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ICI » Topics » IFRS transition exemptions

This excerpt taken from the ICI 6-K filed Mar 21, 2007.
IFRS transition exemptions
These are the Group’s second consolidated financial statements in accordance with adopted IFRS. The Group’s transition date for adoption of IFRS was 1 January 2004.

 

www.ici.com ICI Annual Report and Accounts 2006 69

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Notes relating to the Group accounts continued

 

1 Basis of presentation of financial information (continued)

The complete accounting policies are set out on pages 60 to 63 of this report. IFRS 1 First-time Adoption of International Financial Reporting Standards permits those companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS. The exemptions taken by ICI in accordance with IFRS 1 have been described in the accounting policy to which they relate and are repeated below. These policies have been consistently applied to all the years presented and in preparing the opening IFRS balance sheet at 1 January 2004 for the purpose of the transition to IFRS, except for those relating to the classification and measurement of financial instruments.

ICI has taken the following key exemptions on transition to IFRS:

(a) Business combinations: The Group has chosen not to restate business combinations prior to the transition date on an IFRS basis. Consequently, goodwill has been accounted for up until the transition date of 1 January 2004 in accordance with UK GAAP as applicable at that time, and goodwill has been accounted for subsequent to 1 January 2004 in accordance with IFRS 1 on transition and IFRS 3 Business Combinations on a prospective basis from that date.
 
  In particular, the acquisition of the Unilever Speciality Chemicals business in 1997 for a consideration of £4.2bn was accounted for in compliance with UK GAAP at that time. The net assets acquired were recognised on the balance sheet at fair value (£0.7bn) and the goodwill on the transaction, amounting to £3.5bn, was taken directly to reserves and included as a debit balance in the profit and loss account reserve. In addition, further acquisitions made since 1998 were accounted for under FRS 10; goodwill arising on these acquisitions has been included as an intangible asset and subject to amortisation.
 
  If the Group had not elected to adopt the exemptions in IFRS 1 relating to business combinations, then all acquisitions made by the Group prior to 2004 would have been accounted for in accordance with IFRS 3.
 
  Consequently, in the 1997 and subsequent Group balance sheets:
 
  • The fair value relating to all acquisitions would have been evaluated under IFRS 3.
 
  • Goodwill of circa £3.5bn would have been recognised in 1997 subject to the recognition of intangible assets.
 
  • Intangible assets would have been recognised in accordance with IFRS 3 which contains different requirements from UK GAAP. It is therefore possible, but we have not evaluated this, that some of the goodwill would have been reclassified as intangible assets.
 
  • It is likely that the goodwill relating to the Uniqema business and the Paints business in Latin America would have been impaired and written down to zero. Under SFAS No. 142 Goodwill and Other Intangible Assets, impairments of £122m and £255m were recognised in relation to the Latin American Paints business in 2002 and Uniqema business in 2003, respectively (being the entire goodwill relating to these businesses under US GAAP at that time).

Specifically, these accounts would have been impacted in the following ways:

  • The 1 January 2004 IFRS transition balance sheet and subsequent balance sheets would include significant goodwill and intangible assets subject to the initial recognition criteria, including impairment testing on transition, and annual impairment and amortisation charges discussed below.
     
  • The profit on the disposal of the Quest Food Ingredients business included in the comparative 2004 income statement of £163m would have been significantly reduced as goodwill and intangibles held on the balance sheet would have been included in the assets disposed.
     
  • The income statements for the periods ending 31 December 2004, 2005 and 2006 would have included charges for amortisation of intangibles.

The main impacts on subsequent periods would be:

  • The profit on the planned disposal of Quest would be significantly reduced as goodwill and intangibles held on the balance would be included in the assets disposed.
     
  • The goodwill recognised on the balance sheet would be assessed for impairment at least annually.
     
  • Any intangible assets determined to have a finite life would be subject to amortisation in the income statement each year and impairment testing in accordance with IAS 36 Impairment of Assets.
     
  • Goodwill held in foreign currencies would also be retranslated annually through reserves.
     
(b) Employee benefits: All cumulative actuarial gains and losses have been recognised in equity at the transition date. This is to maintain consistency with prospective Group policy, whereby all actuarial gains and losses will be recognised directly in reserves via the statement of recognised income and expense. If the Group had not adopted such a policy, then the cumulative actuarial gains and losses would have been split into a recognised portion and a larger unrecognised portion. The unrecognised portion offsetting the post-retirement benefit liability on the balance sheet would be charged to the income statement on a systematic basis over a period of time.
 
(c) Cumulative translation differences: One of the requirements of IAS 21 The Effects of Changes in Foreign Exchange Rates is that on disposal of an operation, the cumulative amount of exchange differences previously recognised directly in equity for that foreign operation are to be transferred to the income statement as part of the profit or loss on disposal. The Group has adopted the exemption allowing these cumulative translation differences to be reset to zero at the transition date. If the Group had not taken this exemption, a different amount of net foreign exchange gains and losses would be transferred to the income statement on disposal of a foreign operation.
 
(d) The Group took the exemption under IFRS 1 not to restate comparative information in respect of IAS 32 and IAS 39. As a consequence financial instruments included in the 2004 comparative information are still in accordance with UK GAAP, whereas they are accounted for in accordance with IFRS in the 2005 and 2006 results. In accordance with the transitional provisions of IFRS, this had been treated as a change in accounting policy. The accounting policies for financial instruments under both UK GAAP and under IFRS are detailed on page 62 to 63 of this report. The adjustments made to reserves as a result of adopting IAS 32 and IAS 39 on 1 January 2005 are detailed in note 27. The resultant effect on opening net debt is detailed in note 29. If the Group had not taken this exemption, a number of financial instruments would have been recognised or revalued in the opening balance sheet at 1 January 2004 and accounted for during the year ended 31 December 2004 in accordance with IAS 32 and IAS 39.

 

70 ICI Annual Report and Accounts 2006 www.ici.com

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1 Basis of presentation of financial information (continued)

The exemptions ICI has elected not to adopt include the following:

(a) Share-based payments: The Group has not adopted the exemption to apply IFRS 2 Share-based Payment only to awards made after 7 November 2002, instead a full retrospective approach has been followed on all awards granted but not fully vested at the date of transition to maintain consistency across reporting periods. Fair value disclosures in respect of share based incentive schemes have been previously made in the Group’s US GAAP net income reconciliation in the Annual Report and Accounts.
 
(b) Fair value or revaluation at deemed cost: The Group has not adopted the exemption to restate items of property, plant and equipment to fair value at the transition date. Such items have been maintained at historical cost in order to maintain consistency with previous Group policy.
 
  IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement came into effect on 1 January 2005. The European Commission has adopted a ‘carved-out’ version of IAS 39, which excludes certain aspects of hedge accounting. The endorsement of the full IAS 39 by the European Commission would have no effect on the results of the Group.

Continuing and Discontinued Operations
For reporting purposes, the results in these financial statements differentiate between the Group’s continuing and discontinued operations. Discontinued operations are components of the Group representing separate major lines of business or geographical areas of operations, or are part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operation and which have been sold, permanently terminated or classified as held for sale at the period end. A component of the Group comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. All other operations are classified as continuing operations. Transactions in these financial statements which are identified as relating to discontinued operations comprise items (and associated tax effects) in respect of the following operations; Quest (currently held for sale, with the exception of the Quest Food Ingredients business divested in 2004 which is classified as continuing), Uniqema (sold in 2006), and the Polyurethanes business, Tioxide business, selected Petrochemicals businesses, Acrylics business, Chlor-Chemicals business, Polyester business, Explosives business and Ethylene oxide business all of which were sold or terminated before 1 January 2004.

Non co-terminous year ends
One subsidiary made up its statutory accounts to a date earlier than 31 December, but not earlier than 30 September; additionally three subsidiaries made up their local statutory accounts prior to 30 September. All subsidiaries, including those with non co-terminous year ends, are required to prepare and submit their financial information for inclusion in the Group consolidated accounts in line with the Group’s accounting period 1 January to 31 December. There are consequently no adjustments to be made for the effects of significant transactions or events that occur between the date of the subsidiaries’ financial information and the date of the parent’s financial statements.

Critical accounting policies, judgments and estimates
The preparation of the consolidated financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period and related disclosures. Actual results could differ from those estimates. Judgments made by management on the application of IFRS that have had a significant effect on the financial statements and estimates with a significant risk of material adjustments in the next year are discussed in note 37.

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