FRED 21 Accounting Policies
ACCA’s response to the ASB’s exposure draft is set out below.
- The Association of Chartered Certified
Accountants (ACCA) is pleased to have this opportunity to
comment on the above exposure draft (ED) published by the
Accounting Standards Board (ASB). FRED21 was considered recently
by ACCA's Financial Reporting Committee and the following are
their views.
- We are generally in support of the ED.
Our comments are intended to improve the document while
highlighting some problems which we see as raised by it. We have
also provided answers to the particular questions raised for
comment by ASB on pages 6 and 7 of FRED21.
Fundamental accounting concepts
- We agree that it is necessary to
replace SSAP2 following the finalisation of the Statement of
Principles (SoP), as the four fundamental concepts from the
former do not really work with the latter. The SoP includes more
than four qualitative characteristics and also includes
definitions of assets and liabilities. The concept of
consistency seems not to fit very well at all. The idea in SSAP2
of accounting bases as distinct from accounting policies and
accounting concepts, has not been used much subsequently.
- The replacement of SSAP2 would not
however mean the disappearance of the four fundamental
accounting concepts. They would remain for the time being
applicable to UK companies via the accounting principles of the
Companies Act 1985. The potentially conflicting demands would
remain therefore, for example between consistency (CA 1985) and
comparability (FRED21) when a new standard comes into force or
if sector practice develops in a particular direction.
- On the other hand getting rid of SSAP2
would mean losing the only definition of realisable profits in
accounting standards. For non-corporate entities that would mean
that there would be no apparent general distinction between
realised and unrealised profits.
- For companies the question of
realisability is raised by paragraph 18 of FRED21, and so
presumably ASB consider the distinction of realised/unrealised
to be a valid one. Little further guidance is, however, given by
accounting standards or by the law on the subject. We stated in
our response to the recent ICAEW paper on this subject that we
thought ultimately fruitless the pursuit of a definition of
realised profits as distinct from recognised profits.
- The disappearance of SSAP2's
fundamental accounting concepts of prudence and accruals when
there is not as yet an accounting standard on revenue
recognition is particularly noticeable.
Q1. It is now appropriate to update the discussion of fundamental accounting concepts in SSAP2 so as to bring those concepts into line with their present roles as discussed in the Statement of Principles. Do you agree that this has been satisfactorily achieved?
Generally yes. We have noted some problems
arising in paragraphs 4 and 5 above.
Q2. Do you agree with the proposed definitions of accounting policies and estimation techniques?
Yes.
Q3 Do you agree with the proposed explicit requirement that an entity should adopt accounting policies that are in the opinion of the directors most appropriate to its particular circumstances for the purpose of giving a true and fair view?
Yes.
We note that paragraphs 32 to 35 of FRED21 do not specifically address the question of where accounting standards themselves offer alternative treatments (e.g. in FRS15 interest may be capitalised or not). FRED21 should perhaps make clear that these instances do not represent free choices, but are also cases where companies must choose the most appropriate policies for their own circumstances from possible alternatives.
It would help to reinforce the requirements of paragraph 12 of FRED21, if "most appropriate" were consistently applied, and references to "more appropriate" or "preferable" were eliminated for instance in:
- FRED21 paragraph 41(c)(i)
- FRS3 paragraph 62
Paragraph 62 from FRS3 might also be amended
to remove reference to a fundamental accounting concept of
consistency.
Q4. Do you agree with the proposal that the objectives and constraints set out in paragraphs 19 and 20 should be taken into account in judging the appropriateness of accounting policies?
Yes.
Q5. Do you agree with the proposal that the accounting policies should be reviewed regularly and new policies implemented if judged more appropriate?
We have noted in our response to Q3 above
that the principle from paragraph 12 would be assisted by the
consistent use of "most appropriate " rather than
"more appropriate".
Q6. Do you agree with the proposal that, where estimation techniques are required to enable the accounting policies adopted to be applied, an entity should select estimation techniques that are, in the opinion of its directors, most appropriate to its particular circumstances?
Yes.
Q7. Do you agree with the other proposals in respect of estimation techniques?
Yes.
Q8. Do you agree with the proposed disclosure requirements?
We consider it common practice when there has been a change of policy which has lead to restatement of comparative figures that there is some brief reference to this on the face of the primary statements involved. For example the comparative column may be headed up "1998 (restated)". We think this should be made a specific requirement of the new accounting standard under paragraph 41(c).
Paragraph 41(d) could be improved by making it clear that effect should be a quantified effect, in the same way as paragraph 45(d) does in relation to the true and fair override.