The Accounting Standards Board (‘ASB’) has published its proposals for the future of financial reporting in the UK and Republic of Ireland. In the material published, the ASB has set out proposals for a three-tier reporting framework, which aims to balance the needs of preparers and users of accounts.
Pursuant to its statutory mandate to cooperate in the development of accounting standards, IAASA has observer status at ASB meetings.
The proposed three-tier approach, which has been developed and consulted on over the past six years, builds on the existing system. Quoted groups will continue to report under international financial reporting standards (IFRS), as adopted by the EU. Under the proposals, they would be joined in Tier 1 by other companies that are publicly accountable. This would apply if their debt is traded on public markets, or if they hold deposits or manage other people’s money. (Some very small financial institutions would be exempt.)
The smallest companies will continue to use the simplified version of UK standards, known as the FRSSE.
Those in between would report under a new standard based on the IFRS for SMEs, which is considerably shorter and less complicated than current UK standards. The FRSME, as it would be called, would be modified to comply with UK and EU law and to ease tax reporting. It runs to about 400 pages.
The ASB is proposing a new standard because the current 2,000-page book, built up over decades, is considered to be an unwieldy and incoherent mixture of old standards and ones that have been partly converged with IFRS. Nevertheless, gaps remain, notably in the reporting of financial instruments. Without these changes, UK standards would in any case have had to be updated.
In the ASB’s assessment, basing reporting for all but the smallest companies on the international framework will reduce the training costs of accountants and the scope for auditing errors. The ASB further considers that a consistent framework should also make interpretation simpler for users of accounts, and companies will find it easier to move between tiers.
An important part of the simplification process is the proposed reduced disclosure regime, which would enable most group subsidiaries to make significant savings. In response to feedback during previous consultations, the ASB plans to develop a standard tailored to the needs of public benefit entities such as charities. It also proposes to retain sector-specific statements of recommended practice (‘SORP’s) where there is a clear need.
In its statement published today, the ASB acknowledges that change gives rise to cost. In that context, the ASB has indicated that a draft (UK based) Impact Assessment exercise estimates the costs of transition at £78.9m. While some entities will be more affected than others, overall the ASB believes this will be recouped through the simplification of reporting for many of them. There is also, in the ASB’s assessment, potential for a reduced cost of debt.
In view of significance of the changes, the ASB is open to fundamental comments on the Draft, not just points of detail. The ASB has further indicated that it is aware that there are differing views and, in that context, one of its members has provided an alternative proposal.
David Loweth, the ASB’s Technical Director and Board member, said: “The exposure draft sets out the Board’s proposals for the future framework for financial reporting by UK and Irish entities. In the Board’s view, the proposals provide a framework targeted to meet the needs of users and preparers, but we know that there are alternative views. That’s why this consultation is so important and why I would urge all constituents with an interest in financial reporting to consider the proposals and to give us your views”.
The ASB has set a consultation period to run until 30 April, 2011. It is proposed that the new framework would be effective from 1 July, 2013.
http://www.iaasa.ie/publications/future_gaap.htm
