected to be covered by the future profits of the
operation. The provision should cover only the direct
costs of the sale or termination and any operating
losses up to the date of sale of the termination (after
taking into account the aggregate profit, if any, from the
future profits of the operation).
Provisions are only made when the entity is
demonstrably committed to the sale or termination of
the operation at the balance sheet date (which requires
a binding sale agreement).
28
UK GAAP vs. IFRS The basics
Intangible assets
Similarities
The definition of intangible assets ‘identifiable non-monetary
assets without physical substance’ is superficially similar under
IAS 38 Intangible Assets (‘IAS 38’) and FRS 10 Goodwill and
Intangible (‘FRS 10’), but there is much greater recognition of
intangible assets under IFRS than has been traditionally the
case under UK GAAP, which has a more restrictive definition and
recognition criteria.
The recognition criteria under both standards require that
there be probable future economic benefits and costs that
can be reliably measured. Intangible assets acquired as part
of a business combination may be recognised separately from
goodwill if certain conditions are met. With the exception of
development costs (under SSAP 13 ‘Research and development’)
or the ‘development phase’ of an internally developed intangible
asset under IAS 38 which meet strict criteria, internally
developed intangibles are not recognised as an asset. In
particular, research costs (or costs of the research phase of
an internally developed intangible asset), and assets such as
internally generated brands, titles and customer lists are not
capitalised.
Intangible assets are initially recognised at cost and are
subsequently accounted for using either the cost model or the
revaluation model (permitted only in the rare circumstances
where the intangible has a readily ascertainable market value).
There are similar requirements under both IAS 38 and FRS 10,
except that IAS 38 does not permit the amortisation of goodwill.
Under both standards, intangible assets are amortised over their
useful lives, where finite (or if it is indefinite, not amortised).
Significant differences
IFRS
Recognition
– intangible
assets
UK GAAP
The criteria for recognition of intangible assets do
not require the asset to be separable. An asset is
identifiable if it is separable or it arises from contractual
or legal rights.
An asset must be controlled. While it is more difficult in
the absence of legal rights, legal enforceability is not a
necessary condition for control.
To be recognised as an intangible asset, an asset
must be identifiable i.e., capable of being disposed of
separately, without disposing of a business of the entity,
and controlled by the entity though custody or legal
rights.
IAS 38 permits customer relationships to be identified
as an intangible asset, where the relevant recognition
criteria are met.
A portfolio of clients is not an intangible asset, in the
absence of legal rights.
Computer software integral to the related hardware is
classified as P,P&E. Computer software not integral to
the related hardware is an intangible asset.
Software development costs directly attributable
to bringing a computer system or other computeroperated machinery into working condition are treated
as part of the cost of the related hardware, not a
separate intangible asset.
Recognition
— intangible
assets
acquired in
a business
combination
For intangible assets acquired as part of a business
combination, the probability and reliability of
measurement criteria for recognition are deemed
always to be met.
An intangible asset acquired as part of the acquisition
of a business should be capitalised separately from
goodwill only if its value can be measured reliably on
initial recognition.
There is no restriction on the amount recognised as fair
value, if it would create or increase ‘negative goodwill’.
Unless the intangible asset has a readily ascertainable
market value, the fair value should be limited to an
amount that does not create or increase negative
goodwill on the acquisition. Otherwise, the intangible
asset is subsumed in goodwill.
Recognition
– internally
developed
intangible
assets
An intangible asset arising from the development phase
of an internal project must be capitalised if certain
criteria are met.
Where certain criteria (similar, but not identical to IFRS
criteria) are met, an entity may capitalise development
expenditure.
Goodwill
amortisation
and
impairment
Amortisation of goodwill is not permitted, instead
annual impairment testing is required.
Goodwill is amortised over its useful economic life.
Reversals of goodwill impairment are not permitted.
Annual impairment reviews are required where the
useful economic life of goodwill exceeds 20 years or is
indefinite.
Reversals of impairment are permitted only in
restrictive circumstances.
UK GAAP vs. IFRS The basics
29
Financial instruments: recognition
and measurement
Similarities
In the UK FRS 26 Financial Instruments: Recognition and
Measurement (‘FRS 26’) which is equivalent to IAS 39 Financial
Instruments: Recognition and Measurement (‘IAS 39’) is
mandatory for listed entities (i.e., those with securities admitted
to trading on a regulated market) and entities that apply the
fair value accounting rules in the CA Act 2006 only, although
other entities can choose to apply it. For all other entities limited
guidance is available under FRS 4 Capital Instruments (‘FRS 4’)
on equity and debt instruments and the rules set out in CA 2006
specifies the accounting rules for investments. FRS 5 Reporting
the Substance of Transactions (‘FRS 5’) principles also apply
to the recognition and derecognition of financial assets and
liabilities.
IAS 39 and FRS 26 specify the criteria for the classification of
financial assets and financial liabilities into the various categories
and the basis of accounting under those categories. Generally
financial instruments are recognised initially at fair value, plus
transactions costs (if the financial instrument is not carried at
fair value through profit or loss) and are subsequently measured
either at fair value or at amortised cost using the effective
interest rate method.
Significant differences
IFRS
Scope
Classification
and
measurement
of financial
assets and
financial
liabilities
UK GAAP
IAS 39 applies to all types of financial instruments,
subject to certain scope exclusions, e.g., interests in
shares of subsidiaries, associates and joint ventures;
rights and obligations under lease and insurance
contracts; employee benefits; and share-based
payments.
The scope exemptions under FRS 26 are similar to
those in IAS 39, except that FRS 26 does not apply to
contingent consideration. Instead, the rules in FRS 7
Fair Values in Acquisition Accounting (‘FRS 7’) apply.
Changes to contingent consideration are reflected as
adjustments to goodwill.
IAS 39 applies to contingent consideration.
For entities that do not apply FRS 26, the guidance
available under FRS 4 and CA 2006 is very limited and
would not cover certain financial instruments, e.g.,
derivatives and embedded derivatives.
IAS 39 provides detailed criteria for classification of
financial assets and liabilities.
No such classification of financial assets and liabilities
exists except where FRS 26 (rules are the same as in IAS
39) is applied. For financial liabilities, FRS 4 requires
that immediately after issue, debt is stated at the net
proceeds, being the fair value of the consideration
received after deduction of issue costs. In some cases
(e.g., interest free term loans), this will not be the
same as the fair value of the financial liability itself, if
determined under IAS 39/FRS 26.
There are four possible classifications of financial
assets:
►► Available-for-sale financial assets;
►► Loans and receivables*;
►► Held-to-maturity investments*; and
►► Financial assets at fair value through profit or loss
(FVTPL).
Financial liabilities can be classified as:
►► At amortised cost*; or
►► Financial liabilities at FVTPL.
Financial instruments are initially measured at fair value
plus transaction costs (if the financial instrument is not
carried at FVTPL), i.e., available-for-sale financial assets
are measured using the effective interest rate method
first, and monetary items denominated in a foreign
currency are retranslated, with adjustments recognised
in profit or loss. However, subsequent fair value
movements are recognised in other comprehensive
income.
The instruments marked * are measured at amortised
cost using the effective interest rate method.
All other financial assets and financial liabilities are
measured at fair value.
Often, debt financial assets are accounted for in
a similar way (the mirror image to the treatment
prescribed by FRS 4 for debt liabilities).
The Accounting Regulations under the CA 2006 on
measurement of investments require that fixed asset
investments may be carried:
►► At cost less impairment; or
►► At valuation (using the alternative accounting rules).
Current asset investments may be included at the lower
of cost and net realisable value (or current cost under
the alternative accounting rules).
CA 2006 generally permits financial instruments to be
reported at fair value (using the fair value accounting
rules) although there are restrictions on which financial
instruments may be accounted for using the fair value
accounting rules.
Specific rules for reclassification of financial
instruments also apply.
30
UK GAAP vs. IFRS The basics
IFRS
Recognition/
derecognition
of financial
assets and
liabilities
UK GAAP
A financial liability or a part of it should be derecognised
when it is extinguished, i.e., the obligation specified in
the contract is discharged, cancelled or expires.
IAS 39 has complex rules for derecogition of financial
assets which differ in a number of ways from UK GAAP.
Linked presentation is not permitted under IAS 39.
Derivatives
Derivative financial instruments are recognised and
measured at fair value.
An entity should separate and account for an embedded
derivative separately from the host contract if certain
criteria are met i.e., depending on whether or not they
are closely related.
There is no specific guidance on derecognition of
financial liabilities under FRS 5. FRS 5 adresses the
recognition and derecognition of financial assets for
those entities not applying FRS 26.
FRS 5 provides for a linked presentation for certain
types of ‘ring-fenced’ financing (not permitted under
FRS 26).
Except where FRS 26 is applied, there is no requirement
to recognise derivative financial instruments, although
if loss making and not hedged, a provision would be
required under FRS 12.
Except where FRS 26 is applied, there is no requirement
to separate embedded derivatives from host contracts.
An exchange between an existing borrower and lender
of debt instruments with substantially different terms
is accounted for as an extinguishment of the original
liability and the recognition of a new financial liability
(i.e., at fair value).
Except where FRS 26 is applied , gains or losses arising
on the early repurchase or settlement of debt are
recognised in the profit and loss account in the period
during which the repurchase or early settlement
is made.
Similarly a substantial modification of the terms of
an existing financial liability or a part of it shall be
accounted for as an extinguishment.
There is no specific guidance in FRS 4 or FRS 5 on
exchanges and modifications.
Extinguishing
financial
liabilities
with equity
instruments
(IFRIC 19)
Equity instruments issued as consideration to extinguish
a financial liability in a debt-equity swap are measured
at their fair value (or where this cannot be reliably
measured, the fair value of the liability extinguished)
except in certain specific circumstances.
For entities applying FRS 26, UITF 47 Extinguishing
Financial Liabilities with Equity Instruments (‘UITF 47’) is
the same as IFRIC 19.
Allocation of
finance costs
Financial instruments at amortised cost are measured
using the effective interest rate method.
Exchange and
modification
of financial
liabilities
Entities not applying FRS 26 may simply recognise the
carrying amount of the liability foregone in equity.
The difference between the carrying amount of the
liability and the consideration paid is recognised in
profit or loss.
The effective interest rate is the rate that exactly
discounts estimated future cash payments or receipts
(considering all contractual terms but not future
credit losses) through the expected life of the financial
instrument or, where appropriate, a shorter period
to the net carrying amount of the financial asset or
financial liability.
Where FRS 26 is not applied, finance costs of debt
are allocated to periods over the term of the debt at a
constant rate on the carrying amount.
Where the amount of payments required by a debt
instrument is contingent on uncertain future events
such as changes in an index, those events are taken into
account in calculating finance costs and the carrying
amount of debt once they have occurred.
UK GAAP vs. IFRS The basics
31
Financial instruments: recognition
and measurement
Significant differences (cont’d)
IFRS
UK GAAP
Impairment of
An entity must assess at the end of each reporting
financial assets period whether there is any objective evidence of
impairment of a financial asset or group of financial
assets.
Impairment charges for financial assets classified as
loans and receivables, or held to maturity are measured
as the difference between the asset’s carrying amount
and the present value of the estimated future cash
discounted using the original effective interest rate and
are recognised immediately in profit or loss.
Where FRS 26 is applied, the rules are the same as in
IAS 39.
FRS 11 impairment rules apply to investments in
subsidiaries, associates and joint ventures in individual
financial statements, but not to other financial assets.
Under company law, where the historical cost rules
are applied, recognition of impairment is mandatory
only where there is a permanent diminution in value,
although entities may recognise a diminution in value
which is not permanent.
If there is a decline in fair value of an available-forsale financial asset and there is objective evidence of
impairment the impairment loss (and any cumulative
amounts previously recognised in OCI) are recognised
in profit or loss.
Reversal of impairment is permitted except for
unquoted equity instruments carried at cost less
impairment (because their fair value cannot be reliably
measured).
Hedge
accounting
IAS 39 includes detailed requirements on what can
qualify as hedged items and hedging instruments, when
hedge accounting can be applied and the accounting for
different types of hedges, i.e., fair value hedges, cash
flow hedges, and hedges of a net investment in a foreign
operation, and the requirements for discontinuing
hedge accounting.
Where FRS 26 is not applied, generally commercial
hedging arrangements are accounted for when the
hedged transaction occurs i.e., hedges are not required
to be recognised and revalued at each reporting date.
Where FRS 26 is applied, the rules are the same as
IAS 39.
The ineffective portions of hedges are always
recognised in profit or loss.
Distributions
of non-cash
assets to
owners
(IFRIC 17)
A liability to distribute non-cash assets to owners
should be measured at the fair value of the assets to be
distributed.
If the owners have the option of receiving either a noncash asset or cash, the dividend payable is estimated
considering the fair value and probability of the owners
selecting each alternative.
No specific guidance exists under UK GAAP in respect of
payment of non-cash dividends.
Generally, these would be measured at the book amount
of the non-cash assets to be distributed.
On settlement the difference between the carrying
amount of the dividend payable and that of the assets
distributed is recognised in profit or loss.
32
UK GAAP vs. IFRS The basics
Investment property
Similarities
IAS 40 Investment Property (‘IAS 40’) and SSAP 19 Accounting
for Investment Properties (‘SSAP 19’) address the accounting
for an investor’s interests in land and/or buildings (i.e., property)
that are used to earn rental income and/or held for capital
appreciation. Both standards exclude properties held for own use
but include leased properties.
Significant differences
IFRS
Definition and
scope
UK GAAP
Investment property is land and/or a building, or part
of a building, held by the owner to earn rentals and/
or for capital appreciation rather than for use in the
production or supply of goods or services, or for
administrative purposes or sale in the ordinary course
of business.
Investment property includes property under
construction or being redeveloped for future use as
investment property.
Investment property is an interest in land and/or
buildings in respect of which construction work and
development have been completed and which are held
for investment potential, with any rental income being
negotiated at arm’s length.
It excludes property under construction or
redevelopment for future use as investment property.
If the entity provides significant ancillary services to the
occupants, the property is not an investment property.
Intra-group
investment
property
Property owned by a subsidiary and leased to, or
occupied by, the parent or another group company
should be treated as investment property in the owner’s
individual financial statements if it meets the definition
of investment property.
SSAP 19 excludes property held for own use or let
to another group company from the definition of
investment property, therefore such property cannot
be included as investment property in the individual or
consolidated financial statements.
However, such a property cannot be treated as an
investment property in the consolidated financial
statements as it is owner-occupied property from the
perspective of the consolidated financial statements.
Leased
investment
property
An entity that adopts the fair value model has the
option, on a property-by-property basis, to account
for property interests held under operating leases as
investment properties or as operating leases under
IAS 17.
Where one such property is classified as investment
property, all investment property is accounted for
under the fair value model.
Measurement
at initial
recognition
Investment property is measured initially at cost
comprising the purchase price and any directly
attributable expenditure.
Leasehold property is frequently classified as tangible
fixed assets (e.g., lease premiums for long term
interests) and SSAP 19 applies to such an interest
where it meets the definition of an investment property.
There is no option to apply lease accounting to leased
investment properties.
Investment properties are recognised in the balance
sheet at their open market value.
The use of cost is not permitted under UK GAAP.
The initial cost of an investment property held under
an operating lease (and the related lease liability) is as
prescribed under a finance lease by IAS 17. Any lease
premium paid will be included within cost (but obviously
not the lease liability).
UK GAAP vs. IFRS The basics
33
Investment property
Significant differences (cont’d)
IFRS
Subsequent
measurement
UK GAAP
Entities have an option to use cost or the fair value
model, which must be applied to all the investment
property held.
However, where investment property is held under
an operating lease, the fair value model is used for all
investment property.
There is no choice of policy, only the fair value model is
permitted under SSAP 19.
Properties held on lease must be depreciated where the
unexpired term is 20 years or less.
It is possible to make a separate choice of model for:
►► All investment property backing liabilities that pay a
return linked directly to the fair value of or returns
from specified assets including that investment
property and
►► All other investment property.
Under the cost model, IAS 16 is applied to all
investment properties other than those held for sale
under IFRS 5.
Fair value
model
All property, including interests under operating leases,
must be measured at fair value without deduction of
transaction costs, except where marketable value
cannot be reliably determined on a continuing basis, in
which case the cost model is applied, to that investment
property.
The fair value of investment property held under a
lease reflects expected cash flows, and therefore there
is a need to add back any recognised lease liability
in arriving at the carrying amount of the investment
property.
Investment properties are carried at their open market
value.
For investment property under operating leases,
general practice is that the open market value should
be included net of any accrued rent receivable debtor.
Properties held under a lease must be depreciated
where the unexpired term is 20 years or less.
Depreciation is not required under the fair value model.
Revaluation
gains and
losses
All gains and losses shall be included in profit or loss in
the period in which they arise.
Changes in the value of investment properties are
recognised through the investment revaluation reserve
(which can be negative), except where the change is
expected to be a permanent diminution in value, in
which case it is taken to the profit and loss account.
Change of
use of an
investment
property
IAS 40 contains detailed specific guidance on
evidence a change of use and the subsequent
accounting for changes in the use of properties to/
from investment properties from/to inventories,
P,P&E and operating leases.
There is limited guidance on how transfers should be
accounted for.
34
Transfers to investment property are usually made at
cost with the properties being subsequently revalued,
unless there is a diminution in value on transfer from
current assets taken to the profit and loss account
under UITF 5 Transfers from Current Assets to
Fixed Assets.
UK GAAP vs. IFRS The basics
Business combinations
Similarities
IFRS 3 Business Combinations (‘IFRS 3’) and FRS 6 Acquisitions
and Mergers (‘FRS 6’) specify similar (but not identical)
requirements for accounting for business combinations.
Under the acquisition method of accounting, both standards
require that the acquirer recognises identifiable assets
acquired and liabilities assumed (including any assets and
liabilities previously not recognised by the acquiree e.g.,
contingent liabilities) measured at their acquisition-date fair
values, measures consideration transferred at fair value, and
determines goodwill arising from the transaction.
IFRS 3 and FRS 7 Fair Values in Acquisition Accounting (‘FRS 7’)
provide guidance on how the fair values of assets acquired and
liabilities assumed should be determined, although these are not
the same.
Both UK GAAP and IFRS permit an investigation period before
the fair value excise must be finalised, although the length
differs as does the treatment of changes to fair values of assets
and liabilities.
Significant differences
IFRS
Scope
UK GAAP
IFRS 3 excludes from its scope combinations of entities
or businesses under common control.
However, it is worth noting that combinations under
common control are not identical to the scope of group
reconstructions under UK GAAP.
Definition of a
business
A business is an integrated set of activities and assets
that is capable of being conducted and managed for the
purpose of providing a return in the form of dividends,
lower costs or other economic benefits directly to
investors or other owners, members or participants.
FRS 6 specifically addresses group reconstructions
which generally should be accounted for using merger
accounting if certain criteria are met.
There is no specific definition of a business under FRS 6
or FRS 7.
As a result, some combinations that would not be
regarded as ‘business combinations’ under IFRS may be
accounted for as a business acquisition under UK GAAP.
It consists of inputs and processes applied to those
inputs, which together are or will be used to create
outputs.
Merger
accounting
All business combinations should be accounted for by
applying the acquisition method. Merger accounting is
not permitted.
The acquisition accounting method is only applied to
business combinations that do not meet the criteria
for merger accounting. In practice very few third party
transactions meet these criteria.
Reverse
acquisitions
Usually the acquirer is the entity that transfers
consideration. However in reverse acquisitions, the
entity issuing its equity interests is the acquiree.
The concept of reverse acquisition does not exist in UK
GAAP and is also incompatible with CA 2006 and would
only be used with a ‘true and fair override’.
There is detailed guidance on the application of the
acquisition method to reverse acquisitions.
Separation
of other
transactions
from the
business
combination
In identifying whether a transaction is part of the
exchange for the acquiree the acquirer considers
the reasons for the transaction, who initiated the
transaction and its timing.
Where the transaction is driven by and/or is mainly for
the benefit of the acquirer or combined entity, it is less
likely to be part of the business combination.
Extensive guidance on arrangements for contingent
payments to employees or selling shareholders
and indicators for when these should be treated as
contingent consideration or remuneration is provided.
There is no explicit guidance on separate arrangements
entered into at the time of the transactions.
However, where acquisition agreements requiring
non-compete or bonuses to vendors who continue to
work for the acquired company exist, it is necessary
to determine whether the substance of such an
arrangement is payment for the business acquired
(i.e., contingent consideration) or an expense such as
compensation for services or profit sharing.
UK GAAP vs. IFRS The basics
35
Business combinations
Significant differences (cont’d)
IFRS
Pre-existing
relationship
between
acquirer and
acquiree
UK GAAP
A pre-existing relationship that the acquirer had with
the acquiree is treated as being settled by the business
combination either at fair value if contractual, or if
non-contractual at the lower of the amount for which
the contract is favourable or unfavourable compared to
market and any settlement provisions in the contract.
There is no similar guidance on pre-existing
relationships under UK GAAP.
The gain or loss is recognised in profit or loss.
Noncontrolling
interest (NCI)
NCI is measured either at fair value or at the NCI’s
proportionate share of the fair value of the acquiree’s
net identifiable assets.
Minority interest is measured at the minority interest’s
proportionate share of the fair value of the acquiree’s
net identifiable assets.
This choice is made on a transaction-by-transaction
basis.
Contingent
consideration
Contingent consideration is initially measured at fair
value (i.e., a weighted average) and any subsequent
changes are recognised in either profit or loss, or OCI in
accordance with IAS 39.
Contingent consideration is measured at fair
value (i.e., amount probable to be paid) with any
subsequent adjustments made against goodwill.
Contingent consideration meeting the definition of
equity is not remeasured.
Acquisition
costs
An acquirer must expense acquisition-related costs in
the periods in which the costs are incurred, except for
costs to issue debt or equity securities which shall be
recognised in accordance with IAS 32 and IAS 39.
All fees and similar incremental costs incurred directly
in making an acquisition (except for the issue costs of
shares or other securities) are included in the cost of
acquisition.
Recognition
of bargain
purchase
The excess of the fair value of identifiable assets,
liabilities and contingent liabilities over the
consideration (i.e., negative goodwill) is recognised
immediately through the income statement.
Negative goodwill is capitalised and recognised in the
profit and loss account in the periods in which the nonmonetary assets are recovered through depreciation
and sale. Negative goodwill in excess of the fair value
of the non-monetary assets is recognised in the
periods expected to benefit.
Measurement
of goodwill at
acquisition
Goodwill is measured as the difference between the:
Goodwill is the difference between the:
i. Aggregate of the fair values of the purchase
consideration, non-controlling interest and any
previous equity held in the acquiree; and
i. Fair value of the purchase consideration; and
ii. Net fair value of the identifiable assets acquired and
liabilities assumed.
Exchange of
share-based
payment
awards held
by acquiree’s
employees
for acquirer’s
awards
36
ii. Fair value of the net identifiable assets acquired.
Where a minority interest exists, goodwill is determined
only in relation to the group’s interest in the acquiree.
Exchanges of share-based payment awards in
a business combination are accounted for as
modifications of the previous awards.
There is no equivalent guidance under UK GAAP. Where
the awards are vested on acqusition, and subsequently
exercised, these clearly form part of the consideration.
Either all or a portion of the market-based measures of
the acquirer’s replacement awards attributable to the
employees’ pre-combination service should be included
in measuring the purchase consideration.
FRS 7 does not prescribe the basis of measurement of
share-based payment awards as part of the acquisition
accounting.
UK GAAP vs. IFRS The basics
IFRS
Measurement
of other assets
acquired and
liabilities
assumed
UK GAAP
The identifiable assets acquired and the liabilities
assumed are measured at their acquisition-date fair
values (with limited specified exceptions).
FRS 7 prescribes the basis of measuring the fair
values on acquisition of most categories of assets and
liabilities including:
Specific guidance is provided in respect of certain
assets and liabilities including:
►► Intangible assets based on replacement cost, using
the estimated market value.
►► An acquirer recognises an asset or a liability in
respect of an operating lease held by the acquiree
if the existing lease terms are favourable or
unfavourable relative to market.
►► Stock and work-in-progress at the lower of
replacement cost and NRV.
►► A contingent liability is recognised if it is a present
obligation arising from past events and its fair
value can be measured reliably. Subsequently, the
contingent liability is recognised at the higher of
the amount required by IAS 37, and the amount
initially recognised less, if appropriate, cumulative
amortisation.
►► Contingent assets and liabilities may be recognised
at fair value if their likely outcomes can be
determined. Reasonable estimates of the expected
outcome may be used.
►► An indemnification asset is measured on the same
basis as the indemnified item, subject to the need
for a valuation allowance for uncollectible amounts.
Although there is no specific guidance on leases,
unfavourable leases can be regarded as onerous
leases and a provision made for the excess over market
rates. However, where this is done, all leases should
be considered and an asset recognised for any leases
where the rentals at the acquisition date are below
market rates.
►► A reacquired right is recognised as an intangible
asset and measured on the basis of the remaining
contractual term of the related contract.
There is no specific guidance under UK GAAP on
recognition and measurement of indemnified assets
and re-acquired rights.
►► Income taxes, employee benefits, share-based
payment awards and non-current assets/disposal
groups classified as held for sale are measured in
accordance with other applicable IFRS standards
which are different from their UK equivalent.
Generally assets should not be recognised at amounts
above their recoverable amounts, unaffected by
acquirer’s intentions.
The acquirer shall remeasure its previously held equity
interest in the acquiree at its acquisition-date fair value
and recognise the resulting gain or loss, if any, in profit
or loss.
The cost of acquisition is the total of the costs of the
interests acquired, determined as at the date of each
transaction.
►► Contingent assets cannot be recognised.
Business
combinations
achieved in
stages
Any amounts previously recognised through OCI are
recognised on the same basis as would be required if
the acquirer had disposed directly of the previously held
equity interest.
Measurement
period and
reassessment
of fair values
►► Tangible assets based on market value (where
reliable) or depreciated replacement cost.
The application of the detailed guidance under both UK
GAAP and IFRS may result in differences.
Where the fair values of identifiable assets and
liabilities recognised as part of the earlier transaction
are reassessed compared to their carrying amounts, a
revaluation gain is recognised in the STRGL.
Changes to fair values during the measurement
period are recognised retrospectively, including any
consequential effects on the income statement, e.g.,
depreciation or amortisation.
Where acquisition accounting is not completed by
the approval of the first post-acquisition financial
statements, provisional fair values are reported.
These are amended if necessary with an adjustment
to goodwill in the next set of financial statements.
After the measurement period ends, revisions of the
business combination accounting are permitted only to
correct material errors.
Although FRS 7 does not explicitly address this,
changes have generally been dealt with prospectively
under UK GAAP.
Measurement period has a maximum of 12 months.
After the investigation period amendments to fair
value are permitted but are dealt with in the profit or
loss account (unless fundamental errors).
UK GAAP vs. IFRS The basics
37
Non-current assets held for sale and
discontinued operations
Similarities
FRS 3 Reporting Financial Performance (‘FRS 3’) and IFRS 5
Non-current Assets Held for Sale and Discontinued Operations
(‘IFRS 5’) set out the requirements for the separate presentation
of discontinued operations (with comparatives restated, where
appropriate) in the profit and loss account/income statement
under UK GAAP and IFRS respectively.
IFRS 5 also deals with the measurement and presentation of
assets and disposal groups held for sale. There is no equivalent
standard under UK GAAP although relevant rules in other
standards (e.g. FRS 7 on accounting for subsidiaries acquired
for resale and FRS 3 on provisions on sale or termination of
operations) apply.
Both IFRS 5 and FRS 7 require that where a subsidiary is
classified for sale, its assets should be measured at the lower of
their carrying amount (i.e., cost) and fair value less costs to sell
(or NRV under UK GAAP).
Significant differences
IFRS
Definitions
UK GAAP
A discontinued operation is a component of an entity
that has either been disposed of, or is classified as held
for sale, and:
►► Represents a separate major line of business or
geographical area of operations;
►► Is part of a single coordinated plan to dispose of
a separate major line of business or geographical
area of operations; and
►► Is a subsidiary acquired exclusively with a view to
resale.
An operation is classified as discontinued if it is sold or
terminated subject to certain conditions including:
►► The sale or termination is to be completed either
in the period or before the earlier of three months
after the commencement of the subsequent period
and the date of approval of the financial statements;
►► The sale or termination has a material effect on
the nature and focus of the reporting entity’s
operations and represents a material reduction in
its operating facilities; and
Abandoned operations are reported in discontinued
operations in the period in which they are abandoned.
►► The assets, liabilities, results of operations and
activities are clearly distinguishable, physically,
operationally and for financial reporting purposes.
Classification
If the carrying amount of a non-current asset (or a
disposal group) will be recovered principally through a
sale transaction rather than through continuing use,
the asset or disposal group is classified as held for sale.
There is no equivalent requirement under UK GAAP.
Measurement
of assets held
for sale
A non-current asset held for sale is measured at the
lower of its carrying amount and fair value less costs
to sell.
There is limited guidance under UK GAAP on accounting
for assets held for sale or disposal groups.
group are recognised in profit or loss. A gain is not
recognised in excess of cumulative impairment losses
recognised (under IFRS 5 or previously in accordance
with IAS 36).
A fixed asset to be disposed of will be largely
independent of income streams of other assets and
therefore forms its own IGU.
FRS 7 requires that an interest in a subsidiary or
A newly acquired subsidiary held for sale is measured at division for resale is shown as a separate current asset,
fair value less costs to sell.
at the lower of cost and net realisable value, instead of
Any adjustments to the carrying amount of the disposal being consolidated.
If there is an impairment to reflect, there is a specified
order of allocation to non-current assets in the disposal
group.
Any impairment in asset values should be recorded.
Assets held for
distribution to
owners
Assets held for distribution to owners are measured
at the lower of the carrying amount and fair value less
costs to distribute.
As there is no specific guidance under UK GAAP. In
practice, the assets would continue being measured
at their carrying amounts until they are transferred to
the owners.
Depreciation
Depreciation ceases when an asset is classified as held
for sale and measured under the IFRS 5 rules.
Generally depreciation of assets only ceases upon
disposal or at the end of their useful economic lives.
38
UK GAAP vs. IFRS The basics
IFRS
Changes to a
plan of sale
UK GAAP
The entity shall measure a non-current asset that
ceases to be classified as held for sale (or ceases to be
included in a disposal group classified as held for sale)
at the lower of:
There are no similar requirements under UK GAAP.
►► Its carrying amount before the asset (or disposal
group) was classified as held for sale, adjusted for
any depreciation, amortisation or revaluations
that would have been recognised had the asset
(or disposal group) not been classified as held for
sale; and
If a subsidiary or business (treated as an interest for
resale in the acquisition accounting) is not in fact
sold within approximately one year of the date of the
acquisition, it should be consolidated normally, with
adjustments to fair values based on individual assets
and liabilities and corresponding adjustments to
goodwill.
►► Its recoverable amount at the date of the
subsequent decision not to sell.
Where an asset has been previously impaired, a
change to a plan of sale may result in a change to the
recoverable amount.
Any adjustment is reflected in profit and loss (unless
previously carried at revaluation in which case the
adjustment is treated as a revaluation increase or
decrease).
When an interest in an associate or JCE ceases to
be held for sale, it is accounted for using the equity
method/proportionate consolidation method (as
appropriate) from the date of its classification
as held for sale, with amendments to prior
financial statements.
UK GAAP vs. IFRS The basics
39
IFRS resources
Ernst & Young has developed a number of publications that contain details and discussions on IFRS matters, all of which can be
downloaded from our website www.ey.com/ifrs, including:
International GAAP®
2011
This is the 2011 edition of our
comprehensive, in-depth guide
to interpreting and implementing
International Financial Reporting
Standards (IFRS) written by
Ernst & Young’s IFRS professionals around
the world. The guide is an essential tool for anyone involved in
applying, auditing, interpreting, regulating, studying or teaching
international financial reporting. It offers insights on how to
approach issues in the complex, global world of international
financial reporting, where IFRS has become the financial
reporting system in more than 100 countries.
International GAAP®
Disclosure Checklist
Our International GAAP® Disclosure
Checklist captures the full list of disclosure
requirements to help companies
comply with IFRS in their IFRS financial
statements.
International GAAP®
illustrative financial
statements
This publication is an illustrative set of
financial statements (both interim and
annual) incorporating the new disclosures
that arise from the changes required to
standards effective.
This is supplemented by illustrative financial statements
that are aimed at specific sectors and industries including
Good Bank (International) Limited, Good Investment Ltd,
Good Insurance (International) Limited and Good Petroleum
(International) Limited.
ey.com/IFRS
March/April 2011
Insights on International GAAP®
IFRS Outlook
In this issue ...
Effective dates — when will proposed new IFRS standards apply?
Effective dates — when will proposed
new IFRS standards apply?
2
What we think of the new proposed
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assets
5
Our views on the hedge accounting
proposals
8
IFRS update
11
Resources
12
The IASB and the US FASB continue to focus on a number of projects, including revenue
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revised standards during the second half of 2011. With the new standards on the horizon, the
Boards requested feedback on when and how the new standards should be applied. Read
about our views on the effective dates of the new standards and the feedback the IASB
received from other stakeholders.
O`Ylo]l`afcg^l`]f]ohjghgk]\YhhjgY[`^gjaehYaje]flg^ÔfYf[aYd
assets
The IASB and US FASB jointly proposed a new common approach for determining when
[j]\aldgkk]kk`gmd\Z]j][g_fak]\gf[]jlYafÕfYf[aYdYkk]lk&>af\gmlo`Ylgmjna]okYj]
on this proposed approach.
Our views on the hedge accounting proposals
The IASB recently issued an ED that proposed a fundamental shift away from the way
entities have conventionally applied hedge accounting under IFRS. Learn about our views
on the proposals.
IFRS update
Find out which projects the IASB and the IFRS Interpretations Committee are currently
discussing.
Resources
Look here for an up-to-date list of our recent publications, including Good Construction
Group (International) Limited 31 December 2010, an illustrated set of consolidated
ÕfYf[aYdklYl]e]flkg^YÕ[lalagmk_jgmhg^[gfkljm[lagf[gehYfa]k$Yf\Joint Project
Watch, which provides a snapshot of the key developments on the various joint projects
of the IASB and the US FASB.
We welcome your feedback on IFRS Outlook. Please contact us at [email protected].
Ruth Picker
Global Leader of IFRS Services
The future of financial
reporting in the UK
Are you ready?
This publication highlights the proposed
changes to financial reporting in
the UK, the key considerations and
likely implications of the changes to
UK companies.
IFRS Outlook
This bi-monthly publication addresses
matters such as Ernst & Young’s views
on activities of the IASB and IFRS
Interpretations Committee, the political
environment surrounding the current
state of standard setting or the broader
implications of IFRS.
IFRS Developments
Ernst & Young creates this newsletter to
announce significant decisions on topics
that have a broad audience, application
or appeal.
Applying IFRS
This publication contains analyses of
proposals, standards or interpretations to
enable you to better understand the effect
they may have and how to apply them.
40
UK GAAP vs. IFRS The basics
Who to contact
Please talk to your regular Ernst & Young contact
if you have any questions relating to IFRS reporting
in the UK and Ireland. Alternatively, please email
the Future of UK GAAP (FoUKG) team on
[email protected].
UK GAAP vs. IFRS The basics
41
Ernst & Young LLP
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© Ernst & Young LLP 2011. Published in the UK.
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