Financial reporting: the UK Accounting Standards Board is proposing a three-tier approach to developing UK Gaap converged with IFRS.[ILLUSTRATION OMITTED] We will soon see the end of financial reporting standards (FRSs) and their older colleagues, statements of standard accounting practice (SSAPs). At least that's the intention of the Accounting Standards Board The role of the Accounting Standards Board (ASB) is to issue accounting standards in the United Kingdom. It is recognised for that purpose under the Companies Act 1985. It took over the task of setting accounting standards from the Accounting Standards Committee (ASC) in 1990. (ASB ASB Asbestos ASB Arbeiter Samariter Bund (German medical help organisation) ASB Anti-Social Behaviour ASB Accounting Standards Board (UK FRC) ASB Aarhus School of Business ), which published plans to this effect in a consultation paper entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: "Policy proposal: the future of UK Gaap UK GAAP United Kingdom Generally Accepted Accounting Principles " in August. The document sets out the board's strategy for the future basis of UK and Irish Gaap and its convergence with international financial reporting standards International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB). Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). (IFRS IFRS International Financial Reporting Standard(s) IFRS Inter Frame Relay Service IFRS Indiana Facilities Registry System ). The key proposal is that all FRSs and SSAPs be withdrawn and replaced with the new IFRS for small and medium-sized enterprises (SMEs), published by the International Accounting Standards Board  An editor has expressed concern that this article or section is .Please help improve the article by adding information and sources on neglected viewpoints, or by summarizing and in July. Entities in the UK and Ireland would then be faced with three possible accounting regimes: IFRS as adopted by the European Union European Union (EU), name given since the ratification (Nov., 1993) of the Treaty of European Union, or Maastricht Treaty, to the European Community ; the new IFRS for SMEs; or the financial reporting standard for smaller entities (FRSSE FRSSE Financial Reporting Standard for Smaller Entities (United Kingdom) ). The basis for deciding which one applies will rest largely on whether a company is "pubLicly accountable". Entities that are publicly accountable would need to apply EU-adopted IFRS, whereas those that are not publicly accountable would be covered by IFRS for SMEs. The exception to this would be that the smallest firms could still apply the FRSSE (see table). If we focus on the entities in tiers 1 and 2 of the table, we can see that size is not a determining factor in terms of public accountability. Not everyone agrees with this. For example, many UK building and friendly societies are small and some people argue that the extension of EU-adopted IFRS to all such societies would not benefit their members. Other people argue that any large company, even if it's unlisted, is publicly accountable. Having considered these views, the ASB has concluded that, if an entity is deemed publicly accountable, it should apply EU-adopted IFRS, irrespective of irrespective of prep. Without consideration of; regardless of. irrespective of preposition despite size. While it's possible to "trade up" from any tier--eg, tier-2 companies can take on EU-adopted IFRS--many users of accounts will be uncomfortable with the idea that a large company could adopt IFRS for SMEs because it is not publicly accountable. The ASB's proposals for determining public accountability are as follows. First, if an entity has debt or equity instruments traded on a public market or is in the process of issuing such instruments, it is publicly accountable. Alternatively, if it's a deposit-taking entity and/ or holds assets in a fiduciary capacity for a broad range of outsiders as its main business, it is also publicly accountable and would, therefore, have to apply EU-adopted IFRS. Examples of the latter group include banks, credit unions, insurance firms, mutual funds, building societies and friendly societies. Most entities that would fall into tier 1 have been applying EU-adopted IFRS for some time. For those companies for which this would be a new experience, at least the main body of the new accounting standards to apply has existed for a while. But IFRS for SMEs was published barely three months ago. Although its contents had been debated for years, applying them would entail entail, in law, restriction of inheritance to a limited class of descendants for at least several generations. The object of entail is to preserve large estates in land from the disintegration that is caused by equal inheritance by all the heirs and by the ordinary some important changes in the following areas: * The cash flow statement. Whereas FRS FRS abbr. Fellow of the Royal Society FRS, n “flexed rotated side-bent,” an osteopathic abbreviation used to describe vertebral position in cases of spinal dysfunction. 1 exempts entities such as certain subsidiary undertakings from preparing a cash flow statement, IFRS for SMEs offers no such exemption. * Consolidated accounts. IFRS for SMEs focuses on the power to control, whereas the UK Gaap definition also encompasses situations in which control is actually exercised in practice, irrespective of whether the power to control is present. * Business combinations. UK Gaap allows these to be accounted for using either the merger accounting approach (in which the carrying values Carrying Value Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt. Notes: This is different than market value, as it can be higher or lower depending on the circumstances. of assets and liabilities of the parties don't have to be adjusted to fair value on consolidation) or the acquisition accounting model (whereby the identifiable assets and liabilities of the acquired company are included in the consolidated balance sheet consolidated balance sheet A balance sheet in which assets and liabilities of a parent company and its controlled subsidiaries are combined, thereby presenting balance sheet items for the parent and its subsidiaries as if they were a single firm. at fair value). IFRS for SMEs requires all business combinations to use the latter method. * Goodwill. UK Gaap requires goodwill and other intangible assets Intangible Asset An asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. that have finite lives to be amortised over their useful life. There's a presumption A conclusion made as to the existence or nonexistence of a fact that must be drawn from other evidence that is admitted and proven to be true. A Rule of Law. If certain facts are established, a judge or jury must assume another fact that the law recognizes as a logical that this useful life is no more than 20 years, but this presumption can be rebutted and either a longer life or an indefinite INDEFINITE. That which is undefined; uncertain. INDEFINITE, NUMBER. A number which may be increased or diminished at pleasure. 2. When a corporation is composed of an indefinite number of persons, any number of them consisting of a majority of those life may be substituted. Where goodwill or any intangibles are regarded as having infinite life, they should not be amortised. IFRS for SMEs takes the view that all intangibles, including goodwill, have a finite life and, in the absence of a reliable estimate of that life, it shall be presumed to be ten years, with systematic amortisation Noun 1. amortisation - the reduction of the value of an asset by prorating its cost over a period of years amortization reduction, step-down, diminution, decrease - the act of decreasing or reducing something 2. required over that period. * Financial instruments. IFRS for SMEs has only two classifications: fair value through profit and loss (FVTPL) and cost. Basic financial instruments--eg, cash, trade receivables and straightforward loans--are measured at cost or amortised cost using the effective-interest method. Equity instruments with a quoted price should be accounted for as FVTPL. Complex financial instruments--eg, derivatives such as options and forward contracts will be measured at FVTPL. The new standard requires no separation of embedded Inserted into. See embedded system. derivatives and allows the use of full IFRS for recognition and measurement while retaining reduced disclosure requirements. Current UK Gaap is substantially based on full IFRS. * Deferred tax. IFRS for SMEs requires deferred tax to be recognised on the basis of temporary differences rather than obligations arising from timing differences. UK Gaap allows, but does not require, deferred tax liabilities that won't be settled for some time to be discounted to reflect the time value of money. In contrast, IFRS for SMEs prohibits discounting. * Investment properties. UK Gaap requires these to be included in the balance sheet at their open market value. Value changes are taken to the statement of total recognised gains and losses. IFRS for SMEs requires an investment property whose fair value can be measured reliably without undue cost or effort to be recognised at fair value at each reporting date, with changes in fair value reflected in profit or loss. * Segment reporting segment reporting A type of financial reporting in which the firm discloses information by identifiable industry segments. For example, Union Pacific Corporation reports revenues, income, assets, depreciation, and capital expenditures for each of four and earnings per share. Both are covered by UK Gaap, but IFRS for SMEs addresses neither. Many "public-benefit entities" that prepare accounts in accordance with UK Gaap are likely to have to apply the new IFRS for SMEs. But international standards are not designed to apply to such entities' activities in the private sector. Would this be a problem? The ASB's consultation paper defines a public-benefit entity as one that is "organised and operated primarily for community or social benefit, whose funders and other resource providers do not receive any financial return from the organisation, and any surpluses are applied to support the objectives of the entity". This definition would cover charities, housing associations, universities and further education institutions. The ASB recognises the risk that simply mandating IFRS for SMEs for public-benefit entities could lead to inconsistent accounting practices and increased complexity as these organisations try to create their own answers to sector-wide issues. Its consultation paper is, therefore, seeking views on whether IFRS for SMEs needs to be supplemented with specific UK guidance if it's to provide an adequate and practicable accounting framework for the public-benefit sector. The deadline for responses to the consultation is February 1, 2010. After considering them, the ASB will publish an exposure draft outlining its recommendations for the future of UK Gaap, with an anticipated transition date for financial years starting on or after January 1, 2012. Many large groups moved from their local Gaap to full IFRS in 2005. The main lesson learned from that experience is that a successful transition requires planning well in advance. It may seem as though 2012 is a long way off--unless you're building an Olympic venue--but such an approach can help to control costs and avert last-minute surprises. Now is the time to consider the broad implications of the transition and ask questions about tax arrangements, dividend streams, group structure, remuneration REMUNERATION. Reward; recompense; salary. Dig. 17, 1, 7. , earn-outs and covenants. With this information, more detailed plans for change can be made and communicated to key stakeholders Stakeholders All parties that have an interest, financial or otherwise, in a firm-stockholders, creditors, bondholders, employees, customers, management, the community, and the government. . Further information The ASB's consultation paper can be downloaded from www.snipurl.com/rpb3d. The institute will be issuing a response and is keen to hear your views, which can be given via the financial reporting section of CIMAsphere (www.cimasphere.com) or e-mailed directly to nick.topazio@cimaglobal.com. A three-day CIMA Mastercourse entitled "Accounting standards masterclass" will be held on December 9-11 in Manchester. For more details, visit www.cimamastercourses.com/asmc. Nick Topazio ACMA ACMA Australian Communications and Media Authority ACMA American Composites Manufacturers Association ACMA Academy of Country Music Awards ACMA American College of Mortgage Attorneys ACMA Associate of the Chartered Institute of Management Accountants is a business and financial reporting specialist at CIMA.
How the accounting regimes would apply under the ASB's proposals
Tier Regime
1 EU-adopted IFRS EU-listed (consolidated accounts);
listed on AIM; listed on the Irish
Enterprise Exchange; other publicly
accountable entities (including
publicly accountable 100 per cent
subsidiaries)
2 IFRS for SMEs Entities that aren't publicly accountable
3 FRSSE An entity that doesn't exceed two or more
of the following criteria: 6.5m [pounds
sterling] balance sheet total; 50
employees
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