Exposure Draft of amendment to FRSSE
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the above Exposure Draft (ED) of Amendment to Financial Reporting Standard for Smaller Entities (FRSSE). It was discussed recently at a meeting of ACCA's Financial Reporting Committee, and these are their views.
ACCA welcomes this ED and regards it as important that the FRSSE is updated regularly. We agree that amendments at more frequent intervals than a year would probably be impractical. Equally we do not think that the amendments should be at much longer intervals.
ACCA's responses to ASB's specific questions
Q1. Do you agree that the requirements for goodwill and intangible assets should be updated to be consistent with the basic requirements of FRS10?
Yes. We are not in favour of substantial measurement and recognition differences between the accounts of smaller and larger entities.
Q2. Do you agree that depreciation periods should be restricted to 20 years or less?
Yes.
Q3. FRS10 prohibits capitalisation of costs of developing intangible assets internally. It also prohibits the revaluation of intangible assets. In both cases it permits exceptions where the assets are virtually identical to assets traded on an active market. Do you agree that this exception should be omitted from the FRSSE?
Yes.
Q4. A number of measures to avoid abuse of the requirements of FRS10 have been omitted from the requirements proposed for the FRSSE. Would you wish to see any of these requirements added to the FRSSE?
No. We do not regard it as important that these are included in the FRSSE.
Q5. FRS11 reaffirms the principle that fixed assets should be stated at no more than their recoverable amount. Do you agree that this principle should be included in the FRSSE?
Yes. We think it is important that the key provisions of such a standard is included.
In addition we consider the ED's exclusion of the treatment of impairment to revalued items seems wrong and inconsistent. If a small company had impairments of revalued assets they would under these proposals have to charge the whole of any impairment to their profit and loss account. Other companies under FRS11 would charge the impairment of the revalued element to the Statement of Total Recognised Gains and Losses. It seems also a little inconsistent with the current FRSSE which does, for example, deal with the ramifications of revaluations on depreciation.
Q6 Would the inclusion in the FRSSE of indicators of impairment be helpful, or is it unnecessary given the smaller scale of businesses covered by the FRSSE?
We are concerned that in excluding the reference to impairment triggers in the ED, ASB may increase the accounting burden on smaller entities, and not the reverse. Unless the principle of impairment tests only being necessary when indicated by one or more of these trigger factors, is clearly set out in the FRSSE, then it would appear that smaller entities would have to carry out annual impairment tests on all their fixed assets. Some examples might be helpful of possible indicators likely to be relevant to small companies.
Q7. Do you agree that FRS11's degree of detail about the calculation of value in use of income generating units is not necessary for the majority of smaller entities?
Yes. On the other hand, it would be unrealistic for the FRSSE to make no reference to the need to look at income generating units when considering impairment. The realities of businesses large and small is that often future cash flows cannot be estimated for individual assets, but only for businesses. With small companies there is a greater chance that the reporting entity would consist of one indivisible income generating unit. Some reference to this problem could be made without bringing in the full restrictions and panoply of FRS11 in this area.
Q8. It is proposed to include in the revised FRSSE the accounting treatment of costs associated with the year 2000 problem and costs associated with the introduction of the euro. Do you agree?
Yes, we agree with the inclusion of the accounting element of these UITFs. We would in addition like to see the disclosure requirements from Abstract 20 included in the FRSSE. We see this information as of legitimate interest to the users of small company accounts, given the interdependence of businesses in supply chains with respect to preparations for the Year 2000.
Q9. Would you wish to include any of the requirements of UITF abstracts 18, 19 and 22? If so what would you include?
No. UITF's 19 and 22 seem unlikely to apply to many small companies, and UITF18 is a clarification of what would already be implied in SSAP24.
Other comments
Many of the disclosures of FRS11 can be rightly left out of the FRSSE. We consider, however, that entities using the FRSSE should be specifically required to
- charge impairments against operating profit
- disclose the reason for any reversal of an impairment provision
- treat impairments as extra depreciation in the balance sheet, rather than as reductions in cost.