Independent Newspapers is changing its financial year end to avoid having to implement immediately a new accounting rule which could have had a serious impact on the group's balance sheet and profits. However, unless the rule is changed or Independent can find some way to retain the value of its titles on its balance sheet, its results will be affected from the current financial year onwards.
Under the new rules, which came into effect for results reported on or after December 23rd, 1998, Independent could have to write off about £360 million against profits over a 20 year period. The amount involved is the value of the titles it has developed. The new rule would not apply to bought in titles. If the £360 million had to be written off over 20 years, pre-tax profits would be reduced by £18 million per year. The write-off would adversely affected group earnings per share, gearing and interest cover. The group is forecast by market analysts to have recorded profits of around £71 million last year.
By changing its financial year end from December 25th, 1998, to December 18th, the group will not now have to comply with the new accounting standard for last year's accounts. However, unless the Accounting Standards Board amends the standard, Independent will have to comply for the current financial year.
Independent titles are valued at a total of £833.6 million as intangible assets in its balance sheet of December 26th, 1997, or 68 per cent of total assets. Some £150 million of this amount was a net surplus added following a revaluation of titles in 1997. Group finance director Mr Jim Parkinson said that the new rules would apply to about £360 million of intangible assets - the value put on titles built up by the group and increases in the value of bought in titles. But Mr Parkinson said that if Independent had to implement the new standard it would have used the "impairment review" method rather than the write-off method. Under the impairment review the group would have to convince its auditors each year that the market value of the titles had not fallen below their balance sheet value in order to avoid writing them off against profits. But some accountancy sources argued yesterday that this impairment review would not be available for newspaper titles which are given in the standard as an example of intangible assets which do not have "readily ascertainable market values".
"We think the new standard is rubbish and is fundamentally flawed," Mr Parkinson argued. The accounting concept of valuing assets at historical cost has already been changed for buildings which can be included in a balance sheet at a valuation, he explained.
"Why then can it not be extended for mastheads?" he asked. There is a contradiction in that the standard allows bought in titles to be included but does not allow the inclusion of developed titles which can be valued by professional valuers on exactly the same criteria as the acquired titles, he pointed out. "By changing our financial year end we are sending a strong message that we fundamentally disagree with the standard," he said. Mr Parkinson argued that value placed on its titles "is the result of many years of investment and should not be arbitrarily adjusted".
The debate within and outside the accountancy profession on the new standard is continuing, he said. "We have firmly stated our views that we do not agree with the implementation of the standard in its current form." Under the new rules - Financial Reporting Standard/Statement 10 - brought in by the Accountancy Standards Board, companies will not be allowed to include as assets in their balance sheet items which do not have a readily ascertainable market value.
Newspaper titles which have been built up over time (organic titles) are specifically set out as unsuitable for inclusion in a balance sheet as intangible assets. Companies may be able to ascribe a value to titles bought in. The Irish Times does not include the value of its title on its balance sheet.
