This article was first published in the June 2012 UK edition of Accounting and Business magazine.
The ASB’s latest exposure drafts were open for comment until the end of April 2012, with final versions likely to be published later this year.
The project affects entities which do not apply the Financial Reporting Standard for Smaller Entities (FRSSE) and, by law, the consolidated accounts of companies listed on a recognised exchange still have to be prepared in accordance with IFRS as adopted in the EU (other entities may still choose to adopt EU-adopted IFRS).
All existing Financial Reporting Standards, Statements of Standard Accounting Practice and Urgent Issues Task Force Abstracts will be replaced by three proposed Financial Reporting Standards 100 to 102. FRS 100 covers practical application aspects, such as transition and legal requirements. FRS 101 lists disclosure exemptions from EU-adopted IFRS in the individual financial statements of entities which are included in publicly available consolidated accounts.
FRS 102 is titled The Financial Reporting Standard applicable in the UK and Republic of Ireland. It contains most of the requirements for entities adopting UK and Irish Generally Accepted Accounting Practice other than the FRSSE. In just a few cases, such as interim financial reporting and operating segments, entities will refer to the relevant EU-adopted International Financial Reporting Standard.
At this point, it may help to clarify the situation with regard to two other reporting standards, the International Financial Reporting Standard for Small and Medium Entities (IFRS for SMEs) and the Financial Reporting Standard for Medium-sized Entities (FRSME). IFRS for SMEs is published by the International Accounting Standard Board (IASB), and has been adopted in a number of jurisdictions, though not the EU. The FRSME was the earlier version of the ASB’s proposals for the UK and Ireland (issued in October 2010). It is now superseded by the proposed FRS 102 (issued in January 2012), which is again based on the IFRS for SMEs.
For smaller entities, the FRSSE will remain in place, but it will need revising to reflect FRS 102, and changes in the proposed EU accounting directive. The directive increases the thresholds for small (and medium-sized) companies. Its current proposal that member states cannot require small companies to add to the specified disclosure requirements marks a key (and much debated) development. The changes most relevant in Ireland will be those in the EU Directive, as adoption of the FRSSE is less widespread than in the UK.
The FRSME aimed to make minimal changes to the IFRS for SMEs, which contains a number of simplifications of full IFRS, and does not include certain accounting treatments permitted by both IFRS and current UK/Irish Financial Reporting Standards. These are now possible under FRS 102 – principally, tangible fixed assets in addition to investment properties can be revalued, and development costs can be capitalised under circumstances familiar to UK and Irish preparers.
Whilst the ASB is being responsive to concerns, it has moved away from the IFRS for SMEs. To assist long-term international convergence, another strategy would have been for the ASB to lobby the IASB about making these changes in the IFRS for SMEs itself.
Also, the section on income tax in FRS 102 follows current UK and Irish GAAP (except for the internationally based requirement to account for deferred tax on revaluations). This is because the equivalent section in the IFRS for SMEs did not become accepted accounting practice. Again, could the ASB and IASB have worked together to produce an international standard which the UK and Ireland would then be able to follow more closely, and which might be better placed for EU adoption?
Despite some disappointment, supporters of international convergence will still find many areas of similarity with international standards and interpretations; for example, in the agriculture and service concession arrangements.
As might be expected, FRS 102 uses the concept of fair value, including for financial instruments. Investment properties will also be carried at fair value, but changes in this value are posted to profit or loss. It will also be possible to adopt a cost-depreciation model where fair value involves undue cost or effort, although this may be difficult to justify for property types covered by standard published indices.
Three becomes two
In addition to the legal requirements for listed groups, the ASB originally proposed a three-tier system. ‘Publicly accountable’ entities (such as banks, and pension schemes – ‘Tier 1’) were to apply EU-adopted IFRS. With smaller entities able to adopt the FRSSE (‘Tier 3’), the FRSME (‘Tier 2’) would have been mainly for the ‘mid-tier’ of entities, as its name implied.
Tier 1 has now been abolished, and publicly accountable entities will now adopt FRS 102, which has additional sections relevant to them (covering financial institutions and retirement benefit plans). As mentioned above, there is also a reference to the full EU-adopted international standard in a few instances.
The demise of Tier 1 results from comments about the costs of compliance with EU-adopted IFRS, compared to the benefits to users of the financial statements. There were also concerns that public accountability could not always be precisely defined. Interestingly, the ASB has not sought to amend the publicly accountable definition to make it workable for interested parties. The solution may have been to apply clear, objective criteria, such as the size of total assets. Most would argue, for example, that the level of risk, complexity and public interest is lower for smaller retirement benefit schemes and local credit unions.
FRS 102 will be effective for accounting periods starting on or after 1 January 2015. This seems a long time ahead, but do bear in mind that you might need to do several things. Firstly, you will have to familiarise yourself with its requirements, and then perhaps educate colleagues or clients on the changes. Finally, there will be a need to gather information for comparatives before the standard comes into effect.
‘Public benefit entities’ (such as charities) will also be subject to a revised SORP, to be applied at the same time as FRS 102. The revision process has yet to begin, raising a concern that public benefit entities may, as a result, have less time than they would wish to implement the new requirements. They will certainly have less opportunity to apply FRS 102 early, compared to other entities.
The time is approaching when unlisted non-small entities will have practically a single point of reference for their accounting requirements, but this is not the IFRS for SMEs, or the FRSME. FRS 102 does represent further convergence between UK/Irish and international frameworks but, arguably, certain compromises too. Finally, changes will also arise from the separately proposed EU Directive.
Paul Cooper, corporate reporting manager, ACCA