March’s issue of Financial Director contained an analysis of the AOL/Time Warner merger. The write-offs were huge and partly related to the timing of the deal. From the date the acquisition was announced, AOL recognised Time Warner as a subsidiary, even though it didn’t formally own the shares. The announcement was the key: as a result of the sliding stock market, including Time Warner stock, the Time Warner investment needed a massive write down contributing to record-breaking losses of $100bn.
If the acquisition had happened in the UK, those losses would not have been nearly as big for the simple reason that a British AOL would not have been allowed to take account of the shares it wanted to own until it actually owned them. If it’s a public offering, the date control transferred is the date the offer becomes unconditional, usually as a result of a sufficient number of acceptances being received.
But the British view is out of step with international thinking. The international standard – based on the US standard – notes that it is not necessary for a transaction to be finalised at law before control may effectively pass to the acquirer. It doesn’t really matter whether you think the British or US international reasoning on acquisitions is right. The point is that if accounting standards are to be harmonised across the globe, then it is that sort of principle that needs to be sorted out. In many ways, it is a minor detail, but one which can lead to material differences in both the profit and loss account, and the balance sheet. Hence, the valuation of the company.
In October last year, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a memorandum of understanding, formally stating their commitment to the convergence of US and international accounting standards. This had two practical effects: first, they promised to adopt compatible, high-quality solutions to existing and future accounting issues.
Second, and perhaps of more practical importance, they set up a short-term convergence project. This project is examining certain specifically identified differences and should then come up with a solution to eliminating them.
The two accounting standards setters say they expect to issue an exposure draft to address some, and perhaps all, of those identified differences by the latter part of 2003. If they succeed, it will be seen as a major step toward improving the comparability of financial statements across borders. But will they?
When IASB chairman Sir David Tweedie described the task as a challenge, he wasn’t exaggerating. Since the so-called Norwalk agreement (the meeting took place in Norwalk, Connecticut) staffers from the IASB and FASB have been getting on with the job. They may be starting to feel like Hercules when he went off to slay the many-headed monster Hydra. Every time they cut off one difference between international accounting and US accounting, another two may grow in its place.
This ED is not expected to remove every difference between IFRS and US GAAP. Those that can’t be overcome within the next few months will be removed after 1 January 2005 through co-ordination of work programmes and by working on the same issues – not necessarily jointly, but at the same time.
It is easy to dismiss this work as something that is happening in a quasi-academic environment, but that is simply not the case. For many companies, the impact of IAS on investor relations will be considerable. Companies will have to rethink the ways in which they measure performance and communicate with investors.
The markets aren’t going to blame the accounting standards setters if your company results wobble, they’ll blame you.
FDs are facing a substantial challenge, not only in complying with the changes but in a coherent articulation of their companies’ performance. This is big-picture stuff, combined with a strong grasp of detail.
While IASB is happy to keep its existing approach to recognising an acquisition, the US is reportedly beginning to think that the British position on timing of business combinations is the right one. Whether IASB has caught up yet with that shift is unknown. But there is still a lot that the standards setters need to sort out between now and March 2004. That’s when the IASB needs to have everything out the door so that finance directors and their team can catch up before 1 January 2005.
Some of the UK’s top companies are failing to adequately report poor performance and sometimes obscure their true profit figures
The UK’s imminent exit from the EU that may now put the audit committee to the ultimate test
Audit tendering has turned from good practice to legal practice under the EU audit reforms
Businesses will have to think more strategically about where they can source those non-audit services in the future