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Comments fromACCA
September 2005

ACCA is pleased to have this opportunity to comment on the above exposure draft. The consultation document has formed a helpful focus for the debate on the convergence of UK standards and IFRS.

Our main observations are as follows.

• Following the 2005 transition of the accounts of listed companies to IFRS, ASB should focus its standard setting activities on the remit of the reporting by other entities.
  
• Convergence with IFRS should progress. However now that the IASB is proceeding with its project of standards for non-publicly accountable entities (NPAE), ASB should take into account likely developments in this area in developing UK standards which would appear to be for a similar constituency. IASB is consulting at the moment on where significant recognition and measurement differences might be made compared to full IFRS. UK convergence on these areas might be delayed until the likely form of the IASB NPAE standards is clearer. This still leaves scope we believe for significant convergence to proceed.
  
• ASB should consider whether it could allow a ‘big bang’ conversion option for companies using UK standards as an alternative to a pattern of continuing changes and restatement lasting over several years.
  
• ASB should channel via EFRAG its main contribution of comment and proactive research on new projects to the IASB. EFRAG should be the main technical voice on these issues given its role in advising on the endorsement of IFRS for use by European listed companies.
  
• ASB can act as a gathering point for UK views on the development of IFRS, though its activities will need to change to fit with this role.

ACCA’s responses to the matters raised by ASB

a) Channel of communication of UK views to IASB

The ASB believes it should continue to provide a focus for UK constituents to ensure that their views are properly considered in the international development of accounting standards. This suggested role is not standard setting as such and so need not be filled by a standard setter, but it is more acting as a forum for UK views. We note that UK bodies are taking part in the IASB’s due process (by submitting comment letters for example) and therefore they do not need ASB to act as intermediary in that process. There is however scope no doubt for UK input to the IASB to be both extended and its quality improved.

In our view ASB may currently be well placed to carry out this forum role. It is part of the existing structure of developing standards and has experienced staff in place. Interaction with IASB is best done by ASB as the national body with the power to set the standards or endorse IFRS for use.

If this is to be a major role for ASB then a change of approach may be needed, with ASB engaging more with UK and Ireland constituents. It should aim to stimulate directly awareness of the issues, discussion of the implications and of appropriate solutions. Seminars and roundtable discussions bringing together the accountancy profession, preparers and users might prove to be useful means of doing this. EFRAG at a European level has helped debate on IASB exposure drafts by making its tentative views available at an early stage in the IASB consultative period. ASB might similarly issue staff papers commenting on the IASB proposals, in addition to the Board’s official view which has principally focussed on how IASB’s proposals might be translated into UK GAAP. We would encourage the ASB to experiment with some of these suggestions.

(b) Contribute to the development of IFRS

ASB should continue to provide its own input to, and comments on, the work of the IASB. In addition it should maximise its influence on EFRAG’s input and comments. The EU endorses IFRS based on EFRAG’s technical advice to the Commission and member states. Interaction with IASB on the technical content of the standards as they affect listed companies would be best done by EFRAG, which as a key component of endorsement ultimately will have more influence with IASB than national standard setters. EFRAG however needs the experience and resources of national standard setters, and of the ASB in particular, to help it in tackling the issues with IASB. ASB should therefore devote more of its resources into this interaction, in co-operation with the other EU national standard setters.

We are aware that a change in the status and funding of EFRAG may occur including a move to more government funding of EFRAG. This should not of itself compromise its independent status or make it impossible for ASB to act with it. Independence from capital market participants is of more significance than independence from governmental bodies.

(c) Converging UK standards with IFRS

We note the current proposals set out in the ASB’s Technical Plan to achieve complete convergence with IFRS over 3 years (that is by 2008) which represents a speeding up on the previous proposals in 2004. Complete convergence would be such that UK standards are identical to full IFRS. The implication of the plan would be that in 2008 there might be the following systems of accounting standards in use in the UK.

• Full IFRS by listed companies’ consolidated accounts and as an option by other companies.
• An identical set of UK standards for use by unlisted companies.
• IASB’s set of standards for NPAEs (which might or might not be legally available).
• The FRSSE for use by any qualifying UK companies (for instance those with a turnover below £5.6 million).

This would appear to involve unnecessary duplication and complexity.

If this plan of convergence were to proceed ASB should give companies the option to convert from existing UK standards in a ‘big bang’ at the end of this process, in addition to the gradual transition approach they are currently pursuing which implies an extended period of adjustments to the standards and therefore of restatements of accounts.

We consider, however, IASB’s decision to develop a set of standards for NPAE should be highly significant to ASB’s convergence plan because:

• it is an acceptance by IASB that full IFRS are not suitable for NPAEs
• the constituency of companies using UK standards are now entirely NPAEs.

It would be undesirable for UK NPAEs to make major shifts in accounting as a result of convergence only for some of these changes to then be deemed as inappropriate by IASB. The problem is that the shape of the future NPAE standards are not yet clear in terms of:

• recognition and measurement differences with full IFRS
• the extent of disclosure reductions
• style, length, complexity.

Our recommendation to the ASB is therefore to continue with a convergence programme, but direct it away from areas where either:

• recognition and measurement might be adjusted significantly by the IASB NPAE standards (based on the current consultation by IASB) or
• areas of recognition and measurement changes that are new or considered difficult in full IFRS where a period of delay in implementation by UK NPAEs might be reasonable.

The ASB’s Technical Plan envisages groupings of convergence standards. In terms of those groupings progress on convergence might therefore best be on:

• revenue recognition and inventory (Table 3)
• presentation (Table 4)
• tangible fixed assets (Table 5)
• related parties from Table 8.

Convergence should therefore be delayed for now for example on business combinations, consolidations, financial instruments and tax.

In terms of the extent of adaptations of IFRS for UK convergence, disclosure reductions should be made where appropriate for wholly-owned subsidiaries and for a parent company’s unconsolidated statements. Some options available in IFRS might be eliminated for application in the UK, for instance the cost option for investment property. We agree with the proposed approach for public benefit entities.

When the shape of the IASB’s NPAE standards is clearer, the ASB might be able to use these to form the basis for converging UK standards, possibly for all companies without the need for the FRSSE. If so then in 2008 the UK might be using just:

• IFRS by listed companies and with the option for anyone else
• UK standards based on the IASB NPAE standards.

The need for ASB input into the shape of the NPAE standards is therefore vital both for the development of UK standards and also as the developer of the FRSSE their input would seem particularly helpful.

Statements of Recommended Practice (SORP) are amplification and recommended practice in applying accounting standards to particular sectors. ASB’s activities in relation to SORPs can only apply in relation to UK standards. The proposed policy in relation to SORPs set out in Section 5 of the seems reasonable. In sectors where most companies are using IFRS then probably a SORP is not required. In sectors where adoption is mixed the SORP will principally have to relate to UK standards (converged or not) but should make some reference to differences between UK standards and IFRS. There will be a number of sectors (particularly for public benefit entities) where all entities will be using UK standards.

(d) Interpretations of UK standards based on IFRS

We agree that ASB should not issue these, but divert emerging issues to IFRIC.

(e) The issuing of UITF ‘views’

If there is a real issue of matters not being addressed internationally, this approach seems reasonable. It is not clear, however, that there is such a problem even after EU companies have started their transition process. ASB should again co-operate across the EU via EFRAG as this will be primarily a listed company issue.

Our other comments

The draft policy statement notes ASB’s role in developing the Operating & Financial Review by the issue of the first Reporting Standard (RS1). ASB should not necessarily limit its activities in relation to other forms of financial reporting to RS1 but should consider adding further guidance for example on:

• risk reporting
• alternative financial performance measures
• non-financial performance measures
• sustainability reporting at some point.

The ASB’s role has been and will be changing in a number of respects noted above. For instance it has been switching focus away from standard setting for listed companies to one of setting standards for unlisted entities, from developing its own standards to contributing to the development of the standards at an international level, and away from standard setting to acting as a communication conduit for UK financial reporting interests. Changing roles require a reconsideration of the experience and expertise among its board members and staff for instance in the light of new roles.

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