Divisions over shape of new UK GAAP

by Richard Crump

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30 Nov 2012

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THE FIRST PART of a new reporting framework that will replace UK GAAP has been broadly welcomed by the profession, though concerns remain over yet-to-be issued standard based on IFRS for SMEs – which will affect the bulk of companies.

Last week, the FRC published the first two parts of a new financial reporting standard – FRS 100 Application of Financial Reporting Requirements and FRS 101 Reduced Disclosure Framework – that will replace local accounting rules from January 2015.

FRS 100 sets out the overall financial reporting requirements, giving many entities a choice of detailed accounting requirements depending on factors such as size, and whether or not they are part of a listed group. FRS 101 cuts the reporting burden on listed groups by allowing subsidiaries to apply IFRS with fewer disclosures.

Early adoption is allowed – a move welcomed by Danielle Stewart, partner at Baker Tilly and a former member of the FRC's Accounting Standards Board, the standard-setting arm succeeded by the Accounting Council that developed the framework – meaning that companies with a December year-end can adopt the standards immediately.

"Everyone has been gagging for the exemptions. Particularly because December is a popular year-end for big groups," Stewart says.

Under the disclosure exemptions, subsidiaries will not be required to disclose related party transactions entered into between two or more members of a group. Certain requirements associated with the disclosure of impairment of assets, financial instruments, fair value measurement, statement of cash flows and the presentation of financial statements will also be exempt.

However, financial institutions are not exempt from the disclosure requirements of financial instruments, fair value measurements to the extent that they apply to financial instruments, and elements of the presentation of financial statements.

"A lot of subsidiaries that use IFRS at the group level just want to go away and use IFRS with reduced disclosures," says Andrew Davies, Ernst & Young partner and leader of Financial Accounting Advisory Services in the UK and Ireland. "The exemption to cash flow statement disclosures is pretty significant, and related party disclosures can be quite onerous."

It is envisaged that the exemptions could result in cost savings in the preparation of financial statements without reducing the quality of financial reporting. The changes are also likely to affect companies' tax positions.

"The policies will impact the P&L account and will create more volatile accounting," says Davies, adding that tax payments associated with foreign exchange and fair value will be particularly affected.

The framework is not without flaw, however. Stewart says it is a "shame" that it hasn't "really solved the fact that Companies Act applies". Under the Companies Act, there are still "a raft of disclosures" that need to be made in the subsidiary accounts.

"This should be addressed by getting BIS to do some tweaks to the Companies Act," Stewart says.

While the cuts to accounting disclosures have been met with nodding approval, opinion is divided over FRS 102, which has yet to be issued.

FRS 102, or new UK GAAP, completes the suite of new financial reporting standards, and will be issued by the FRC early next year. Based on the IASB's IFRS for SMEs, the standard has been significantly amended.

Described by Davies at E&Y as "a bit if a hotch-potch" of standards, FRS 102 has some elements similar to IFRS, some similar to IFRS for SMEs, some similar to UK GAAP and others completely unique.

Not everyone is happy about the UK standard and international rules.

"It is a bit of a missed opportunity," says Sue Almond, technical director at ACCA. "More work could have been done with the IASB to get the changes made in the UK standard put through to IFRS for SMEs. Our preference would be to adopt rather than adapt."

Defending the FRC's work, Stewart says there are reasons why the standard has not been made "absolutely consistent" with IFRS.

"There are certain things in IFRS that are not bang on yet. Hopefully, IFRS will end up in a sensible place and, by taking a different stance in UK, we can influence that," she says.

"If the standard doesn't fall into line over time, we can look at revisions to IFRS, but I don't see why we should take a step back."

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