Stocks Section

A Massive Shake up In Company Accounts - Here's The Lowdown For Investors That Focus On Fundamentals

February 2006

Interesting Points

• The P&L account no long appears, having been replaced with the consolidated income statement
• Pre-tax profit rises by £2.5m to £17.6 but this is not real cash it is only an input on an accountants spreadsheet!

Goodwill Amortisation

• This input for a lot of companies will be its biggest adjustment
• Accounting goodwill when companies make adjustments will not be allowed to be written off as a charge against profits

Finance Charges

• These look as though they'll be higher because far more of lease arrangements will be treated as finance leases
• The company will in effect own the asset being leased so rent becomes an interest charge

Deferred Tax

• These have been tightened significantly
• A reduction of future liabilities to lower present day amounts is not on anymore
• A potential tax on re-valued assets will also be charged
• For the majority of companies the new accounting standards will mean higher tax bills

Exceptional Items

• The so called Joker in the pack
• With the UK standards companies had to show them before calculating pre-tax profits
• But they don't exist with the new international standards
• Keep a close eye on this area because it's where companies will likely be playing many of their games and other assorted tricks

Summary

Company and their accountants have long been notorious for playing legal games with their figures. And it now looks, with the rules chopped and changed that working out what is what requires even more concentration and diligence. Still, it's important that we as investors keep abreast of such significant news as the introduction of these International Accounting Standards.

See Also

• International Accounting Standards Board