GlaxoSmithKline’s Decision and the Interpretation of Its Financial Statements, Essay Example

If the agreement date for a business combination is on or after 31 March 2004, IFRS 3 is effective, as long as there is sufficient information for the application of the standard. The application can also extend to include the past business transactions and in the same effective date the revised IAS 36 and IAS 38. Therefore, considering that GSK had previously recognized goodwill in the business combination as an entity will upon the effective date stop amortising goodwill in the initial period before or after 31 March 2004 (Bens, 2006, p. 298).

Similarly, the IFRS 3 will require that they remove the carrying amount of accumulated goodwill amortization against the carrying amount of goodwill on the start of the initial reporting period before or after 31 March 2004. They will also be required to establish the carrying amount of goodwill for impairment with respect to IAS 36 from the start of the first annual reporting period. Although negative carrying amounts of goodwill from business combinations before 31 March 2004 might be recognized in the balance sheet in some jurisdictions, the amounts will be derecognized after 31 March 2004 but a similar entry made in the opening balance of the retained earnings.

According to International Financial Reporting Standards (2007), IFRS 3 should be applied on the date of transition for GSK and other first timers, though business combinations that took place prior to 31 March 2004 must not be restated. Similarly, certain changes ought to be made on the amounts in the previous combinations including excluding assets that had been recognized and discovered not to qualify under IFRS. Certain disclosures upon the adoption of IFRS from US GAAP include the specific circumstances that prompted the impairment, which include relative changes in business and legal environment; cut throat competition causing loss of customers; adverse regulations and loss of key customers. Similarly disclosure of the impairment loss in monetary value with the method of determining the fair value of associated unit (Bens, 2006, p. 308).

As a result of the adoption of the IFRS, GSK notably indicates the difference from its 2003 UK GAAP profit before tax as valued at £0.3 billion (5%) primarily due to recognizing a charge on the share-related payments. Additionally, the balance sheet net assets were lowered by 4% to £5.6 billion. Primarily, this result from the iFRS ‘un-netting’ of some assets and liabilities that were previously carried in the balance sheet net under UK GAAP, such as deferred ax assets and liabilities (Dunse, Hutchison & Goodacre, 2004, p. 248).

References

Bens, D A 2006, ‘Discussion of Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments’, Journal of Accounting Research, vol. 44, no. 2, pp. 298-296.

Dunse, N A, Hutchison, N & Goodacre, A 2004, ‘Trade-related valuations and the treatment of goodwill’, Journal of Property Investment & Finance, vol. 22, no. 3, pp. 236-258.