Amendments to the Financial Reporting Standard for Smaller Entities (FRSSE)
ACCA is pleased to have this opportunity to comment on the above exposure draft of amendments to the Financial Reporting Standard for Smaller Entities (FRSSE).
UITF40
We find that the ASB’s due process has been significantly at fault in regard to incorporating the interpretation UITF40 into the FRSSE and has been characterised by a lack of openness and transparency. The inclusion of UITF40 into the FRSSE in the first place was via a non-mandatory appendix because it had been subject to no public consultation. Paragraph 27 of Appendix IV of the FRSSE stated “The Board will consult on the incorporation of this [UITF 40] and subsequent Abstracts for the next update.” In our view ASB have not fulfilled that undertaking by asking no question about the change in status of the UITF40 material in its invitation to comment on this revision.
The ASB has been well aware of the controversial nature of the interpretation. The current proposed revision claims that the change is of no more significance than avoiding any doubt about the applicability of UITF40 to FRSSE entities. We disagree with that claim. Indeed in a meeting in July 2005 ASB confirmed to us the non-mandatory nature of the UITF40 material in Appendix III.
We consider it would be particularly inappropriate to apply UITF40 to smaller entities. The costs that would be involved in terms of records to support the calculations for UITF40 seem significant, and by contrast the benefit to the financial reporting of smaller entities very small.
We consider the accounting implied by UITF40 will be of little benefit to the financial reporting of smaller entities providing services
- The extra asset is uninvoiced accrued income which is probably of little interest to users of the reports looking for readily realisable assets supporting the liquidity position of the entities, and may indeed be a confusing factor
- The pattern of profits if adjusted for this change in accounting basis are unlikely to be significantly more reliable a guide to performance than those produced currently. There are gains from being more related to work done in the period, but losses from the less reliable measures involving subjective estimations of contract activity, time spent and costs to complete.
There will be significant extra time (and therefore costs) involved in the preparation of financial statements, particularly for smaller entities for the following reasons.
- The reporting of revenue recognition will have moved further away from the recording of the transactions (invoicing) which involves a series of adjustments to the accounting records
- The estimation of time spent on contracts will require the development of time recording systems which may not currently exist.
- There would need to be a contract-by-contract evaluation of the degree of completion, costs to complete, potential variations, estimation of attributable profit and of the amounts ultimately recoverable.
We note ASB’s reference elsewhere to the preparation of Regulatory Impact Assessments (RIA) in connection with other consultations and that none has been prepared in this case. Had an RIA been carried out in this case, it would have highlighted this imbalance between costs and benefits in our view.
ASB’s questions raised for comment
Q1. Share based payment
The issue is likely to be reasonably uncommon for smaller entities since their shares have no market and in most cases there is no prospect of one.
We find the proposed new Appendix III to be of little or no help. It sets out concisely the principles from FRS20 of how to account for share based payments, but with none of the guidance to allow practical application. The accounting involved is based on fair valuation of shares or options on shares and there is no equivalent accounting any where else in the FRSSE. Inevitably users of the FRSSE would have to refer to FRS20 to try to understand how to put the principles into effect.
Our preferred solution therefore for this case of complex accounting that would rarely apply to FRSSE entities, is that there should be a specific cross reference to FRS20 with some guidance. The guidance should:
- emphasise the requirement of paragraph 24 in FRS20 that where a reliable fair value of the shares/options granted is not available, an intrinsic value measure (equivalent to the discount on the market price) should be used instead and spread as a cost over the period until the option is exercised. This must be the most common case for the few FRSSE entities that do give shares or options to employees
- specify more clearly the disclosures that should be made by FRSSE entities. We find clause (f) in the proposed Appendix III too vague and potentially leaves FRSSE entities having to provide all of FRS20’s disclosures.
A specific cross reference seems better than relying on the general requirement (in paragraph 4 of the status of the FRSSE section) to consider guidance elsewhere for transactions not covered by the FRSSE.
Q2. Any other amendments to the FRSSE
We accept that the other changes to the main standards that have occurred in the period do not need to be reflected in the FRSSE.
Q3. Debt/equity examples
Some examples might be helpful, including for instance those on preference shares (from paragraph 18 of FRS25) and some from IFRIC2 on co-operatives and mutuals.
Q4. Company law changes
We accept the proposed revisions.
Q5. Scope
We accept the proposed scope change to avoid including the full or partial impact of FRS25 and 26 (financial instruments) in the FRSSE.
Q6. Presentational changes
The most significant of these would be the exclusion from the text of the FRSSE of Appendices V, VI and VII which set out the derivation of the FRSSE from ‘big GAAP’ and from company law, amounting to over 80 pages of text. We agree that it is unnecessary for this material to be included in each copy of the FRSSE, if there is a reference to it being freely available on the ASB website and in a separate booklet when needed.