Mafia Buzz Issue 3 - Get as DOC by monkey6


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									P C Finance Research Clarifying Complexities
Registration Number: 1985/000022/23
Members: P E Hattingh and C P Hattingh
Tele: 011 476-3626; Fax: 011 476-3627; Email:; Web:; Add: P O Box 731625 Fairland 2030

                                                     IFRS Buzz 027

Provision for Leave Pay                                          IFRS 3.33 states that a business combination agreement
                                                                 may allow for adjustments to the cost of the combination
There seems to be a problem in our profession with how to        that are contingent on one or more future events. It gives
account for and classify this item. First off, it is not a       an example of a situation where the adjustment may be
provision but an accrual – see IAS 37.11(b). If you classify     contingent on a specified level of profit being maintained
it as a provision you will need to disclose all the items in     or achieved in future periods.
IAS 84 to 92. You do not need this in your life. Secondly
it is not a provision for the payment to be made when the        The auditor argued that the additional amount of 30 to be
employee leaves the employ of the company. It is vacation        paid for the company was not a contingency as the price
pay that has accrued to the employee during the period up        was fixed at 100 so the 30 had to be expensed.
to the year-end. If, for example, a new employee joined a        IFRS is supposed to be based on principles. The principle
company on 1 March and is entitled to one month’s                is that the amount paid for S should be compared with the
vacation p.a. and the company’s year-end is 31 March, the        identifiable assets and the difference should be reported as
company would provide for one-eleventh of the full               goodwill. The fact that part of the purchase price was fixed
monthly package payable to the employee. At the end of           and the other part was contingent on profits should not
the eleventh month, when the one month’s leave is due, one       change that principle.
month’s salary will have been accrued so there will,
effectively, be no charge to the income statement for the        IFRS 3 specifically caters for this situation. However, the
month that the employee is away. A careful study of IAS          auditors used a narrow interpretation of “contingent
19.13 will confirm this. The following sentence appears in       events” with the result that an illogical answer was arrived
this paragraph: “An obligation arises as employees render        at. IAS 39 specifically scopes out “contracts for contingent
service that increases their entitlement to future               consideration in a business combination.” Factually, H
compensated absences.”                                           paid 130 for S. Any amount over and above the
                                                                 identifiable assets acquired should be recognised as
Last year the financial director of Altron asked its             goodwill. Surely IFRS should be interpreted in the light of
employees to take accumulated leave so that the accrual          fair presentation and when two ways of interpreting
could be reduced (credited to income) thereby increasing         something in a statement are available, surely the one that
profits for the year. The problem is that if employees do        results in a logical and fair presentation of the facts should
not take leave during a year, thirteen months is charged to      be followed?        By ignoring fair presentation when
income for the year.                                             interpreting standards, unnecessary friction is caused
I heard of a case recently where the auditors of a small         between auditors and preparers and is misleading to users.
private company tried to force the company to provide for        The time has arrived to change the way preparers and
leave pay iro leave not taken by the directors for the past 20   auditors interpret IFRS standards.
years! The directors of the company tried to explain to the
                                                                 A Possible New Stupidity
auditors that when you run your own business taking
holidays is right at the bottom of the pile of priorities. The   A new stupidity may embarrass our profession. The way
auditors insisted on an undertaking that they would not          these things work is that some auditor, who has no idea
claim anything from the company!! (I am so pleased I am          about fair presentation and economic reality, misinterprets
a close corporation and do not have to put up with these         some paragraph of IFRS. He or she has an argument with
kind of irritants.)                                              the client (remember that auditors hate being wrong). The
                                                                 auditor then applies to SAICA for a ruling. SAICA agrees
Note that if a company has a policy of “if you do not take
                                                                 with the auditor. This is then published as a new ruling and
the leave, you forfeit it”, this will result in a reduction in
                                                                 the preparer and user community look on in utter disbelief
the provision when the leave is no longer owed to the
                                                                 and anger. IFRS is undermined and the auditing and
                                                                 accounting profession is ridiculed.
Adjustments to the cost of a business                            The latest stupidity that is about to hit us, unless someone
combination contingent on future events                          in authority puts a stop to in immediately, is that
Company H bought company S for 100. The agreement                companies will have to provide for the full taxable
stated that an additional price would be payable using a         temporary differences even if the tax losses exceed the
formula based on the profitability of the company in the         temporary differences! Take the following example:
following year. The formula stated that the additional           Carrying value of plant                     600
amount payable was three times the amount of profit              Tax base of plant                           200
achieved over 20 in the following year. The acquiree             Temporary difference                        400
achieved a profit of 30 in the following year so the acquirer    Tax loss carried forward                    700
had to pay an additional 30 for the acquiree.
                                                               IFRS Buzz 027

The company is not confident about recovering the tax loss,
other than by reversal of temporary differences, so does not
provide for debit deferred tax. The auditors threatened to
qualify if the company did not raise a liability of 29% of
400 for deferred tax! SAICA’s opinion supports the
auditor!! Could we now be forced to provide for another
liability that will never be paid?
IAS 12.35 states that an entity shall recognise a deferred
tax asset arising from unused tax loss to the extent that it
has sufficient taxable temporary differences. In other
words, if you have a tax loss and a taxable temporary
difference you raise both. Paragraph 74(b)(i) states that
this deferred tax asset and deferred tax liability should be
Here is hoping that this stupidity will be nipped in the bud
before it becomes an embarrassment to our profession.
Kind regards,
Charles Hattingh
July 2007
15 CPD Minutes


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