P C Finance Research Clarifying Complexities
Registration Number: 1985/000022/23
Members: P E Hattingh and C P Hattingh
T: 011 476-3626; F: 011 476-3627; E: cphat@iafrica.com; W: www.mafiabuzz.co.za; A: P O Box 731625 Fairland 2030
IFRS Buzz 038
Finders Fee
A supermarket pays consultants a fee for finding suitable
premises in which to operate. The supermarket is
considering capitalising this fee to the operating lease
accrual and straightlining it over the lease period.
The only reference in IAS 17 to costs associated with an
operating lease is in paragraph 34 which excludes
insurance and maintenance from the requirement to
straight line. SIC 15 deals with incentives. I could find no
guidance for treating this type of expense in IAS 17.
When there is no guidance in a standard one refers to IAS
8, which requires one to use judgement in arriving at
relevant and reliable information. In doing so, one should
refer to standards dealing with similar issues and the
framework. The framework does not permit the statement
of financial position to contain deferrals and IAS 16 does
not permit one to capitalise the costs of opening a new
facility.
Taking the above into account, it is my view that a finders
fee paid to consultants for finding new premises should be
expensed immediately.
Impairment of A-F-S Equity F.A.
Problem
A listed company holds a 10% strategic equity investment
in another listed company. The investment has been
classified as an available-for-sale financial asset. The
original cost of the investment was R10m and during the
bull market it rose to R25m. R15m was recognised in
other comprehensive income and is lying in a separate
reserve in equity. During the year the bull market came to
an end and the market value of the investment fell to R2m.
Issue
Should the write-down be accounted for as a charge to
other comprehensive income (resulting in a debit reserve
of R8m in equity) or should the write down be expensed in
profit or loss as an impairment loss of R23m less a
reclassification adjustment of R15m, i.e. a net R8m loss?
IAS 39 Standard
Paragraph 67 states that where there is objective evidence
that an available-for-sale financial asset is impaired, the
loss should be charged to profit or loss (in this case R23m)
net of any reclassification adjustment (in this case R15m)
or R8m, being the difference between the original cost and
fair value.
Paragraph 69 states that an impairment loss iro an equity
investment shall not be reversed through profit or loss, i.e.
if the investment is revalued in the following year to say
R5m, the R3m is credited to other comprehensive income.
Paragraphs 59 and 61 give guidance when determining
whether or not a financial asset is impaired. For there to
be impairment a “loss event” must have occurred after
initial recognition of the asset that has an impact on the
estimated future cash flows of the financial asset that can
be reliably estimated.
The following examples of
objective evidence iro an equity investment are:

Significant financial difficulty of the issuer

The disappearance of an active market because of
financial difficulties

Significant changes in the technological, market,
economic or legal environment in which the issuer
operates indicating that the cost of the investment may
not be recovered

A significant prolonged decline in the fair value below
cost
The preparer of the financial statements will have to
apply judgement. The important point emerging from the
above is that one does not automatically assume that,
because the value of an equity investment has fallen below
cost, it is impaired. You must see “objective evidence of
impairment” before making this call.
When this statement was first published, I received in one
week two calls from insurance companies stating that they
had invested large amounts in listed equities and by the
end of the year the market prices had fallen substantially.
They wanted to know whether they could take the loss
directly to equity (those days there was no such thing as
“other comprehensive income”). We (I was on the
committees at that stage) contacted the IASC and
requested an opinion. The answer we got was: “Have you
never seen a debit reserve!”
There are two additional points I would like to raise:
1.
2.
It makes no difference to a sophisticated analyst
whether the loss is treated in profit or loss or in other
comprehensive income. A loss is a loss.
The IASB is considering cancelling the whole concept
of available-for-sale financial assets and will, in
future, require that all gains and losses go through
profit or loss. The problem will then be what SAICA
and the JSE will do about headline earnings! More
companies will publish “core headline earnings” if
they force companies to include such gains and losses
in profit or loss.
Kind regards,
Charles Hattingh October 2009
10 Minutes CPD Points