Impact from adoption of revised IFRS 3

Impact from adoption of revised IFRS 3

The revised International Financial Reporting Standard 3 was introduced to ensure companies fully disclosed off-balance sheet and other earnings risk, and companies are now required to identify numerous non-cash items in their accounts.

Abano adopted the revised IFRS3 from 1 June 2010. This has changed how Abano reports and accounts for acquisitions and associated acquisition costs.

1. Time Value Interest Component of Acquisition Earn Out
Previously, both the full value of the purchase price and the deferred purchase price payment were capitalised in the balance sheet. Now, under the revised IFRS3, a component of the deferred purchase price payment, which reflects the time value of the deferred payment, is expensed. This does not increase the purchase price, is a non-cash expense and is non-deductible for tax purposes.

2. Change in Estimate of Deferred Payments on Acquisitions
Historically, there was no profit or loss impact from any change in the estimation of the deferred payment during the earn out period, with any movement simply a balance sheet movement. Under the revised IFRS3, any movement in the estimated deferred payment or liability is now expensed and is a non-deductible expense for tax purposes.
 
3. Acquisition costs to be expensed
Historically, costs associated with an acquisition, such as legal or due diligence costs, have been able to be capitalised. Under the revised IFRS3, these costs must now be expensed. This is a non-deductible expense for tax purposes.

The impact of these changes means that the level of acquisition related expenses in Abano’s Profit and Loss increases relative to the number and size of acquisitions made. That is, the more acquisitions made, the higher the expense, conversely providing a negative impact on the Net Profit After Tax.
If acquisitions perform well, the resulting deferred purchase price payment over the earn out period increases due to the increased performance, and although positive, this also leads to an increased expense in Abano’s Profit and Loss account, providing a negative impact on the Net Profit After Tax.

Non Conforming Financial Information: Reporting on Underlying Earnings
Therefore, in addition to reporting results under IFRS, the Abano Board also reports on underlying earnings as it believes this provides a more appropriate representation of Abano’s performance, and on a like-for-like basis with previous years, as well as useful information on the ‘normalised’ profit of the company.

Underlying earnings exclude one-off gains/losses, IFRS adjustments and impairments, including their tax effect, and is reconciled back to reported profit. It is the measure used within the company to evaluate performance, establish strategic goals and to allocate resources. This is a non-GAAP financial measure and is not prepared in accordance with NZ IFRS.