Arthur Andersen technical partner Isobel Sharp this week warned that the new financial reporting standard on provisions would force many companies to change procedures and restate their accounts.
‘Like all good standards, it has its problem areas,’ Sharp told the English ICA’s financial reporting conference in London on Monday. For maintenance and repair provisions, she said, ‘FRS 12 is an absolute pain that undermines a lot of current accounting practice’.
Provisions for repairs and maintenance will not be permitted under the new standard. Instead, they must be treated as ‘accelerated depreciation’, which is creating serious problems for company accounting records, she said.
Under FRS 12 ‘Provisions, Contingent Liabilities and Contingent Assets’, published by the Accounting Standards Board last month, a ship that required regular refits would have to be broken down into constituent parts – for example the hull and superstructure and items such as interior fittings that would be renewed more regularly. The different elements would need to be depreciated separately, explained Sharp.
Implementing FRS 12 will have a ‘double-dip’ impact on many companies’ accounts, she added. The standard applies retrospectively, so that non-qualifying provisions from last year’s accounts will have to be written off against this year’s earnings.
In a similar way, FRS 12 could cause problems with the Inland Revenue.
‘Treating certain things as revenue-type items where they are now classified as capital expenditures could make dealing with the tax man very tricky,’ she explained. ‘This is all accounting that should not affect tax, but who knows?’
Sharp also questioned an exemption clause in FRS 12 based on the definition of a ‘constructive obligation’. ‘The first person who uses it may get a one-way ticket to the (Financial Reporting) Review Panel,’ she warned.
ASB member Geoffrey Whittington, professor of financial accounting at Cambridge University, countered that in substance, Sharp’s comments were not deeply critical.
‘If you are going to be innovative, you have to change things – and when you change, you get problems,’ said Whittington. ‘In a way, it’s a tribute that we are changing something.’
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