Future of UK GAAP

Comments from ACCA to the Accounting Standards Board, February 2010.

ACCA is pleased to comment on the above consultation on the proposed future of UK GAAP. Since the consultation was published by the Accounting Standards Board, ACCA has consulted its members on the key issues raised within it, through public meetings and an on-line survey . The consultation was also considered by ACCA’s Financial Reporting Committee and the views expressed in this letter take into consideration the opinions of the Committee, informed by the wider consultation with members.

General comments

We have continuously supported the long term convergence of UK GAAP with IFRS, ultimately resulting in all companies in the UK and Ireland reporting under a single set of accounting principles. We welcome the Board’s timely proposal to incorporate the IFRS for SMEs into UK GAAP.

As we have stated in previous comment letters to the Board regarding their convergence plan with IFRS, we believe there is little justification to maintain the three main tiers of accounting standards that we currently have – IFRS, full UK and Ireland standards and the FRSSE. Instead, there should in the future be two main tiers (albeit based on the same principles and sharing much in common):

  • full IFRS
  • IFRS for SMEs, constituting UK accounting standards

We appreciate there will be challenges and transitional costs to adopting the IFRS for SMEs as a replacement to UK GAAP for many entities. We have nevertheless consistently supported the use of a single set of globally accepted accounting standards and consider that the use of the IFRS for SMEs by non-publicly accountable entities internationally would complement and reinforce the use of full IFRS by publicly accountable entities. We believe the benefits would include:

  • comparability between the reports of listed and unlisted companies in the UK and Ireland
  • comparability between reports of companies across jurisdictions, which would contribute to cross-border trade and ‘levelling of the playing field’
  • the preparation of accounting information on a more consistent basis, helping to simplify internal reporting, and so reducing costs for companies
  • accountants preparing or auditing financial statements having to be familiar with only one basis for preparation, reducing scope for confusion and complexity
  • the training and education of accountants and users being simplified by being based on a single system of financial reporting a saving of resources involved in 
  • maintaining a separate system of UK GAAP.

Moving to a two tier system would mean the phasing out of the FRSSE. While we do not believe that there would be significant challenges for FRSSE users to apply the IFRS for SMEs, we are of the view that exemptions will be appropriate for current FRSSE users (ie small entities) from certain requirements of the IFRS for SMEs (for details see our answer to Q8 and Q9 below).

Ideally, we would like to see these further exemptions for small entities being considered by the IASB itself when it considers its initial review of the IFRS for SMEs, with UK and Irish constituents pressing for the relevant changes through the IASB’s due process. In the meantime, we believe the Board should make the appropriate transitional derogations as part of its adoption of the IFRS for SMEs into UK GAAP.

Although there are a number of other issues that need to be resolved, such as the compatibility of the IFRS for SMEs with legal requirements and the need to consider the thresholds for extension of full IFRS to large private entities, we believe that the proposed timeframe should be appropriate (subject to the relevant software being ready) to ensure the adoption of the IFRS for SMEs into UK GAAP.

Specific questions raised by the ASB

Question 1 – Which definition of Public Accountability do you prefer: the Board’s proposal (paragraph 2.3) or the current legal definitions (paragraph 2.5)? Please state the reasons for your preference. If you do not agree with either definition, please explain why not and what your proposed alternative would be?

We would like to see the compulsory use of full IFRS extended to

  • all other quoted companies – those that do not need to prepare consolidated financial accounts and those quoted on other markets,
  • deposit taking entities that hold assets in a fiduciary capacity as their primary business, and
  • very large entities – subject to review of the appropriate thresholds, but perhaps based on the SSAP 25 requirement of ten times the statutory definition of a medium-sized entity.

1 and 2 are certainly in line with the Board’s definition of publicly accountable, but we believe there is significant public interest in extending the use of full IFRS to very large entities. We would not however support the current legal definitions as noted in paragraph 2.5 of the consultation, as this could potentially result in companies below the size we envisage being publicly accountable.

The Board should also explain why certain other entities that could be deemed as publicly accountable, such as large high profile charities and some QUANGOs (outside of the government’s accounting boundary) have been excluded from this particular definition of public accountability.

Question 2 – Do you agree that all entities that are publicly accountable should be included in Tier 1? If not, why not?

We agree that all publicly accountable entities should be included in Tier 1, and apply full IFRS.

While, in principle, we support the extension of full IFRS to deposit taking entities in the UK and Ireland that hold assets in a fiduciary capacity as their primary business, we understand the concerns as to whether it would be appropriate for very small deposit taking entities such as the smaller credit unions to have to apply IFRS in full. We believe that it is important for the Board to assess the cost / benefits of such smaller financial fiduciaries having to apply full IFRS, before concluding on whether they should be kept within the definition of a publicly accountable entity.

Question 3 – Do you agree with the Board’s proposal that wholly-owned subsidiaries that are publicly accountable should apply EU adopted IFRS? If not, why not?

It is unclear as to whether Questions 3 and 4 are addressing wholly-owned subsidiaries of publicly accountable entities, or simply publicly accountable, wholly-owned subsidiaries. In the case of the latter, we consider they should apply IFRS in full, along with all other entities that are deemed to be publicly accountable. However, our responses to questions 3 and 4 assume they are aimed at wholly-owned subsidiaries of publicly accountable entities.

For many subsidiaries that are already preparing IFRS accounting information for consolidation purposes, a requirement to extend IFRS may not represent a significant burden. However, as IFRS is not designed for the individual accounts of companies in groups, there could be a case for some reduction in disclosure requirements, similar to those in existing UK GAAP, as outlined in paragraph 2.15 of the consultation.

However, as well as potentially creating an additional layer of reporting, we have concerns about the possible legal difficulties in applying the disclosure reductions while complying with either EU endorsed IFRS or with the Accounting Directives. Furthermore, we are unclear that there is sufficient public support to insist that these companies apply IFRS. Therefore, we propose that wholly-owned subsidiaries of publicly accountable entities that are not themselves publicly accountable should apply the IFRS for SMEs (with appropriate derogations in respect of entities that would have otherwise applied the FRSSE).

Question 4 – Do you still consider that wholly-owned subsidiaries that are publicly accountable should be allowed reduced disclosures? If so, it would be helpful if you could highlight such disclosure reductions as well as explaining the rationale for these reductions.

Assuming the question is, in fact, aimed at wholly-owned subsidiaries of publicly accountable entities that are not themselves publicly accountable, we would note that existing exemptions under UK GAAP, including those noted in paragraph 2.15 of the consultation, are appropriate and proportionate for wholly-owned subsidiaries. However, and unlike some of the other derogations we are proposing (see our responses to Questions 6, 8 and 9), we believe that this is a matter that should be systematically assessed by the IASB and amended according to their due process. Where it is felt that changes are required, the Board should urge the IASB to make the relevant amendments. We should also refer you to our concerns noted under question 3 above.

Question 5 – Do you agree with the Board’s proposal that the IFRS for SMEs should be used by ‘Tier 2’ entities?

We agree that the IFRS for SMEs should replace UK GAAP for Tier 2 entities.

Question 6 – Do you agree with the Board’s proposal that the IFRS for SMEs should be adopted wholesale and not amended? If not, why not? It would be helpful if you could provide specific examples of any amendments that should be made, as well as the reason for recommending these amendments.

In principle, we would like to see the IFRS for SMEs adopted wholesale as the basis of UK GAAP for the reasons noted by the ASB in paragraph 2.21. However, we recognise that some amendments may be necessary in the UK and Irish context, if for example there prove to be incompatibilities between the IFRS for SMEs and  companies’ legislation based on the EU Accounting Directives.

As outlined in our response to Question 4, in principle we believe there should be some derogations for wholly-owned subsidiaries, but would prefer for these to be dealt with through the IASB rather than at jurisdictional level.

We also strongly believe that future UK GAAP as based on the IFRS for SMEs should include derogations for small entities. We would envisage that these would in great measure reflect the current position of the FRSSE and therefore negate the need for the third tier of accounting proposed in the consultation. We consider the replacement of the FRSSE in more detail in our response to Questions 8 and 9.

We recognise that some of these amendments would mean that some UK and Irish companies would not be able to claim, if they wanted to, compliance with the IFRS for SMEs, but would refer to the UK standard or standards, which could in turn be noted as being largely based on the IFRS for SMEs.

Question 7 – Do you agree with the Board’s proposal that large Non-Publicly Accountable Entities should be permitted to adopt the IFRS for SMEs? Or do you agree that large entities should be required to use EU adopted IFRS? Please give reasons for your view.

Very large companies, which are likely to have a degree of public interest for employees and the wider public, should require compulsory application of  full IFRS. However, appropriate size thresholds (eg. number of employees, turnover, number of members, etc) need to be established for the extension of IFRS to such companies.

Questions 8 & 9 – Do you agree with the Board that the FRSSE should remain in force for the foreseeable future, and that it could be replaced after an appropriate transition period, following the issuance of the IFRS for SMEs?

No. We believe the retention of the FRSSE in UK GAAP following the issuance of the IFRS for SMEs will add unnecessary complexity to the structure of UK GAAP. We would prefer the FRSSE to be replaced by the IFRS for SMEs, together with the rest of UK GAAP, although a number of derogations will be necessary within the IFRS for SMEs to ensure that it remains relevant to small entities.  

As noted in the consultation, ACCA conducted field-testing on the IFRS for SMEs exposure draft, with the majority the companies sampled (23 out of 25) being users of the FRSSE. From that testing it was evident that there were very few issues noted in terms of translating from the FRSSE to the IFRS for SMEs. The overall consensus was that preparers of accounts of smaller entities would have few problems in applying the IFRS for SMEs, largely because they were unlikely to encounter the more complex accounting issues.

We also understand that entities in Ireland within the scope of the FRSSE are rarely applying it, and are applying UK GAAP instead. As applying the IFRS for SMEs should be less complex than using full UK GAAP, this further suggests that it could be used by all companies currently applying the FRSSE.

As noted in our response to Question 6, we would therefore support the FRSSE being replaced by the IFRS for SMEs, but believe that a number of exemptions would be appropriate, to include, in certain cases:

  • no obligation for consolidated accounts to be prepared
  • no requirement for a cashflow statement
  • share-based payments being dealt with by note disclosure, and the cost not requiring to be recognised.

The Board may also wish to consider other disclosure requirements that might be seen as burdensome or less relevant to small companies and the users of their accounts.

Under the proposals, the Board are suggesting an adoption date of 2012. We believe that the transition period would be adequate to resolve the issues around compatibility with legal requirements as well as those relating to the thresholds for very large publicly accountable entities and these derogations for small entities.

While we do not support the retention of the FRSSE for the foreseeable future, should the Board decide to continue with it as proposed, we strongly believe that this should be for as short a time as possible.

Question 10 – Do you agree with the Board’s current views on the future role of SORPs. If not, why not?

We agree with the Board’s pragmatic views on the future role of SORPs as outlined in the table on paragraph 2.36, given that many of the areas covered by them are being dealt with by IASB projects.

Questions 11 – 14, concerning the Board’s proposals to develop a public benefit entity standard.

We do not support the development of a new standard for public benefit entities by the Board. We do not believe it is feasible for the Board to adequately cover all issues faced by the wide range of not-for-profit entities in a single standard. We believe that the current use of specialised SORPs works well, and that these should be further developed to ensure they are in line with the proposed changes to UK GAAP (ie the IFRS for SMEs). We are not clear that there would turn out to be insurmountable difficulties with this approach.

We believe it is important that this development process be on similar lines to the current development of SORPs, with input from a representative selection of interested parties from the sector itself. This will help to ensure that any new guidance for these sectors retains the user-friendly approach and style of the existing SORPs, which we believe are particularly beneficial for the many non-accountants who have to apply them in the voluntary sector.

Question 15 – If you are an entity whose basis of preparing financial statements will change under these proposals, what are the likely effects of applying those new requirements? Please indicate both benefits and costs and other effects as appropriate. If you are a user of financial statements (such as an investor or creditor) what positive and negative effects do you anticipate from the implementation of the proposals set out in this paper?

During our extensive consultations on the future of UK GAAP since the Board published its consultation, we obtained views expressed by both users and preparers of financial statements.

Preparer perspective

As already noted, the field-testers who translated their financial statements from UK GAAP to the IFRS for SMEs, did not encounter any major issues. Although there will be an initial learning curve, for preparers and practitioners, this is not likely to be excessive, and the required learning would not be much more significant than that has been required in previous years by the ongoing updates to accounting requirements within legislation, the FRSSE, etc. We would note the importance of the development and dissemination of software to support the transition to IFRS for SMEs for the vast bulk of entities and that this has to be factored into the timetable. For the relatively few publicly accountable entities that would have to migrate from UK GAAP to full IFRS there will tend to be adequate resources and expertise from the existing listed company sector.

Therefore, while there are likely to be one-off costs, as is the case with any such transition, these are not likely to be significant. For those small entities, where practitioners usually prepare the accounts, the increase in fees, reflecting some of the additional requirements in the IFRS for SMEs compared to the FRSSE, should not be significant.

User perspective

Users largely view greater consistency between listed and non-listed companies in the UK and Ireland, and more comparability with enterprises from abroad as the main benefits of adopting the IFRS for SMEs into UK GAAP. There is also the view that this would lead to greater understanding and transparency for the user community.

Users would face the same, one-off, challenges as preparers of financial statements in terms of required learning, but also in respect of updating their analysis and review systems.

However we firmly believe that the benefits of moving to a consistent framework of accounting in the UK and Ireland will very much outweigh the costs, both for preparers and the user community. For companies that currently fall within the scope of the FRSSE, the IFRS for SMEs may be more challenging. However, with the appropriate exemptions, as outlined in our response to Questions 8 and 9, we do not believe that most entities that currently apply the FRSSE will have to cope with the more complex and challenging areas in the IFRS for SMEs.

In addition, for those entities that currently apply full UK GAAP there would be a positive reduction in complexity were they to use the IFRS for SMEs.

Education and training

While initially there would be transition costs relating to the education and training of accountants, in the long run, we believe that the impact of a move to a single basis of accounting on teaching and education services at all levels would be positive. Accountants would not have to be familiar with two accounting regimes, and therefore qualifications and training programmes would be simplified. In parallel, accounting skills would be more readily transferable both between markets and between employers.

We believe there would be considerable cost reductions for all stakeholders in this respect. The costs of currently meeting training needs (for qualifications and for CPD etc) in both UK GAAP and IFRS would be reduced for all parties, be they students, professionals, employers or tuition providers.

Question 16 – What are your views on the proposed adoption dates?

Results from the survey of our members suggest that the time required for transition would not be significant. When appropriate software packages are made available, the process should be relatively smooth. However, we acknowledge that sufficient time is needed for training and education, and for companies with more sophisticated information systems and more complex accounting issues.

While the proposed adoption date could fit into such a time frame, it is important that this allows enough time for further detailed analysis and consultation. This would include a review of the thresholds for very large publicly accountable entities and an assessment of which derogations to the IFRS for SMEs may be appropriate for the UK and Irish context, especially if (as we would prefer) the IFRS for SMEs was also seen as the replacement for the FRSSE.

While we are comfortable with the 2012 adoption date, if further time is needed to resolve these issues, we believe it is important for the Board to make their intentions clear, thereby allowing all interested parties to plan accordingly.