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Comments from ACCA
June 2007

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the above consultative document (CD), which was considered by ACCA's Financial Reporting Committee. I am writing to give you their views.

ACCA's responses to questions raised for comment by DTI

Q1. Are there any risks associated with an increase in the thresholds used to define small and medium-sized companies?

We consider that there are risks associated with such a change of thresholds

• Loss of information on the public record about an extended number of small companies because of the inadequacy of filed information represented by abbreviated accounts
• Reduced assurance levels on the financial information provided by those companies which would no longer be audited

We have referred in more detail to these concerns in the comments we have made to the European Commission in response to their simplification plans, a copy of which is attached.

Before there is any change to the thresholds in UK company law we believe that it needs to be justified by evidence on the costs and benefits. Given the European Commission's plans to reconsider fundamentally the reporting requirements in the Directives, it would be more appropriate to hold back on the threshold amendments raised in this CD.

Q2. If so in your view are the risks of increasing the small and medium-sized company thresholds outweighed by the benefits?

This should be determined by the DTI on the basis of evidence from objective research and not solely on a canvassing of opinions.

In our view any benefits are likely to be relatively modest. Changes in filing requirements do not save much, if any, money if complete financial statements have to be prepared for shareholders and the tax authorities. Preparing multiple sets of accounts may indeed increase costs not reduce them. We also notice that no account has been taken of the cost of change itself - such as assessing the impact, deciding on courses of action and implementation in redrafted accounts among others.

Q3. What are your views on current and proposed reporting provisions (thresholds, exemptions, disclosure requirements etc.) for SMEs - do they merit further review?

A copy of our submission to the European Commission is attached.

Q4. Do you agree with the Government's proposals to take up the option to extend the application of 'air value' accounting?

Yes. It will be helpful to remove any legal impediment from companies applying IAS39 fully (or its UK equivalent FRS26).

Q5. What are your views on the proposals for implementing disclosure requirements in respect of off-balance sheet arrangements?

We consider that these disclosures will already be covered by requirements in UK standards or will duplicate existing requirements in UK legislation. Implementation of these disclosure requirements or exemption from them will not have a significant impact either way.

We agree that the relevant recital in the preamble to the Directive should not be part of UK legislation.

The disclosure requirements of the FRSSE are different from full UK standards though we consider these would cover the Directive's requirements as well. The FRSSE requirements about off-balance sheet arrangements must be seen in the context of its not requiring any consolidation of subsidiaries or associates. We agree with UK law taking up the options to exempt small companies and to limit the statutory disclosures for medium-sized companies.

As noted in the CD the ASB will have to consider the extent to which all these off-balance sheet arrangements are already disclosed under UK GAAP and should issue a clarifying statement on this or amended appendices to the relevant standards on the legal requirements.

Q6. Do you have any comments concerning the proposed approach to implementing the requirements in respect of related party transactions? In particular do you think the UK should take advantage of the following options,
- to exempt medium-sized companies (which are not PLC's) from the obligation to disclose related party transactions
- in respect of medium-sized companies which are public companies to restrict the disclosure obligation as regards related party transactions in certain respects?

The CD has underplayed the differences between this EU requirement and both IAS24 and with the UK FRS8. The standards are tougher. For example they require the disclosure of all transactions not just those that 'have not been concluded under normal market conditions'. FRS8 also defines 'material' in a particular way - in relation to the other party involved as well as to the company.

We, therefore, consider that these legal requirements would not add to the requirements already set out in UK accounting standards including the FRSSE and so there is no deregulatory gain from them. In our view the statutory backing for the disclosures which will now be established should be applied to all companies - small, medium or large. Any small company exemption in the law might undermine the requirement in the FRSSE at some point in the future.

Our comments on the implementation proposals in paragraph 3.46 are therefore as follows:

1. small companies - DTI should not take up the exemption for the reasons set out above
2. medium sized that are not PLCs - as above
3. medium-sized PLCs - as above. We would additionally note that the proposed disclosures would still represent a very retrograde step compared to existing requirements. Item (i) for instance would only address transactions with owners, but not with fellow subsidiaries and associates . Item (ii) would only refer to the directors and not to key management personnel and close family members.
4. group transactions - we agree that this option should be taken up to keep as close as possible with FRS8.

Q7. Can you identify any need to require further disclosure as regards the duty to include in the corporate governance statement information concerning the operation of shareholders' meetings and a description of how shareholder rights can be exercised?

No.

Q8. Which of the 3 options: -

1. Prescribe the reporting requirements as part of the Companies Act regime;
2. Prescribe the reporting requirements through rules made by the Financial Services Authority; or
3. Prescribe the reporting requirements as self-standing corporate governance rules made by the Secretary of State

do you think would be the best approach to implementing the requirement to produce a corporate governance statement?

None of these options are ideal. Our preferred suggestion for an appropriate 'light touch' implementation would be to amend the Companies Act to state simply that companies should make a statement in accordance with the FRC Combined Code.

This part of the EC directives was based on implementing practice already well embedded by UK listed companies in accordance with the Combined Code and the Turnbull guidance on internal control. In our view there is nothing in the EC directive requirements on corporate governance reporting that is not already required. The Code actually goes further than the directives by requiring not just a comply or explain statement but also a statement of how listed companies apply the Code's principles.

The amendments relating to corporate governance in EC directives are based on the recommendations of the High Level Group of Company Law Experts led by Prof. Jaap Winter. This group strongly recommended a soft law approach, such as we have with the Combined Code, where 'enforcement' is by the market. The group clearly articulated the reasons for this and wanted legislation to be kept to a minimum. It would be very unfortunate if the unintended consequence of implementing this part of the directives would be to introduce hard law where it was not needed. Enforcement of governance reporting is not an issue as governance reporting is already of a high standard in the UK .

None of the options outlined represent a 'light touch' and each would add to the regulatory burden and have adverse unintended consequences. Introducing law to cover matters dealt with by the Combined Code and Listing Rules will either mean duplication of the Combined Code or transfer of material from the Combined Code to legislation. This would lead to confusion. It would also frustrate further evolution of the Code as needs change.

We have the following comments on the particular options:

Option (a): as indicated above, enforcement of disclosure is not an issue so there is no need for the FRRP to enforce compliance.

Option (b): similarly there is no need for the FSA to enforce compliance.

Option (c): there is absolutely no need to create criminal offences to enforce compliance.

We wish to point out an apparent misunderstanding in the statement by the DTI of the current UK position on reporting on internal control (row c of 3.5.3). The consultation document says that "there is no specific provision relating to disclosure of the main features of the company's internal control and

risk management systems in relation to the financial reporting process". We think the Turnbull guidance covers this well. The guidance says "the annual report and accounts should include such meaningful, high-level information as the board considers necessary to assist shareholders' understanding of the main features of the company's risk management processes and system of internal control, and should not give a misleading impression" . It is well understood that 'internal control and risk management systems in relation to the financial reporting process' is a subset of risk management and internal control as a whole.

Arguably, The Combined Code should be amended to include a provision on disclosure of the main features of the system of risk management and internal control.

The directives' requirements on composition and operation of the board and its committees (3.5.3 f) are surely already adequately covered in the Business Review requirements, the Code requirement for companies to state how they apply the principles of the Combined Code (for example principle 1) as well as the Code requirements on disclosure relating to the board's committees.

Q9. Should companies have the option of whether to publish the statement separate to the directors' report or should publication be restricted to the directors' report?

They should have the option.

Q10. Directors responsibilities

We agree that the requirements of the Directive as regards the collective responsibility of directors are already accommodated by the Companies Act 2006 and that no additional action is required.

Q11. Timetable for implementation

We have no particular comments on this.

Q12 - 15. Regulatory impact assessment.

Some comments on these are noted above under Q2. We also find it strange that no amount is included for the lifting of the audit threshold or for the extra tax benefit of the capital allowances.

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