Are media companies better off with full IFRS than IFRS for SMEs?

Wednesday, March 24, 2010 | Posted by: Grant Thornton
Categories: Future of UK GAAP | Tags: amortisation of goodwill, IFRS for SMEs,, IFRS,, Media,

By Mark Henshaw, Partner at Grant Thornton, Media sector

The ASB is proposing the adoption of IFRS for SMEs by all Non-Publically Accountable Entities. The motivation is (amongst other things) that the IFRS for SMEs allows for improved comparability and it assists companies in accessing capital.

At first glance, this looks appealing, but when it comes to conversion, I think that large privates in the media sector or those that are either looking to list over the medium term, would expect comparability to their listed peers (who apply full IFRS). However, they may be in for a shock if they expect IFRS and IFRS for SMEs to give comparable results - it appears comparability does not extend that far.

For example, companies engaged in developing media content will probably not be too pleased to know that their internally generated development costs will have to be written off, whereas full IFRS requires capitalisation subject to certain conditions. Similarly, borrowing costs (interest and similar costs) will have to be expensed, whereas full IFRS requires these to be capitalised where they form part of the cost of qualifying assets.

Comparability is further impaired for companies carrying significant amounts of goodwill on their balance sheets. Full IFRS does not allow for the amortisation of goodwill, it is considered to have an indefinite life and is tested annually for impairment. IFRS for SMEs, however, limits useful life to 10 years, unless management can reliably estimate a longer term. Goodwill is amortised over this period, resulting in an annual amortisation charge. In some instances, UK GAAP offers better comparability than IFRS for SMEs because it makes the presumption that goodwill has a useful life of no more than 20 years.

For many companies these costs are significant, and the inability to capitalise these costs will lead to significantly different balance sheets to those of their listed peers.

So, what would I say to companies that find themselves in this position? It may be more appropriate for them to adopt full IFRS. If a company is planning on a listing in the future, they are going to have to embrace full IFRS at some point anyway.

I will be advising companies looking for comparability with their listed peers, to give some serious thought to which accounting framework would be more appropriate. This is not a decision to be taken lightly - management would need to consider the impact on tax, loan covenants and costs of preparing full IFRS accounts rather than IFRS for SME accounts.

Given the choice, I would expect a number of media companies to choose full IFRS, what do you think?