In October 2010, the ASB published detailed proposals on the future of financial reporting in the UK & Republic of Ireland. The ASB issued two draft financial reporting standards; FRED (Financial Reporting Exposure Draft) 43 proposed a tier system setting out which financial reporting standards an entity would apply; and FRED 44 setting out a new financial reporting standard to replace existing UK & Republic of Ireland financial reporting standards (current FRS). The FREDs built on the ASB’s previous consultations dating back to 2004.
During the consultation period the ASB undertook an outreach programme with the objective of raising awareness of the proposals given the significant impact they could have on future financial reporting in the UK & Republic of Ireland. The ASB met with auditors, preparers and users of small and medium sized entities to raise awareness and to improve its understanding of users’ needs from small and medium sized entities financial statements.
The ASB has received nearly 300 responses to the FREDs and has been carefully considering the matters raised in the comment letters over recent months.
Tentative decisions
The ASB has tentatively decided not to extend the application of EU-adopted IFRS beyond what is required by Company law. A summary of the key tentative decisions is provided below.
(i) Continuation of the project
Although the responses address a number of detailed concerns regarding the proposals, the ASB tentatively decided that the responses provide sufficient evidence to support the project objective of updating current financial reporting standards and to move to a framework based on International Financial Reporting Standards (IFRS).
(ii) Remove the definition of public accountability
FRED 43 proposed a tier system for financial reporting based on whether an entity had public accountability, as defined. Respondents to FRED 43, although generally supportive of the proposal for a tier system, raised a number of questions regarding practical application of the definition. In addition, entities that apply current FRS that would, in accordance with the proposals, be required to apply IFRS (that is entities such as credit unions, building societies and pension funds) questioned the cost benefit of the proposals. These entities were particularly concerned about the extensive disclosures required by IFRS. The ASB gave further consideration to the recognition and measurement requirements proposed in FRED 44 and noted that those requirements were close to IFRS and that as an alternative to IFRS it could extend disclosure requirements for certain types of entity, and, if necessary amend FRED 44 to address the specific circumstances of entities previously considered to have public accountability.
(iii) Amending FRED 44 for a wider application
The ASB has been considering what, if any, amendments are required to FRED 44 now that it will apply to a wider scope of entities – that is now that entities previously considered to have public accountability will be able to apply the proposals in FRED 44. The ASB has tentatively decided that for areas not addressed in the draft FRSME, such as earnings per share, it should be extended via a cross reference to EU-adopted IFRS. The ASB has also tentatively agreed to extend the disclosures for financial instruments for certain types of entities. The ASB has agreed a working definition of a financial institution which it will discuss with interested parties over the summer.
(iv) The future of Statements of Recommended Practice (SORPs)
The ASB decision to remove the definition of public accountability has had an impact on the future role of the SORPs, for example the Financial Reporting for Pension Schemes SORP would now need to be updated to comply with the proposed requirements in FRED 44. The ASB staff will be working with SORP making bodies over the coming months to assess the impact of the ASB’s decisions.
(v) Amending the IFRS for SMEs for application in the UK & Republic of Ireland
FRED 44 was based on the International Accounting Standards Board’s standard for small and medium sized entities (the IFRS for SMEs). The ASB had proposed in the FRED to make only minimal changes to the IFRS for SME other than those changes that were required to ensure compliance with UK Company law.
Respondents to the FRED questioned the decision of minimal changes and many noted that as a consequence FRED 44 removed accounting options that are permitted in current FRS. These respondents questioned what improvement was made to financial reporting in removing these options, also noting that the IFRS for SMEs was originally developed by the IASB for jurisdictions that did not already have high quality financial reporting standards which is not the situation in the UK & Republic of Ireland.
In addition to the concern regarding the removal of certain accounting options in FRED 44 a number of respondents sought clarification of the requirements in FRED 44. The Board agreed that it should, where necessary, address these clarifications.
There is also an inconsistency between the Company law formats and the formats in the FRSME. To address this, the ASB tentatively decided that the formats in Company law should take precedence and the draft FRSME should be amended accordingly.
As a consequence the ASB tentatively revised its proposals for amending the IFRS for SMEs to:
- changes should be made to permit accounting options that exist in current FRSs at the transition date that align with EU-adopted IFRS;
- changes should be consistent with EU-adopted IFRS;
- use should be made, where possible, of existing exemptions in Company law to avoid gold-plating; and
- changes should be made to provide clarification, by reference to EU-adopted IFRS, that will avoid unnecessary diversity in practice.
(vi) Reduced disclosure framework
FRED 43 proposed a reduced disclosure framework for qualifying subsidiaries. The aim of this proposal was to permit subsidiaries of groups that were required to prepare financial statements in accordance with EU-adopted IFRS to move subsidiaries to IFRS - permitting converged recognition and measurement principles for group reporting but with reduced disclosures. The ASB reviewed its decision for a reduced disclosure framework in view of its decision to amend the IFRS for SMEs more widely. After seeking input the ASB decided to continue to develop a reduced disclosure framework for qualifying subsidiaries – noting however, it would need to consider further the definition of a qualifying subsidiary. It is likely that the reduced disclosure regime will be available to all subsidiaries, however, subsidiaries which are financial institutions will not be permitted to take advantage of ‘IFRS 7 Financial Instruments: Disclosures’ exemptions. The ASB also tentatively decided that subsidiaries applying the reduced disclosure framework should follow the SORPs.
(vii) Delay of the effective date
The responses regarding the effective date were very mixed with some respondents seeking delay whilst others urged the ASB to move forward swiftly given its previous consultations. The ASB noted that the application of the proposals was also linked to the effective date of the IASB major projects, such as IFRS 9 ‘Financial Instruments’. The ASB decided that in view of the amendments it was proposing to the FREDs that it should defer the effective date to 1 January 2014.
(viii) Impact of the proposals
The ASB is carefully considering the comments received to its draft impact assessment as set out in the FRED and how its decisions noted above affect that assessment. The ASB has decided to it should review the project’s objectives at a future meeting in view of changes being made to the proposals.
