Study Zone

IFRS3 and IAS27 – the pitfalls

Clare Finch considers the common misunderstandings associated with these new standards

First and most importantly, you need to know when IFRS3 will become relevant to you. Each examining body is different. For example, if you are sitting ACCA this becomes examinable in December 2008. However, for those sitting CIMA, it can be ignored until 2010. You need to find out.
In January 2008, the IASB issued revisions of IFRS3 and IAS27. This has had a major impact. All material for syllabuses requiring consolidation has had to be rewritten. All past questions in this area have needed a complete technical update. Students need to be very cautious when using old material, and even some supposedly 'updated material' is failing to reflect the full effect of the revision of these standards.
Non-controlling interest/'gross goodwill'
A common (erroneous) belief is that this is all there is to the changes. This is very worrying – there is much more to this than just changing the terminology and doing a bit of basic maths to gross up goodwill.
It is true that the terminology has changed. The term 'Minority Interest' is replaced with the term 'Non-controlling interest'. It is also true that an option to show goodwill gross has been introduced. BUT it is not true that the non-controlling interest share of goodwill will be proportionate to the group share – the standard is clear on this point.
Let us assume the parent company share of goodwill calculated on the old method is, say, $3,000, and the parent owns 75% of the subsidiary. A major misunderstanding is to then believe gross goodwill is:
£3,000 x 100/75 = £4,000
So the Non-controlling interest share of the goodwill is $1,000
It may not be the case that the NCI share of the goodwill is proportionate to the parent's share of the goodwill and therefore there is more to the calculation than just doing a basic 'gross-up' – rather it has to be done on a 'fair value' basis.
Once it is understood that the gross up is not necessarily on a proportionate basis, a new misunderstanding arises if the gross goodwill is then impaired. IAS 36 requires a subsidiaries goodwill impairment to be allocated between the parent and the NCI on the same basis as the subsidiaries profits and losses are allocated.
This leads to a situation whereby although the parent owns 75% of the shares they own 90% of the goodwill. But when that goodwill gets impaired the group only takes a 75% hit (based on its proportionate shareholding). It can be argued that this is anomalous but it is the correct treatment per IFRS.
Corporate reporting resit students be warned: the impact on the topic of piecemeal acquisition and partial disposals is major. The old knowledge needs to be discarded, with these topics being learnt again – from scratch.

* Clare Finch is a tutor at Kaplan Financial and author of A Student's Guide to International Financial Reporting Standards

[«all Studies]