On 12 November 2009, the IASB issued IFRS 9 “Financial Instruments”. This is the first stage of a three stage project that will probably make or break the international reputation of the IASB and its deeply impressive chairman, Sir David Tweedie.
The IASB inherited IAS 32 and IAS 39 from its predecessor, the IASC. IAS 32 and IAS 39 have been rather markedly unloved ever since their introduction. IAS 39 in particular has been criticised for taking fairly complicated financial transactions and making them more complicated still with piecemeal rules for different types of transaction. Although it definitely had its supporters, many people said that the perceived complexity of IAS 39 made it insufficiently understandable by most people to be much real use.
Here at ExP, we believe that IAS 39 has had a slightly unfair press over the years. It does have its faults for sure, but it also has a decent logic at its core. The new IFRS (which will come in three parts over the next year; the next two stages to deal with impairments and the third phase to address hedging rules) has a tough job. Make the rules simpler and it will create loopholes that will be exploited by creative accounting. Close every possible gap and it will result in an accounting standard that puts on weight each year with minor amendments and ends up not understandable.
The attempts at simplification are honourable. We’ll wait to see with interest how well they work. But well done to the IASB for keeping calm in the global financial crisis that many commentators blamed the accountancy profession for making much worse. They were under huge pressure to make change and they appear to have done a good job in the time they had available.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-29 19:07:122009-11-29 19:07:12IFRS 9 released. This is a biggie.
British Airways is a big airline and so is Iberia; the flag carrier airline of Spain. Both have experienced considerable difficulties in recent years with the global recession greatly reducing revenues and causing operating losses.
For nearly two years, the two airlines were in discussions about merger, in order to share routes and operating fixed costs. The deal was finally announced in mid November 2009.
The deal is that the two airlines will fuse to create a new business with the working name of Topco. Topco’s capital will be 55% owned by BA’s shareholders and 45% by Iberia’s shareholders. The board will meet in Spain and the CEO of BA will become the CEO of the new business.
For accounting purposes, mergers don’t exist. There is always an acquirer and an acquiree; respectively being the controlling party and the controlled. In this situation, we accountants see it that BA has just done a deal to acquire a new subsidiary, called Iberia. Assuming that Iberia’s shareholders agree to sell. And before that happens, there’s the minor issue of BA’s huge deficit on its defined benefit pension scheme to sort out. IAS 19 produces some deeply unattractive pension liabilities on BA’s statement of financial position.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-22 19:03:022009-11-22 19:03:02BA and Iberia to merge. Except not.
Everybody is calling it a merger, but do mergers really exist? And from what date does the combination happen?
Key aspect 1: Determining if IFRS 3 applies and identifying the acquirer.
IFRS 3 applies only to combinations as a result of which an entity (identified as “the acquirer”) obtains “control” of “the acquiree”. Is that the case?
Yes: Xerox is set to acquire 100% of ACS, with ACS expected to “continue to operate as an independent organisation” (branded “ACS, a Xerox Company”) and with Lynn Blodgett (ACS CEO) reporting to Ursula Burns (Xerox CEO).
Key aspect 2: Determining the acquisition date
IFRS 3 requires the combination to be acquisition accounted for at the date when control is obtained. Is the “acquisition date” determinable based on released information?
Not quite: the agreement was signed by the two boards on 28.09.09, but the transaction is “expected to close” by the end of Q1-2010.
Key aspect 3: Recognising and measuring the consideration transferred
IFRS 3 requires consideration transferred to be fair valued at acquisition date, with any transaction costs being expensed and not included as part of the consideration. How does it work in the case?
Xerox is set to pay $18.6 in cash and issue 4.9 shares in exchange of 1 ACS share. Considering share prices on the eve of the deal being announced, such consideration would have amounted to $6.2 billion. However, due to the subsequent fall in Xerox’ share price , the fair value of the agreed consideration went down to $5.5 billion. By the “acquisition date”, the fair value of this consideration may again vary. As to the costs of issuing the new shares raising the $3 billion expected to be needed to finance the deal, IFRS 3 would want them expensed in acquirer’s books and NOT considered as part of the consideration paid (and, therefore, potentially capitalised as goodwill).
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-04 18:09:132009-11-04 18:09:13Xerox Corporation and Affiliated Computer Services (BPO world leader) unveil planned new business combination
A few accounting standards arguably have an unfortunate tendency to exaggerate the economic cycle. During a time of economic downturn, the chances of a company having impaired assets is increased. This has the unfortunate effect of taking poor trading results and augmenting them with impairment losses. In other words, accounting conventions take a bad situation and make it worse.
Or so some people would say.
Some financial instruments are also shown at fair value. Fair value is primarily decided by reference to market values. During a slump, this also makes reported results worse.
The argument advanced by many is that we ought to amend accounting standards to introduce some sort of dampening effect – requiring companies to impair assets or make provisions during times of boom and release these provisions during a slump. This, it is argued, is only the equivalent of making hay while the sun shines.
There’s only one problem with this idea of “dynamic provisioning”. Mostly, it flies in the face of the definition of a liability in the Framework. Also, it’s precisely the opposite of what IAS 37 and IFRS 4 (insurance contracts) aimed to do. Fiddling with the accounts to save people from unjustifiable optimism and excessive, groundless pessimism might be politically popular in the current market turbulence, but arguably it would only reduce the reliability of financial reporting in the long term. Investors ought to be smart enough to use other information provided to them, such as the statement of cash flows, before reaching judgement on the desirability of a company’s shares.
We hope that the IASB stick to their guns and resist the pressure to codify creative accounting and massaging figures by bogus provisions. We’re confident that they will.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-10-14 18:14:492009-10-14 18:14:49Are accountants to blame for the global crisis?
So, how am I doing weight wise? More to the point, what has this got to do with the exams?
Ratio analysis is an important area of the syllabus and one overriding principle to remember when looking at ratio analysis is that a ratio is irrelevant when looked at in isolation. Ratios must be looked at against comparatives or benchmarks in order to interpret them and then to look at the underlying causes.
So, back to my weight of 85kg. How am I doing? Is my weight ok?
85kg by itself is irrelevant. We need to look at comparatives for somebody who is my gender and my height. For example, 85kg for an adult male with a height of 1.90m (6 foot, 3 inches) is a healthy weight. 85kg for an adult female with a height of 1.60m (5 foot, 3 inches) is an unhealthy weight with the person being classified as obese.
Using my example of 85kg, by comparing it with people who are the same height as me is in effect comparing it with “industry standards”.
What about my performance over time? Is my weight increasing, decreasing or remaining static when compared to last year and the year before. Comparing movements within this personal ratio analysis unfortunately reveals that my weight has increased.
Now onto the important issue behind ratio analysis and that is of looking at the underlying cause of the movement in the ratio. Unfortunately, it looks like the cake I have with my afternoon tea could be on the way out…
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-09-02 18:32:532009-09-02 18:32:53My 85kg and ratio analysis...
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