Free Accounting Dissertations - All Of The Above Will Reduce Distributable Profits. Many Companies Would Have
All of the above will reduce distributable profits. Many companies would have to financially restructure themselves in order to have sufficient distributable profits to meet dividends paid in last year.
Deferred tax credit. Deferred tax credit is available under UK GAAP but not under IFRS. GlaxoSmithKline’s restated its 2004 earning per share by (1.9p) due to non-availability of deferred tax credit under IFRS (AccountancyAge, 2005a).
Inclusion of business disposals gains in profits from operations. BAT’s profits for year 2004 increased by £1.3bn after it included gains from disposals to operating profits (AccountancyAge, 2005b). Adding disposal gains to operating profits will make it harder for investors and analysts to separate the earnings from continuing businesses.
Derivative contracts. Under IFRS, some derivative contracts will not qualify as hedges as they wont meet the criteria. UK GAAP allowed deferment of such contracts until transaction took place. IFRS won’t allow the deferment of such contract and would impact the profit and loss account even before the transaction took place. It is better in a way that investors will know the current value of the firm as on date rather than historical costs of such instruments, especially if the duration of financial instruments was long. At the same time, it would increase the burden on the company to calculate the fair value of all such transactions.
Agricultural. UK GAAP allowed companies to use a cost model for biological assets and all agricultural produce. But under IAS companies would have to use mark to market method for valuing such assets. Now companies would have to use market valuation even for assets in far off countries.
Advantages of IFRS over UK GAAP
Common financial language. Adopting common financial reporting standards will open up a company to more markets and investors. The growth in telecommunications has made it easier for smaller investors to invest across physical boundaries. Such investors are normally not as financially sophisticated as some big financial institutions. They would also not like to understand more than one accounting standards as they don’t have required resources in hand to do so. With one common accounting standard, more investors would like to explore companies across nations.
Acquisitions. IFRS 3 is more open and transparent than UK GAAP on acquisitions. It will allow investors and analysts to judge faster the success of an acquisition. Many of the companies that have relied on acquisition as a key cornerstone for growth would now come under intense scrutiny and may have to develop a new strategy for growing business.
Consolidation. In IFRS, all entities will have to provide a cash flow statement. Additionally there would be more transparency within the group companies and this should make the consolidation process more straight-forward.
