Free Accounting Dissertations - Fair Value. If We Look At Global Level, Both Uk Gaap And Ifrs Have Adopted
Fair value. If we look at global level, both UK GAAP and IFRS have adopted fair value method as the foundation of their accounting standards. IFRS takes fair value adoption even higher when it says that income statement will include the changes in the fair value of items that have not been yet traded like derivatives. The emphasis in new accounting standards is on mark-to-market fair value of assets and liabilities rather than on actual market price based fair values. Now both realised and unrealised changes in fair values would be incorporated in income statements. The first year of transition will see high volatility in earnings and balance sheet statements. Though this brings higher volatility, it will also test the management skills in proper presentation and explanation of changes. It may also change the benchmarks of success for managements.
Acquisitions. Acquisition accounting will change under new accounting standards. Under UK GAAP, companies can choose between purchase and merger accounting. Under IFRS, companies will have to account under purchase method only.
Goodwill. UK GAAP allowed amortisation of goodwill and companies had the option of not segregating intangible assets from goodwill. Under IFRS, intangible assets have to be separated from goodwill. Goodwill can not be amortised now but companies will have to undertake annual impairment tests to justify the value of goodwill on the balance sheets. BAT’s profits for year 2004 increased by £454m because it no longer had to amortise goodwill of that amount (AccountancyAge, 2005b).
Consolidation of accounts. Under new accounting rules, companies may have to consolidate certain additional subsidiaries into group accounts. On the other hand companies will have to exclude certain subsidiaries or special purpose vehicles which were not included till now.
Research and development costs. Under IAS 39, research costs can’t be carried on the balance sheet and would have to write them off as incurred. Companies would still be allowed to capitalise development in line with UK GAAP.
Stock options. Internet and share market last boom in late 1990s led to rapid increase in share options as a way to reward employees. The new requirements to record an expense on income statement for the value of share options granted to employees could have a significant impact on earnings. AstraZeneca said in its pro forma 2004 IFRS numbers that new accounting rules on stock options has made it re-consider the use of stock options in rewarding its employees (Tricks, 2005).
Distributable profits. Organisations ability to pay dividends is dependent on their distributable profits.
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