Impact of IFRS on Intangible Assets and Goodwill

European quoted companies are planning the transition to International Financial Reporting Standards for 2005. Some of the most significant changes from current GAAP will be in the area of intangible assets and goodwill. The key dates and significant changes are summarised below.

Key dates

• The transition date is the date in calendar 2004 on which your financial year starts.
• Your opening balance sheet at the transition date must be restated to IFRS.
• Financial statements for 2004, that is for the year that starts during 2004, will be reported under current GAAP, but will need to be restated under IFRS.
• You are encouraged to publish the restated IFRS 2004 financial statements as soon as they can be reliably quantified.
• You must prepare 2005 financial statements under IFRS with restated comparatives for 2004.

Key changes

• You must recognise, value and report intangible assets, such as brands, software, patents, IP etc., acquired in a business combination, on your balance sheet.
• Business combinations after your transition date are within the scope of IFRS.
• You can elect to reclassify prior business combinations.
• Internally generated intangible assets, arising from development work on such things as pre-production prototypes, new materials, devices, products etc. must be recognised on your balance sheet if a series of tests are passed. Expenditure on brands, mastheads and similar are specifically excluded.
• Intangible assets must be assigned a useful life and will be amortised over that life.
• It is possible to assign an indefinite useful life in which case there is no amortisation charge.
• Goodwill arising from a business combination must be reported on the balance sheet and is not amortised.
• Intangible assets with an indefinite life and goodwill must be tested annually for impairment and any resulting reduction in value charged to P&L.
• Restatement to IFRS may result in material adjustments to your balance sheet and profits.
• This may be classified as price sensitive information and must be handled accordingly.