The UK Government is relearning the lessons from the 2005 transfer to international accounting rules as it decides how best to roll out similar rules for the UK’s 80,000-strong, mid-sized private companies.
Internal documents, prepared by government researchers have shown international accounting rules predominately serve the biggest corporations, which has now worried the government considering allowing new accounting standards for smaller businesses.
Research by the Department of Business, Innovation and Skills (BIS), obtained by Accountancy Age, found that while UK listed companies have overall benefited from switching to International Financial Reporting Standards (IFRS), “the main beneficiaries have been the largest corporations”.
The findings reinforce complaints by small-cap businesses that full IFRS is time consuming and of little value to potential investors. And they will add momentum
to attempts by small cap companies to ease the reporting burden.
Nearly all listed UK companies must use IFRS as produced by the International Accounting Standards Board (IASB) and adopted by the European Union.
But the standards are far from popular. In September, James Geddes, chief financial officer at AIM-listed market researchers Brainjuicer, said most of the public accounting information he produced was “fairly meaningless and, at worst, misleading”.
“Our auditor agrees that what we are having to disclose is nonsensical, but they say we can’t do a lot about it,” he said.
Backed up by BIS
Now government research seems to echo his concerns. Sources close to BIS say, in fact, IFRS has only helped a handful of the very largest corporations which have access to diverse capital markets in nations across the world.
The issue is one of critical importance as the UK’s independent accounting rule maker, the ASB attempts to bring in a form of IFRS-lite, called IFRS for SMEs, for the UK’s 80,000 non-listed small and medium-sized entities.
The ASB’s plans to adopt a slimmed-down variation of full IFRS is facing resistance from BIS, which is worried the move may burden businesses recovering from the crisis and facing a public sector cost-cutting campaign.
Impact assessments passed between the ASB and BIS suggest the new rules “could well involve a significant increase in net cost to UK businesses”, according to correspondence seen by Accountancy Age.
In a 21 September letter, BIS corporate law and governance director Richard Carter reminded ASB chairman Ian Mackintosh “about the importance my ministers attach to ensuring that any changes to UK Generally Accepted Accounting Principles (UK GAAP) lead to a net reduction in burdens on business”.
The point was reiterated by a BIS spokeswoman last week, who said it was essential
the new standards help UK businesses.
“As with any changes to regulation, whether by HM Government directly, or by independent bodies such as the ASB, it is clearly essential that the regulation be net beneficial to the UK and its economy,” she said.
Pressure from BIS may in fact scuttle the entire IFRS for SMEs project with senior government figures insisting the final proposals, due to be released in late October, include a “do nothing” option.
Carter said he was concerned respondents may be inadvertently misled into assuming the ASB proposal is a forgone conclusion.
“It is important to be very clear from the start that this may or may not lead to a final standard similar to the current [proposals],” Carter said in his letter.
Technically, the ASB can go it alone, with or without BIS’ support. As the UK’s independent standard setter, the body has the power to cast its own accounting rules without fear or favour. Only last week one of the ASB’s remaining structural tethers to government – its funding, via the Financial Reporting Council – was severed as part of the spending review. It is now wholly dependent on private industry funds.
However, it’s unlikely the ASB will assert its authority anytime soon. BIS and the ASB enjoy a close relationship evidenced by BIS’ director of accounting, David Tyrall, attendance at ordinarily closed ASB meetings.
Within the ASB there is little appetite to walk away from the IFRS for SMEs project. It has been eight years since the board first made a commitment to adopt the accounting rules, and a number of consultations have all confirmed that desire among its constituents.
The ASB’s decision will likely depend on the results of an impact assessment, being prepared by the board to try and quantify the costs and benefits of adopting the new standards.
At what cost?
The assessment, requested by BIS, will try and put a pound-figure on the cost of adopting the new rules, however BIS itself conceded in September that, “at this stage there simply was not enough information readily available to reach definitive conclusions”.
In a statement a spokeswoman said this preliminary assessment will be published as part of the consultation but that the ASB will need more data to “clarify the costs and benefits for businesses and investors”.
Board members admit that, when it comes to accounting standards, impact assessments remain “highly subjective”, and warned “it is questionable how much reliance should be placed on quantified projections”.
Another grenade was lobbed into the melee last week with the departure of Ian Mackintosh, chairman of the ASB and its chief advocate for IFRS for SME adoption.
Mackintosh was named new vice chairman of the International Accounting Standards Board, the body which conceived of IFRS for SME rules.
He has now been placed on gardening leave while he waits to take on the new role in June next year. His departure however, combined with BIS’ concerns, may lead remaining board members to decelerate adoption plans.
The ASB may also face opposition on another front. Under its plans, a tranche of UK businesses will become so-called “tier one” businesses. These entities, classified as “publicly accountable”, will not be eligible to use IFRS for SMEs and will instead have to adopt full IFRS.
At the moment, not all listed companies use IFRS, including some of the 8,541 companies traded on the UK’s secondary market, PLUS. The government will be sensitive to concerns IFRS for SMEs will unnecessarily burden these small businesses, which the government hopes will play a key role in healing the wounded economy recovering from a crisis and a near-unprecedented round of spending cuts.
Already trade groups have been agitating to reduce the reporting burden on small-cap listed companies.
Tim Ward, chief executive of Quoted Companies Alliance, which represents small and mid-cap quoted companies, said he would like to see small-cap companies offered the option of using the simplified IFRS for SMEs.
“We are certainly keen to see IFRS for SMEs explored. What we are saying is we
want more appropriate disclosure for smaller, quoted companies and we believe there are areas which could be explored,” he said.
Keeping up standards
It may be that the ASB’s own internal conceptual disagreements hold back adoption plans.
The board’s policy has always been to adopt IFRS for SMEs as close as possible to the form released by the IASB. However, the out-of-date tax section is being abandoned, and new alternations are being brought in to bring the standards in line with UK company law and the European Union directives.
The bulk of the standards will remain intact, but even some of these are being fought within the ASB.
“By following the principle of making minimal change to the IFRS for SMEs, we have retained some sections which will involve cost but no apparent benefit – the sections on tax and share-based payments are two cases in point,” said ASB board member Andy Simmonds.
Fellow board member Edward Beale has also voiced concerns the planned roll out will be a distraction as companies are trying to get back on their feet as the economy recovers.
“The current economic crisis increases the importance to the UK economy of growth in the SME sector. Changes to UK [accounting framework] at this point in time are an unnecessary distraction that can easily be avoided,” he said in the letter to Edward Davey, minister for employment relations.
With ASB chairman Mackintosh out of the picture, and board members voicing concern, it’s difficult to see the new standard passing though the board without some level of alteration. Of course, another alternative open to the board would be to delay the new rules entirely.
Draft standards are expected to be released within two weeks, with all responses being closely watched by BIS and ASB members.
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