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: email@example.com; Web: www.mafiabuzz.co.za; 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 employee. 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 offset. 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 2
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