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AIM companies warned over impact of FRS 20. By Nichola Ross Martin

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28th Nov 2006
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As AIM-listed companies gear up for the conversion to reporting under International Financial Reporting Standards (IFRS) from 1 January 2007, KPMG warn that some may have overlooked the fact that one accounting standard needs to be adopted earlier than others.

FRS 20 "share-based payments" mirrors IFRS 2 and is effective for all accounting periods beginning on or after 1 January 2006. It will affect any schemes in which employees (including directors) receive share-based awards. KPMG say that this may cause a significant impact to the profit and loss accounts of any AIM companies who are adopting the new standard.

Under FRS 20/IFRS 2, payments made in the form of shares are measured at fair value and treated as an expense. A study by KPMG's International Financial Reporting Group among large corporates who had already converted to IFRS found that the treatment of share-based payments was among the top three items impacting on the income statement for nearly three in ten companies, and resulted in an average impact of 5% on stated profitability.

However, as they are less cash-rich than main listed companies, companies in the AIM sector have traditionally made much greater use of share-based payments than their FTSE counterparts. Therefore the impact of the new rule on AIM-listed companies may be greater.

"Just as listed companies have had to take great care over effective and timely communication around the impact of IFRS on their figures, so AIM companies also need to be considering what the main impacts will be," Ginny Stevens, head of audit in the AIM sector at KPMG, said.

"With some AIM companies likely to see a dent in profits due to the treatment of share-based payments when they next report their results, they need to start thinking now about how they will communicate this."

Other challenges for accounting periods beginning on or after January 2007 when full adoption of IFRS by AIM companies is required, include segmental reporting, hedging and derivatives, and the identification of more intangible assets on acquisitions.

"With the AIM sector already facing the prospect of increased regulatory requirements through the London Stock Exchange's recent consultation, it is vital that companies manage the transition to FRS 20 and then IFRS successfully. With due planning there is no reason why this cannot be achieved. But AIM companies need to be identifying the key issues now - and share-based payments are on the critical list - and work out how they will present, communicate and explain them," Ginny Stevens concluded.

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