Findings of the FRC in respect of the accounts of fastjet Plc for the year ended 31 December 2013
02 June 2015
The Financial Reporting Council’s (FRC’s) Conduct Committee has reviewed the annual report and accounts of fastjet Plc (the company) for the year ended 31 December 2013.
The principal issue arising related to the transfer of Lonrho plc’s (Lonrho) aviation business to the company in return for the issue of new shares in 2012. This constituted a reverse takeover under the AIM rules. As a result of the issues of shares, Lonrho’s shareholding in the company increased from 3% to in excess of 70%. The company accounted for this transfer as an acquisition under IFRS 3 ‘Business Combinations’ as it considered that this better reflected the substance of the transaction.
Following discussion with the Conduct Committee the company accepts that the increased shareholding and the terms of relevant shareholder agreements gave Lonrho the power to control the company. This transaction should, therefore, have been accounted for as a reverse acquisition, with the company being the acquiree rather than the acquirer for accounting purposes, in accordance with the requirements of IFRS 3 ‘Business Combinations’.
As a consequence, goodwill and other fair value adjustments totalling US$45 million should not have been recognised by the company. Similarly, the impairment charge relating to these items should not have been included in the income statement subsequently. Instead, the company’s consolidated accounts should have included the transferred assets and liabilities at their pre-combination carrying amounts.
To reflect this conclusion, the company has restated the comparative amounts to the results reported in its 2014 financial statements published today. The principal effect of this restatement is to reduce the value of its goodwill asset in the balance sheet at 31 December 2013 from US$11 million to US$nil. Loss after tax for the year ended 31 December 2013 was reduced by US$26 million to US$55 million. There was no impact on cash.
Following the corrective action taken by the company, the Conduct Committee regards the enquiries arising from its review of the company’s annual report and accounts for the year ended 31 December 2013, initiated on 14 November 2014, as concluded.
Notes to editors:
- The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
- The Conduct Committee is a body authorised under the Companies Act 2006 (the Act) to review and investigate the annual accounts, strategic and directors’ reports of public and large private companies to see whether they comply with the requirements of the Act, including applicable accounting standards. Following implementation of the Accounting Regulation (EC) No.1606/2002, this may mean compliance with UK or International Financial Reporting Standards.
- Where breaches of the Act are discovered the Conduct Committee seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs. Where a company’s accounts, strategic or directors’ report are defective in a material respect the Conduct Committee will, wherever possible, try to secure their revision by voluntary means. If this approach fails, the Conduct Committee is empowered to make an application to the court under section 456 of the Act for an order for revision. To date no court applications have been made.
- Paragraph 7 of IFRS 3 ‘Business Combinations’* requires that the guidance in IAS 27 ‘Consolidated and Separate Financial Statements’* be used to identify the acquirer - the entity that obtains control of the acquiree. Paragraph 13 of IAS 27 states that control is presumed to exist when the parent owns more than half of the voting power of an entity unless, in exceptional circumstances, it can be demonstrated that such ownership does not constitute control.
- Paragraph B19 of IFRS 3 notes that a reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes. If reverse acquisition accounting had been applied, the assets and liabilities of the Lonrho aviation business would have been included in the company’s consolidated financial statements at their pre-combination carrying amounts in accordance with paragraph B22 of IFRS 3. Instead, the company accounted for this transaction as an acquisition and included the assets and liabilities at fair value. This resulted in the recognition of goodwill and fair value adjustments, totalling US$45 million, as set out in note 22 to the company’s 2013 financial statements.
- The Conduct Committee maintains a Financial Reporting Review Panel (FRRP). The Chairman is Geoffrey Green and the Deputy Chairs are Joanna Osborne and Ian Wright. There are currently 21 other members drawn from a broad spectrum of commerce and the professions. Individual cases may be dealt with by a specially constituted Review Group of the FRRP.
*As applicable at the time.