The Hindu Business Line : IASB completes financial reporting standards package

WITH the May 24 announcement of three new international standards and three amendments to existing standards, the International Accounting Standards Board (IASB) has completed the package of international financial reporting standards, which listed European companies will be required to use from January, 2005.

All that the IASB has to do now is assess the implications of the standards and identify areas where it can work towards convergence.

The key issues dealt with in the new and revised standards include:

IFRS3 (Business combinations), which will prohibit merger accounting and mandate that all business combinations are accounted for using the purchase method. The likely costs of restructuring an acquired entity will have to be treated as post-combination expenses, unless the entity has a pre-existing liability for restructuring;

IAS36 (Impairment of assets) and IAS38 (Intangible assets) the amendments to which are linked to IFRS3. Intangible items acquired in a business combination are required to be recognised as assets separately from goodwill. The UK practice of amortising goodwill and intangible assets with indefinite useful lives will be prohibited. Instead, they must be tested for impairment annually or more frequently if events or changes in circumstances indicate a possible impairment;

IFRS4 (Insurance contracts), a stopgap standard designed to cater for the 2005 deadline which will be followed by a second phase to converge different global treatments. The IASB has set out conditions for improved disclosure that it believes will not need to be reversed in phase two;

IFRS5 (Non-current assets held for sale and discontinued operations), which emerged from a project with the Financial Accounting Standards Board (FASB) and requires assets that are expected to be sold to be measured at the lower of carrying amount and fair value, less costs to sell. Such assets should not be depreciated and should be presented separately in the balance sheet; and

IAS 39 (Financial instruments: recognition and measurement on fair value hedge accounting for a portfolio hedge of interest rate risk) the amendments to which simplify fair value hedge accounting rules, making it easier to apply to a portfolio hedge of interest rate risk or a macro hedge.

According to the IASB Chairman, Sir David Tweedie, the new standards reflect a significant step towards convergence between international and US GAAP.

It may be recalled that the European Commission had first proposed in 2001 that 7,000 listed companies in the EU should use accounting rules known as international financial reporting standards from January next. However, according to a PricewaterhouseCoopers (PwC) survey of 310 European companies conducted between January and March, a small but significant number of these companies are still not very clear how the new accounting rules will impact their businesses.

PwC has predicted that while a serious financial reporting "train crash" involving European companies in 2005 or soon after is not likely, individual problems, as against systemic failure, may result in restatements by some companies.

According to its survey, large companies as also financial services companies have made progress towards the integration of the new rules.

Further, although companies will have to explain to analysts and investors how their profits and balance sheets are different under the new rules, PwC has found that 80 per cent of the companies surveyed have not worked out its communications plans and has held out the warning that "Without a clear ... external communications strategy, companies risk surprising the market and damaging the share price."