1 CONVERGENCE OF ACCOUNTING STANDARDS

An examination of the treatment of business combinations

under the UK and US GAAP and the IFRS

A review of the reconciliatory Balance Sheets of 10 European

companies

POOJA KAUSHIK
ABSTRACT
This thesis supports global convergence of accounting standards i.e. adoption of the International
Financial Reporting Standards. I have chosen the accounting treatment of intangible assets to
compare and analyze the increased transparency that IFRS provides in relation to the pre-IFRS UK
GAAP and US GAAP. Analysis of the ‘ reconciliation of UK GAAP to IFRS’ balance sheets of 10
companies in the United Kingdom who have adopted IFRS and their previous GAAP numbers has
been used to prove the effectiveness and usefulness of the IFRS. In this thesis, I have used the
stakeholder theory to sum up the benefits of increased transparency to stakeholders. 2
INTRODUCTION: THESIS GOALS AND PURPOSE
With increased globalization in today’s world, there is a lot of talk in the accounting world for a
unified set of standards that would serve investors and other users of financial statements worldwide.
Besides cutting financial reporting costs and helping fund raising for corporations, analysts say that
the standards would also provide investors with a better global insight in their company’s
performance. The IFRS which promulgated by the IASB in London are predicted by many to be the
adopted global set of standards by many.
My thesis supports the global convergence of standards or the adoption of the IFRS.I have chosen to
concentrate on one area- the accounting for business combinations under the pre-IFRS UK GAAP,
US GAAP and the IFRS to prove that the adoption of the IFRS increases transparency in reporting.
The increased transparency has been proven-

By a comparison and evaluation of the accounting treatment under the US GAAP, pre-IFRS
UK GAAP and the IFRS.

By the sample testing of the reconciliatory ‘UK GAAP to IFRS’ Balance Sheets of 10
companies.

The stakeholder theory has been applied to summarize the benefits of the increased transparency to
different stakeholders. The stakeholder theory has been applied to the IFRS as a whole to prove the
benefits of the IFRS using surveys conducted by KPMG and PWC. I divided the thesis body into
three stages in order to organize my findings.
Stage 1- Comparison and evaluation of accounting for business combinations, Stage 2-Sample
analysis and Stage 3-Application of the stakeholder theory. 3
BACKGROUND INFORMATION ON THE IFRS, US GAAP, UK
GAAP AND AREAS OF DIFFERENCES IN ACCOUNTING.
INTRODUCTION TO THE IFRS
International Accounting Standards (IASs) were issued by the IASC from 1973 to 2000. The IASB
replaced the IASC in 2001. Since then, the IASB has amended some IASs, has proposed to amend
other IASs, has proposed to replace some IASs with new International Financial Reporting Standards
(IFRSs), and has adopted or proposed certain new IFRSs on topics for which there was no previous
IAS. Through committees, both the IASC and the IASB also have issued Interpretations of
Standards. Financial statements may not be described as complying with IFRSs unless they comply
with all of the requirements of each applicable standard and each applicable interpretation. (Deloitte
Touche Tohmatsu, 2006)
IASB’s framework, IFRS and Interpretations provides guidelines and explanations for the methods of
accounting. The Framework was published by the IASC in 1989 to provide an outline and
explanations for financial reporting concepts. The Framework serves as a guide to both international
and national standard setters to set consistent accounting standards and assists preparers and auditors
in interpreting standards and dealing with issues that the standards do not cover. There are 34 IFRS
currently in effect. The Standards provide guidance for preparers to deal with the recognition,
measurement, presentation and disclosure requirements for transactions and events. Most IFRS are
intended for application across industries, with only one standard outlining disclosure requirements
for banks and other financial institutions. A second tier 4
of guidance comes from the Interpretations developed by the Standing Interpretations Committee,
now IFRIC. These pronouncements clarify or interpret the standards where the preparer community
identifies the need for improved guidance. (PricewaterhouseCoopers,2002). The adoption of
International Financial Reporting Standards (IFRS), which was required for listed companies of all
25 EU countries on January 1, 2005, is being witnessed throughout the rest of the world at an
increasing rate, with Japan, Australia, Russia, Canada, Hong Kong and several Middle East and
African countries already having decided on a comprehensive , mandatory change. To date, the more
significant holdouts, including the United States, South Africa, Singapore and Malaysia are
committed to modifying local standards to these international standards (Bahal and Ross,1, 2002).
International accounting standards regulate multinational behavior to a certain extent. They ensure
efficient functioning of capital markets. Most importantly, they facilitate greater comparability of
information as without these standards a financial statement from India and U.K would be very
different from one from the United States. They provide a basis on which performance of a
multinational can be evaluated and compared not just nationally but internationally. These standards
also lead to better communication between accountants all over the globe and the sharing of
information could always lead to ideas for ameliorating accounting reporting standards and
techniques. The above-mentioned reasons ultimately lead to investor confidence. Investors possess a
better understanding of international finance and stock markets and this in turn helps them make
better portfolio decisions. 5
IFRS IN EUROPE
All European quoted companies were required to prepare their consolidated financial statements in
accordance with the International Financial Reporting Standards since 2005. The transition dates for
different companies ranged from 31 December 2003 to 30 December 2004.
The EU policy is aimed at the removal of barriers to cross border trading in securities by ensuring
that company financial statements throughout the EU are transparent and comparable. The economic
gains to be derived from an integrated European financial and capital market are considerable. (Lian,
2, 2004). Prior to the IAS, European countries were either using US GAAP or their own national
standards. The European Commission has said “IAS will offer [those now using US GAAP] the same
high quality level of financial information as US GAAP, with the additional advantage that IAS have
been conceived in a truly international perspective and are not modeled by a particular national
environment. The Commission hopes and expects that the US Securities and Exchange Commission
(SEC) will accept in the near future financial statements prepared by EU issuers without requiring a
reconciliation to US GAAP.”
As this thesis compares the pre-IFRS UK GAAP to IFRS, I would like to write a little about the IFRS
situation in the UK. The Accounting Standards Committee (ASC) and the Accounting Standards
Board (ASB) were previously producing UK SSAPs and FRSs. Since the implementation of the
International Financial Reporting Standards, a number of changes have taken place in the accounting
and presentation of financial 6
statements. Some of the areas in which the IFRS differs from the pre-IFRS UK GAAP are-

• Tangible Fixed Assets

• Intangible assets

• Impairment of Assets

• Stock and Long Term Contracts

• Deferred taxes

• Leases

• Retirement Benefits.

IFRS AND US GAAP

DIFFERENCES
Accountants will encounter US GAAP either with American groups or with foreign groups that have
a listing on US stock markets. US GAAP are standards developed for the 12,000 or so listed
companies in the USA , and required by the Securities and Exchange Commission (SEC). Foreign
companies that have shares or bonds listed in the USA need not publish US GAAP accounts as such,
but must in effect prepare them in order to provide a reconciliation statement. This details for their
US investors the differences between net profit and net assets as reported and how they would have
been stated under US GAAP. Though there is no general filing requirement for accounts of unlisted
companies in the USA it is thought that about 15,000 other companies prepare GAAP-compliant
accounts as a requirement of bank borrowings or on 7
a voluntary basis. GAAP, principally developed by the Financial Accounting Standards Board
(FASB), are more extensive than IFRS - comprising hundreds of standards, interpretations, opinions
and other authoritative rules. (Martin, 2004).
Some of the accounting areas in which the US GAAP differs from the IFRS are-

• Tangible assets

• Available for sale marketable securities

• Intangible assets

• Research and development expenditures

• Leases

• Inventory

IASB-FASB CONVERGENCE PROJECTS

In September 2002, the FASB and the IASB reached an agreement to conduct a short-term project to
work towards eliminating the differences between the IFRS and US GAAP. The SEC also made an
announcement in the same month in which it said that starting in 2007 , it might allow foreign
companies which are trying to raise capital in the US to use the IFRS rather than reconciling to US
GAAP as they do right now. Convergence is supposed to ease the task of raising capital. Once the
process is complete, investors will need less help comparing results of competing firms based in
different countries. U.S. companies that conform to GAAP will be able to raise capital abroad
without reconciling their results to IFRS. (Reason, 2005, 2). The FASB and IASB are 8
also working together on a number of long-term projects that deal with concepts like business
combinations, employee benefits and comprehensive income.

LITERATURE REVIEW
I have analyzed and compare the reconciliatory Balance Sheets of 10 European countries . I chose
these companies from different sectors of the European economy and have written about their
performance. For the theoretical framework, I use the stakeholder theory.
The stakeholder research tradition began to unfold in the wake of R. Edward Freeman’s seminal book
Strategic Management. A Stakeholders Approach, which was published in the mid-1980s. The book
initiated a still ongoing academic discussion. It demonstrated in a comprehensive fashion that
strategic management of private sector firms could become much more effective and efficient, if
managerial efforts regard various stakeholders concerns. Or, in other words, shareholders benefit
long-term if other legitimate interests in the firm do not fall by the wayside (Scholl, 2).Thus, besides
shareholders the interests of other stakeholders in and outside the organization had to be taken into
consideration while making managerial decisions and implementing policies.
Stakeholder theory suggests that an organization has relationships with many constituent groups, or
"stakeholders,"(Covell, 2004) that affect and are affected by its decisions (Freeman, 1984). A major
purpose of stakeholder theory is to help corporate managers understand their stakeholder
environments and manage more effectively within the nexus of relationships that exists for their
companies. However, a larger purpose of stakeholder theory is to help corporate managers improve
the value of the outcomes of 9
their actions, and minimize the harms to stakeholders. The whole point of stakeholder theory, in fact,
lies in what happens when corporations and stakeholders act out of their relationships. (Logsdon and
Wood, 3).
The stakeholder theory involves answering three important questions-

Who are the organization’s stakeholders for accounting standards?

This step involves identification of the organization’s stakeholders. Stakeholders are defined as those
individuals that have a "stake" in the performance of an organization, that the interests of all
legitimate stakeholders have intrinsic value, and that no set of interests is assumed to dominate the
others (Donaldson & Preston, 1995). In the Ivey Business Journal, Robert Philips writes that
stakeholders are those groups from whom the organization has voluntarily accepted benefits, and to
whom the organization has therefore incurred obligations of fairness. Typically, this includes groups
such as financiers, employees, customers, suppliers and local communities. (Philips, 2004, 2).
Stakeholder theory holds that besides these legitimate stakeholders, derivative stakeholders like
competitors or activist groups are important as their actions can influence the corporation.

Why are the stakeholders important for accounting standards?

Brenner and Cochran comment that "the stakeholder theory of the firm posits that the nature of an
organization's stakeholders, their values, their relative influence on decisions and the nature of the
situation are all relevant information for predicting organizational behavior"(1991, p. 462). Milton
Friedman uses the property rights argument stating that shareholders own an organization as they
own the equity shares and if they desire to 10
maximize the value of their investment , it is the manager’s duty to work in accordance. Managers
who fail to do so violate the moral property right .(Mitchell et al. 1997) note that stakeholder theory
has managerial importance because it can determine to what and to whom managers need to listen
and give attention.

What do Stakeholders want?

Different people want different things from their relationships with organizations. Stakeholder
discussions often focus on allocating some measure of organizational value or outcome (e.g., who
gets how much money from the firm). The question of how the organization creates this value
usually gets less attention, but it is certainly not less important. Not all stakeholders want a voice in
organizational decision-making, but those who do desire a voice should have it. (Philips, 2004, 2)
My literature sources had to be organized into three data sets-IFRS standards, US GAAP and pre –
IFRS UK GAAP. My documents for analyzing the IFRS were the web summaries put up on the
International Accounting Standards Board site. For pre-IFRS UK GAAP, I referred primarily to the
Deloitte and Touche publication ‘GAAP 2004’. For the US GAAP, I referred to the textbook being
used right now in UMass Boston for AF310 and AF311 ‘Intermediate Accounting’ by Kieso,
Weygandt and Warfield. The IFRS accounting for intangible assets was the x variable I used to prove
my y variables, which are, increased transparency and better stakeholder management. I must
mention that this research greatly benefited from the articles posted by Intangibles Business Ltd. The
research resources I have used are archives, real data, literature, interviews, reviews and the research
facilities available at UMASS in the Healey library database. The databases I have used are Business
Source Premier, Lexis Nexis Academic, 11
Ebrary and the Wall Street Journal for articles. Besides these, I have also used other UMB resources
like the CM faculty, the CM Business Center and the advice and guidance of the Accounting and
Management Department faculty.

METHODOLOGY
I have used an analytical as well as a theoretical framework to prove my research objective. My
research can be divided into three stages.
Stage one involves analysis involves looking at the standards for intangible assets and goodwill
under IFRS , UK GAAP and US GAAP and making comparisons.
This is followed by Stage two- the analysis of the reconciliations of Balance Sheets of a sample of 10
companies and interpret the data to prove the increased transparency under IFRS.
In Stage three, The stakeholder theory which I have explained in detailed in a later section has been
to used to prove how this increased transparency has lead to better stakeholder management i.e.
provides managers with a number of alternatives to serve stakeholders in a better manner which
would ultimately prove beneficial to business. In the end I use the stakeholder theory again to prove
the general effectiveness of the IFRS using the information in surveys conducted .
Empirically , my research could be summarized in the following steps- collection of data,
questioning of the information collected, forming conclusions and finally putting together all of my
research on paper. The diagram on the next page summarizes the structure and organization of my
thesis. 12
Accounting for intangible assets
Sample analysis
Using the stakeholder theory

IFRS 3
US GAAP

SFAS 141

SFAS 142

UK GAAP

FRS 10

Comparisons and differences

Analysis of reconciliatory statements of sample of 10 European companies that have transitioned to

the IFRS

INCREASED TRANSPARENCY

Interpretation of data on intangible assets and goodwill

IFRS

IFRS 3

Investors
Government

Suppliers
Customers
Creditors

Society 13
US GAAP

ANALYSIS
STAGE 1
ACCOUNTING FOR INTANGIBLE ASSETS
This stage involves a comparison of accounting for
intangibles under IFRS, US GAAP and UK GAAP.

SFAS 141

SFAS 142

UK GAAP

FRS 10

Comparisons

and

differences IFRS 3 14
Introducing concepts: Intangible assets, Goodwill
Intangible assets
The Uniform Commercial Code (Section 9-102(a)(42)) defines "general intangibles" as "any personal
property other than accounts, chattel paper, commercial tort claims, deposit accounts, documents,
goods, instruments, investment property, letter of credit rights, letters of credit, money, and oil, gas,
or other minerals before extraction. The term includes payment intangibles and software." In today’s
global economy dominated by information and service providers, intangible assets constitute a major
proportion of total assets. Intangible assets command an increasingly large proportion of a company’s
value and this value has largely not been recognized. In heavily branded consumer businesses such as
Coca Cola or Nike, brands account to up to 80% of the company’s value. In other industries, such as
pharmaceutical, patents and copyrights are more prominent(Thaynes,1 ). Thus, Microsoft’s software,
Coke’s secret formula and America Online’s subscription base are the most important assets on their
balance sheets. Infact, the value of tangible assets as a percentage of all assets has been steadily
decreasing as shown in the graph below which is provided by the Federal Reserve Board but which is
recreated by me for this thesis’s purpose. The original graph is attached.
80%
70%
60%
50%55 Years ‘00 15
While intangibles are potential sources of income, their values can erode just as quickly. Just before
Winstar Communications filed for bankruptcy in 2001, their assets were listed at 5 billion dollars.
However, on liquidation the assets fetched just 42 million dollars due to decline in the value of
intangibles. Traditional assessment of national economic performance has relied upon understanding
the GDP in terms of traditional factors of production – land, labor and capital. Knowledge assets may
be distinguished from the traditional factors of production – in that they are governed by what has
been described as the ‘law of increasing returns’. In contrast to the traditional factors of production
that were governed by diminishing returns, every additional unit of knowledge used effectively
results in a marginal increase in performance. Success of companies such as Microsoft is often
attributed to the fact that every additional unit of information-based product or service would result
in an increase in the marginal returns. Given the changing dynamics underlying national
performance, it is not surprising that some less developed economies with significant assets in ICT
knowledge and Internet-related expertise are hoping to leapfrog more developed economies.
( Malhotra,2000). Intangible assets have two main characteristics- they lack physical existence and
they are not financial instruments. Intangible assets derive their value from the rights and privileges
granted to the company using them. (Kieso, Weygandt and Warfield,570). Intangible assets are
further classified as limited life intangibles or indefinite life intangibles. Limited life intangibles have
a known useful life and indefinite life intangibles are intangibles whose useful life cannot be
determined. Accounting treatment for the intangibles vary according to their type which we shall
look more in detail in the next section. When intangibles are purchased from other parties they are
most recorded at the 16
cost of purchase or fair market value under most accounting systems. This cost includes all the
expenses incurred to make the asset ready for use. These include its purchase price, legal fees and
incidental expenses. Internally generated intangibles are generally expensed as incurred. All the
research and development costs that companies have to incur to come up with the asset are expensed
in the income statement.
The six major categories of intangible assets are marketing –related intangible assets, customer-
related intangible assets, artistic-related intangible assets, contract-related intangible assets,
technology-related intangible assets and goodwill. Marketing - related intangibles assets are those
assets used in the marketing or promotion of products .These include trademark, trade names and
internet domain names. Customer-related intangible assets include assets such as customer contracts,
customer relationships, subscriber lists, customer orders and backlogs and core deposits. Artistic –
related intangible assets include ownership rights to plays, literary works, musical works etc.
Contract –related intangible assets include licenses, non-competition agreements and various other
agreements and contract rights. Goodwill is an important component of intangible assets and comes
into play during business acquisitions and mergers. Goodwill can be internally created or purchased
goodwill. Accounting treatment for goodwill differs according to its type and the accounting
standards followed. 17
Goodwill
Goodwill is the excess of the purchase price over the fair market value of an asset during a business
combination. Some of the reasons why a business would be worth more than the sum of the fair
values of the accountable and identifiable net assets of that business are-
The expertise of the workforce — current accounting practices do not normally recognize the value of
human resources as an asset on the balance sheet.
The reputation of the product(s) of the business — if the product has a well known name attached to
it then sales and profits will be boosted on the basis of reputation alone.
The general economic environment — levels of interest rates and exchange rates and levels of
investor confidence generally will clearly have a major influence on the value of businesses and
hence on the amount of goodwill attaching to a business.( Robins,2000)
Goodwill is often referred to as the most intangible of all intangible assets. The problem of
determining the proper cost to allocate to intangible assets in a business combination is complex
because of the many different types of intangibles that might be considered. It is extremely difficult
not only to identify certain types of intangibles but also to assign a value to them in a business
combination. As a result, the approach followed is to record identifiable intangible assets that can be
reliably measured. Other intangible assets that are difficult to identify or measure are recorded as
goodwill. (Kieso,Weygandt and Warfield, 578) 18
IFRS accounting for business combinations
The three IFRS standards impacting accounting for intangible assets are IFRS3, Business
Combinations, IAS36, Impairment of Assets and IAS38, Intangible Assets. These three standards are
applicable to intangible assets and goodwill acquired on or after 31 March 2004.IAS38 prescribes
accounting treatment for the recognition of internally generated and acquired intangible assets.
IAS38 prescribes the rules for impairment testing of assets and goodwill. IFRS3 prescribes the
overall treatment for accounting for acquired assets and goodwill in a business combination. The
three standards can be summarized as follows-

Acquired intangible assets

Business combinations are accounted for using the purchase method i.e. accounting from the
perspective of the acquirer. Intangible assets are initially recognized at cost based on the following
criteria-

1) They are identifiable

2) The probable future economic benefits created by them will benefit the organization.

3) The measurement of their cost is reliable.

After their initial recognition, intangible assets may be carried at their cost or revalued amount less
any accumulated amortization or impairment losses. Their revaluation amount is their fair value at
the date of revaluation. If there is an increase in the amount of carrying value after revaluation is
credited to a revaluation surplus account. 19
Internally Generated Intangible assets
Internally generated goodwill, brands, mastheads, publishing titles, customer lists are not recognized
as intangible assets. Research and development costs are generally expensed. They can however be
treated as an intangible asset if they meet the following criteria-

• They are identifiable

• The probable future economic benefits created by them will benefit the organization.

• The measurement of their cost is reliable.

Goodwill
Internally generated goodwill is not recognized. The only goodwill recognized is as a result of
business combinations. Goodwill represents the difference between the total purchase consideration
and the total of the fair value of all acquired assets and liabilities assumed. If the fair value of the
assets exceed the purchase consideration , then the acquirer must reassess and identify all the assets
and immediately after reassessment must recognize the negative goodwill as a profit in the income
statement.

Impairment testing
The useful life of the asset is determined .If the asset has a finite useful life , it should be amortized
over its life. For assets with indefinite useful life, annual impairment testing is required. The test
involves a comparison of the carrying value of the asset with its 20
estimated recoverable amount. The recoverable is defined as the higher of the value less costs to sell
and the value in use. The in use is generally based on the discounted future cash flows from the asset.
When the recoverable amount is found to be lower than the carrying value , the carrying value is
reduced to the recoverable amount with a charge to profits.(Caldwell,4)

US GAAP accounting for Business Combinations

The standards that prescribe treatment for accounting for Business Combinations are SFAS141
Business Combinations and SFAS 142 Goodwill and other intangible assets. The treatment can be
summarized as follows-

Acquired intangible assets

Recorded cost
1)Acquired intangibles are recorded at cost and this cost includes the purchase price and all costs
incurred to bring the asset to its intended use.
2) In cases where the asset is acquired in exchange for stock or other assets, the cost of the asset is
the fair value of the consideration given or the fair value of the intangible received whichever is more
clear
3) In the case of a ‘basket purchase’, cost is allocated on the basis of fair market values of assets
acquired.
Amortization
Assets with limited useful life are amortized over life of the asset. The asset generates cash flows
over such a useful life and the amortization method should to a certain extent 21
reflect the pattern in which the asset is used up if that could be determined. If the usage pattern
cannot be determined then the straight-line method is used. Assets with indefinite life are not
amortized.

Internally Generated Intangibles

Costs related to internally generated intangibles are expensed as incurred. Research and development
costs related to intangibles are expensed and appear in the income statement. Only direct costs
incurred in obtaining intangibles including legal costs are capitalized.

Goodwill
Goodwill recognized is the difference between the purchase consideration and the fair value of
assets. It appears on the balance sheet. Internally generated goodwill is not recognized. The
impairment rule for goodwill involves two steps. First, the fair value of the reporting unit should be
compared to its carrying amount including goodwill. If the fair value of the reporting unit is greater
than the carrying amount, goodwill is considered not to be impaired, and the company does not have
to do anything else. (Kieso, Weygandt and Warfield,593)

Impairment testing of intangibles.

Impairment refers to the write-off or reduction in value of the asset that has to be carried out when
the carrying amount of a long-lived asset is not recoverable. When the carrying value of an intangible
is not recoverable , impairment is carried. Impairment testing for indefinite life intangibles just
involves a fair value test. For limited life intangibles impairment is based on a recoverability test and
a fair value test. Goodwill impairments are based on a fair value test. 22
Types of intangible asset Impairment test
Limited life Recoverability test, then fair
value test
Indefinite life other than goodwill Fair value test
Goodwill Fair value test on reporting unit
then fair value test on implied
goodwill
(Kieso, Weygandt and Warfield,584)

Pre-IFRS UK GAAP accounting for Business Combinations

Starting 2005, all the 25 nations in the European Union including the United Kingdom have adopted
the IFRS. The pre-IFRS UK GAAP is no longer functional. The FRS10 Goodwill and Intangible
assets used to prescribe the rules for accounting for Intangibles and Goodwill. The Deloitte and
Touche publication ‘GAAP 2004’ summarizes the key features of this standard as follows-

• Internally generated goodwill may not be recognized. Purchased goodwill is capitalized and
classified as an asset.

• Internally developed intangible assets are recognized only if they have a readily ascertainable
market value. Purchased intangible assets are capitalized. Intangible assets acquired as a part
of a business combination are recognized only if they are separable and can be measured
reliably.

• Goodwill and intangible assets are amortized over their useful economic lives if this is finite, or
not amortized if this is indefinite. Negative goodwill is classified alongside positive goodwill
and amortized.
23
 • When the period of amortization exceeds 20 years, an impairment test is carried out annually. In
other cases an impairment test at the end of the first full year after acquisition and then if
there is an indicator of impairment.

COMPARING THE IFRS TO US GAAP AND PRE-IFRS UK

GAAP: BUSINESS COMBINATIONS
IFRS 3 vs. UK GAAP
The major differences between the IFRS 3 and FRS provisions for accounting for business
combinations are as follows-

End of merger accounting and pooling of assets

An important requirement of the IFRS 3 is that business acquisitions be accounted for using the
purchase method from the perspective of the acquirer. This nullifies the UK GAAP provision of
allowing companies to use merger accounting where they simply pooled together their balance sheet
thus not recognizing goodwill. The IFRS provision makes it mandatory for companies to recognize
goodwill.

Goodwill no longer amortized

Goodwill is no longer amortized, but is instead subjected to a stringent, annual impairment test. In
the event that it is impaired, an immediate charge will be taken to the profit and loss account, so poor
performing acquisitions will be highlighted through such a charge sooner rather than later. This
represents a fundamental shift in the way goodwill 24
is viewed. Goodwill is seen no longer a s steadily wasting asset, but instead as one that should be
expected to maintain its value.(Hadjiloucas and Winter,2)

More Intangible Assets recognized

Historically, under UK GAAP, when a deal was completed , acquired intangible assets would
generally just be subsumed within a pot marked ‘goodwill’. The major benefit was that by amortizing
this goodwill evenly over a period of usually 20 years, you could predict with greater accuracy the
impact on earnings. (Stevenson and Mc Phee, 82) However, IFRS 3 requires that all identifiable and
valuable intangible assets be reported on the balance sheet. The acquirer needs to recognize
purchased intangibles on the Balance Sheet.

More Disclosures
The IFRS 3 requires that detailed disclosures be made about transactions and the purchase price
allocation method utilized. Detailed information about impairment testing of assets and goodwill also
needs to be disclosed.

Strict criteria for determining useful life

Limited life intangibles can be amortized over their useful life. However , management now needs to
be more stringent about classifying assets as having a definite or indefinite useful life. An indefinite
life assertion needs to be backed by evidence and analysis supporting that no legal , regulatory,
contractual, competitive, economic or other factors limit the life of the asset. (Hadjiloucas and
Winter,3) 25
UK GAAP IFRS
Merging accounting and pooling of assets No merger accounting allowed, all
used . combinations accounted for using the
purchase method.

Goodwill amortized over life of the Goodwill tested for impairment annually.
asset.
Fewer capitalized intangible assets. More intangibles identified and recognized
on acquisition.

Details of purchase price allocation not essentially required to Details of purchase price allocation need to
be disclosed. be disclosed.