Reminders for 2011 year ends

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State of the economy – impairment of assets?

The recovery from the worst recession since the great depression has been slow and jumpy in the developed world. Two years after the nadir of the recession, one rating agency downgraded the world’s largest economy, the US, the eurozone is still trying to avert a sovereign debt crisis and many other parts of the world also plummeted into recession.

The slowdown in some key developed markets and the tightening of monetary policy in emerging markets has impacted negatively on global trade and industrial production volumes. The world economy is set to slow down in 2011, as government and central bank policies are tightened and key developed markets go through a de-leveraging process.

We anticipate an increased number of companies considering impairments in the coming months due to the current impairment indicators.

Risk-free rate – how about Greece?

The risk-free rate is an important element in various calculations and assumptions, as it provides the basis for determining the appropriate discount rate. In many cases, the proxy for such a risk-free rate is the government bond ‘yield’ rate for the country in which the entity operates. However, with the backdrop of recent economic turmoil, the credit rating of government debt has been down-graded in a number of countries, reflecting a market view that the debt (and related yield) is no longer free of risk.

Where this has occurred in a country (country A) for which the entity wishes to apply a risk-free discount rate, an acceptable approach is to use a government bond ‘yield’ rate of a AAA-rated country (country B), with appropriate adjustment for the differences in inflation between the two countries.

Debt restructuring – impact on your performance statement

UITF Abstract 47, issued last year, requires a gain or loss to be recognised in profit or loss when a liability is settled through the issuance of entity’s own equity instruments.

The ASB issued this in order to keep UK GAAP consistent with IFRS. It incorporates the text of IFRIC 19 and is mandatory for entities applying FRS 26 for all 31 December 2011 year-ends. The interpretation should be applied retrospectively from the beginning of the earliest comparative period presented, as application to earlier periods would result only in a reclassification of amounts within equity.

Inter-company financing - act now!

Companies must classify a liability as current if they do not have the unconditional right to defer its settlement for at least 12 months after the balance sheet date. Refinancing a loan on a long-term basis after the year-end will not therefore alter its classification at the balance sheet date; it will be treated as a non-adjusting post-balance-sheet event and require disclosure only.

The above guidance is applicable for both IFRS and UK GAAP preparers.