Vodafone 2006 Annual Report Download - page 129

Vodafone Group Plc Annual Report 2006 127
Principal differences between IFRS and UK GAAP
Measurement and recognition differences
a. Intangible assets
IAS 38, “Intangible Assets” requires that goodwill is not amortised. Instead it is subject
to an annual impairment review. As the Group has elected not to apply IFRS 3
retrospectively to business combinations prior to the opening balance sheet date under
IFRS, the UK GAAP goodwill balance, after adjusting for items including the impact of
proportionate consolidation of joint ventures, at 31 March 2004 (£78,753 million) has
been included in the opening IFRS consolidated balance sheet and is no longer amortised.
Under IAS 38, capitalised payments for licences and spectrum fees are amortised on a
straight line basis over their useful economic life. Amortisation is charged from the
commencement of service of the network. Under UK GAAP, the Group’s policy was to
amortise such costs in proportion to the capacity of the network during the start up
period and then on a straight-line basis thereafter.
b. Proposed dividends
IAS 10, “Events after the Balance Sheet Date” requires that dividends declared after the
balance sheet date should not be recognised as a liability at that balance sheet date as
the liability does not represent a present obligation as defined by IAS 37, “Provisions,
Contingent Liabilities and Contingent Assets”.
c. Financial instruments
IAS 32, “Financial Instruments: Disclosure and Presentation” and IAS 39, “Financial
Instruments: Recognition and Measurement” address the accounting for, and reporting
of, financial instruments. IAS 39 sets out detailed accounting requirements in relation to
financial assets and liabilities.
All derivative financial instruments are accounted for at fair market value whilst other
financial instruments are accounted for either at amortised cost or at fair value
depending on their classification. Subject to certain criteria, financial assets and
financial liabilities may be designated as forming hedge relationships as a result of which
fair value changes are offset in the income statement or charged/credited to equity
depending on the nature of the hedge relationship.
d. Share-based payments
IFRS 2, “Share-based Payment” requires that an expense for equity instruments granted
be recognised in the financial statements based on their fair value at the date of grant.
This expense, which is primarily in relation to employee option and performance share
schemes, is recognised over the vesting period of the scheme.
While IFRS 2 allows the measurement of this expense to be calculated only on options
granted after 7 November 2002, the Group has applied IFRS 2 to all instruments granted
but not fully vested as at 1 April 2004. The Group has adopted the binomial model for
the purposes of calculating fair value under IFRS, calibrated using a Black-Scholes
framework.
e. Defined benefit pension schemes
The Group elected to adopt early the amendment to IAS 19, “Employee Benefits” issued
by the IASB on 16 December 2004 which allows all actuarial gains and losses to be
charged or credited to equity.
The Group’s opening IFRS balance sheet at 1 April 2004 reflects the assets and liabilities
of the Group’s defined benefit schemes totalling a net liability of £154 million. The
transitional adjustment of £257 million to opening reserves comprises the reversal of
entries in relation to UK GAAP accounting under SSAP 24 less the recognition of the net
liabilities of the Group’s and associated undertakings’ defined benefit schemes.
f. Deferred and current taxes
The scope of IAS 12, “Income Taxes” is wider than the corresponding UK GAAP
standards, and requires deferred tax to be provided on all temporary differences rather
than just timing differences under UK GAAP.
As a result, taxes in the Group's IFRS opening balance sheet at 1 April 2004 were
adjusted by £1.0 billion. This includes an additional deferred tax liability of £1.8 billion in
respect of the differences between the carrying value and tax written down value of the
Group's investments in associated undertakings and joint ventures. This comprises £1.3
billion in respect of differences that arose when US investments were acquired and £0.5
billion in respect of undistributed earnings of certain associated undertakings and joint
ventures, principally Vodafone Italy. UK GAAP does not permit deferred tax to be
provided on the undistributed earnings of the Group’s associated undertakings and joint
ventures until there is a binding obligation to distribute those earnings.
IAS 12 also requires deferred tax to be provided in respect of the Group’s liabilities under
its post employment benefit arrangements and on other employee benefits such as
share and share option schemes.
Presentation differences
g. Presentation of equity accounted investments
Under IFRS, in accordance with IAS 1, “Presentation of Financial Statements”, “Tax on
profit” on the face of the consolidated income statement comprises the tax charge of
the Company, its subsidiaries and its share of the tax charge of joint ventures. The
Group’s share of its associated undertakings’ tax charges is shown as part of “Share of
result in associated undertakings” rather than being disclosed as part of the tax charge
under UK GAAP.
In respect of the Verizon Wireless partnership, the line “Share of result in associated
undertakings” includes the Group’s share of pre-tax partnership income and the Group’s
share of the post-tax income attributable to corporate entities (as determined for US
corporate income tax purposes) held by the partnership. The tax attributable to the
Group’s share of allocable partnership income is included as part of “Tax on profit” in the
consolidated income statement. This treatment reflects the fact that tax on allocable
partnership income is, for US corporate income tax purposes, a liability of the partners
and not the partnership. Under UK GAAP, the Group’s share of minority interests in
associated undertakings was reported in minority interests, under IFRS this is reported
within investments in associated undertakings.
h. Presentation of joint ventures
IAS 31, “Interests in Joint Ventures” defines a jointly controlled entity as an entity where
unanimous consent over the strategic financial and operating decisions is required
between the parties sharing control. Control is defined as the power to govern the
financial and operating decisions of an entity so as to obtain economic benefit from it.
The Group has reviewed the classification of its investments and concluded that the
Group’s 76.9% (31 March 2005: 76.8%) interest in Vodafone Italy, classified as a
subsidiary undertaking under UK GAAP, should be accounted for as a joint venture under
IFRS. In addition, the Group’s interests in South Africa, Poland, Kenya and Fiji, which were
classified as associated undertakings under UK GAAP, have been classified as joint
ventures under IFRS as a result of the contractual rights held by the Group. The Group’s
interest in Romania was classified as a joint venture until the acquisition of the
controlling stake from Telesystem International Wireless Inc. of Canada completed on
31 May 2005. The Group has adopted proportionate consolidation as the method of
accounting for these six entities.
Under UK GAAP, the revenue, operating profit, net financing costs and taxation of
Vodafone Italy were consolidated in full in the income statement with a corresponding
allocation to minority interest. Under proportionate consolidation, the Group recognises
its share of all income statement lines with no allocation to minority interest. There is
no effect on the result for a financial period from this adjustment.
Under UK GAAP, the Group’s interests in South Africa, Poland, Romania, Kenya and Fiji
were accounted for under the equity method, with the Group’s share of operating profit,
interest and tax being recognised separately in the consolidated income statement.
Under proportionate consolidation, the Group recognises its share of all income
statement lines. There is no effect on the result for a financial period from this
adjustment.
Under UK GAAP, the Group fully consolidated the cash flows of Vodafone Italy, but did
not consolidate the cash flows of its associated undertakings. The IFRS consolidated
cash flow statement reflects the Group’s share of cash flows relating to its joint ventures
on a line by line basis, with a corresponding recognition of the Group’s share of net debt
for each of the proportionately consolidated entities.
Other differences
i. Reclassification of non-equity minority interests to liabilities
The primary impact of the implementation of IAS 32 is the reclassification of the $1.65
billion preferred shares issued by the Group’s subsidiary, Vodafone Americas Inc., from
non-equity minority interests to liabilities. The reclassification at 1 April 2004 was £875
million. Dividend payments by this subsidiary, which were previously reported in the
Group’s income statement as non-equity minority interests, have been reclassified to
financing costs.
j. Fair value of available-for-sale financial assets
The Group has classified certain of its cost-based investments as available-for-sale
financial assets as defined in IAS 39. This classification does not reflect the intentions of
management in relation to these investments. These assets are measured at fair value
at each reporting date with movements in fair value taken to equity. At 1 April 2004, a
cumulative increase of £233 million in the fair value over the carrying value of these
investments was recognised.
Financials