Ispat Iscor - Accounting for negative goodwill
Ispat Iscor Limited
(formerly Iscor Limited)
(Registration number: 1989/002164/06)
Share code: IIS ISIN: ZAE000057162
(`Ispat Iscor`)
Accounting for negative goodwill
In November 2001 Iscor acquired the remaining 50% of Saldanha Steel at a
discount on the fair value of the identified assets and liabilities as the
operations were incurring and were expected to continue incurring losses at the
time. The discount, or negative goodwill, was to compensate Iscor for the
expected losses.
The post acquisition period to 30 June 2002 witnessed a dramatic turnaround in
Saldanha Steel`s results. Both external and internal factors, as described in
the 2002 annual report of Iscor, contributed to a reduction in losses and
subsequent profitability for Saldanha Steel.
Negative goodwill was immediately recognised as income in the annual financial
statements to 30 June 2002, based on our interpretation, supported by our
auditors, of the appropriate application of the relevant International
Accounting Standard (`IAS`), IAS 22.
In light of the new International Financial Reporting Standards (`IFRS`) 3 -
Business Combinations 2004, the accounting treatment for negative goodwill was
re-examined. It has now been established that the original interpretation of
IAS 22 in 2002 for treatment of negative goodwill was not in line with the
preferred interpretation at that time. Accordingly, negative goodwill should
have been amortised over the life of the Saldanha Steel plant. This change in
interpretation will be corrected retrospectively and disclosed in the 31
December 2004 annual financial statements.
However, Iscor`s treatment of negative goodwill in 2002 is in line with IFRS 3
(the standard which succeeds IAS 22), issued in 2004. In line with the
transitional provisions of IFRS 3, Iscor has elected to early adopt IFRS 3 with
effect from the start of the previous comparative period being 1 July 2003.
Negative goodwill, in the context of the Saldanha Steel acquisition, will
consequently immediately be credited to retained income in terms of the
transitional provisions of IFRS 3.
The effect of correcting the error and the adoption of IFRS 3, therefore, is
consistent with the original accounting treatment of the Saldanha Steel negative
goodwill.
Headline earnings for the entire period in question has been unaffected by this
correction and consequently all price earnings data reported on the JSE
Securities Exchange South Africa have remained valid under both accounting
solutions.
Pretoria
8 December 2004
Sponsor to Ispat Iscor:
Deutsche Securities (SA) (Proprietary) Limited
Profile Group (Pty) Ltd. has taken care in preparing all information on this website, but does not accept any liability for errors or out-of-date information.
