ASB's accounting proposals risk multi-tiered confusion

by Michael Goldstein

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25 Mar 2011

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THE RECENT publication of two exposure drafts by the Accounting Standards Board (ASB) could lead to big changes in financial reporting and significantly reduce comparability of companies' financial statements in the future. All but smaller companies and those already complying with the full International Financial Reporting Standards (IFRS) would be affected to varying degrees. As such, it is essential that potentially affected companies review the proposals and comment on the consultation to help shape the ultimate outcome to one that will make sense for business.

The drafts propose different tiers of financial reporting. Entities that are neither publicly accountable nor ‘small' would have to prepare their financial statements in line with the proposed Financial Reporting Standard for Medium Sized Entities (FRSME). This is based heavily on the
International Financial Reporting Standards for Small and Medium Sized Entities (IFRS for SMEs), which is, itself, a cut-down version of the full IFRS published by the International Accounting Standard Boards. Small companies would be able to prepare their financial statements in accordance with the existing financial reporting standard for smaller entities.

The ASB argues that there is a need for change because UK Generally Accepted Accounting Principles (UK GAAP):

• is an incoherent mixture of UK standards developed over a long period of time with measures that have been converged with the EU-endorsed IFRS
• does not recognise certain transactions that are relevant to an assessment or other financial position of an entity, such as derivatives; and
• has not kept up-to-date with evolving business transactions.

As the world becomes more global in terms of business operations and communications, it is important that investors can compare similar companies around the world on the same basis of financial reporting. These proposals fly in the face of that undeniable logic. In the UK it may well lead to a five-tier system, as current proposals suggest the financial reporting standard for small entities (heavily based on UK GAAP) continues and that there are two forms of reduced disclosure available to reduced subsidiaries. In short, a multi-tiered system is misguided.

We believe that the same accounting principles should be applied to all businesses and these rules should be scalable so that they should not produce an unreasonable burden on business. We believe that in some areas, IFRS has become too complex and is attempting to apply a theoretical framework to business economics which is not actually replicated in the real world. This extension of accounting principles beyond reality seems to us to be a worrying trend which is causing people to distrust the accounting results that emerge.

The proposals to replace UK GAAP with the multi-tier framework could prove a significant challenge to many organisations operating in various sectors. As such, it is essential that companies engage with the ASB's consultation process by the 30th April deadline and give their opinion regarding the cost benefit trade-off that would arise. Failure to respond is likely to be seen as ambivalence or agreement to the proposal.

Michael Goldstein is a partner at BDO

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