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Comments from ACCA
July 2006

ACCA is pleased to have this opportunity to comment on the issues raised in the press release (PN289) of 10 May on the above subject. The issues were considered at a recent meeting of ACCA’s Financial Reporting Committee.

Overall proposals

The objectives of ASB’s convergence plan with IFRS should not keep the three main systems of accounting standards that we currently have – IFRS, full UK standards and the FRSSE. Instead there should be two main systems of standards in future:

• IFRS
• UK form of the standard emerging from the IASB’s so-called SME project and therefore closely related to IFRS.

The compulsory use of IFRS should be extended in the UK/Ireland to:

• all other sorts of quoted companies – those that do not need to prepare consolidated accounts and those quoted on other markets
• financial fiduciaries
• very large private entities (perhaps based on the SSAP25 formulation of ten times the statutory definition of a medium-sized company)
• subsidiaries in groups where the parent company prepares IFRS accounts (with a list of available disclosure reductions)

There should be a standard developed for the UK/Ireland on the basis of the IASB SME standard which would apply to all other entities, replacing existing UK full standards and the FRSSE. These companies would retain an option to use full IFRS.

Not for profit entities should comply with this UK standard using the guidance of relevant SORPs.

We recognise that the ASB cannot go all the way in this direction until the shape and nature of the IASB’s SME standard is finalised and judged appropriate. The exposure draft of that standard is expected in the next few months. We do think that a strategy can be set now on the assumption that they will be appropriate.

Responses to issues raised by ASB

Our responses to the four tentative proposals set out in the press release develop these suggestions in more detail and are set out below.

Extend use of IFRS to publicly accountable entities

We support the idea that all quoted companies should be required to use IFRS. We consider that this was the spirit of the European Union’s policy and that it is a quirk of the EU regulation that they have not been obliged to do so. We note that the Alternative Investment Market is already extending IFRS to its listed companies.

As to other sorts of publicly accountable entities, IASB seem to be intending to treat financial fiduciaries such as banks and insurance companies as publicly accountable. Any IASB SME standards may well therefore assume that standards that might be particularly relevant to them, such as insurance contracts and aspects of financial instruments, will not be needed. Financial fiduciaries probably therefore should be included by ASB as publicly accountable entities and required to use full IFRS. We are, however, aware that there are a significant number of small financial fiduciaries including building societies, credit unions and insurance brokers who might find this a burdensome requirement. They should be given a full opportunity to represent their views before any decision is made.

The second part of the definition of publicly accountable entities refers to ‘public service responsibility’. This term appears to imply either public sector bodies or utilities, but could extend widely beyond that to entities contracting with government to provide services. There seems much less reason for inclusion of these kinds of entities by ASB in the category applying full IFRS.

• Public sector requirements are set by the Treasury advised by FRAB
• We are not persuaded that PFI contractors should be obliged to file IFRS accounts, much less contractors providing such services as school meals.

For entities such as charities (especially those soliciting donations) or housing associations there is significant public accountability and interest from outside stakeholders. Full IFRS, however, would be inappropriate for them because those standards are designed for profit-oriented entities. For these entities the relevant SORPs should continue to be the key means of setting financial reporting and these would be backed up by, and remain consistent with, the UK standard based on the IASB’s “SME” standard.

Extend FRSSE to medium-sized entities

Were the current FRSSE to be extended to medium-sized entities there might have to be significant changes to it, the main ones being that:

• Consolidation is not covered by the FRSSE because it is not required by law for small companies. The current Companies Bill proposes to require consolidation by medium-sized groups. Extending the scope would mean adding a wide body of material to the FRSSE covering consolidation, associates, JVs and business combinations.
  
  
• The FRSSE currently incorporates both company law and standards for small entities. If it is broadened in scope the company law elements should probably be removed as differing requirements for small and for medium-sized would make the document more complex and eliminate any advantage the ‘one-stop-shop’ approach has had.

As noted above the IASB SME standards may be available relatively shortly and seem likely to be a suitable basis for most non-publicly accountable UK companies in future.

We therefore see little point in the ASB proceeding with this extension of the FRSSE given the changes involved. Instead ASB should produce a UK version of the IASB SME standards, including the standards related to consolidation but without the company law requirements, to replace both the FRSSE and full UK standards (see below).

UK subsidiaries of IFRS groups should use IFRS with disclosure reductions/modifications

We support this idea. IFRS are not designed for the individual accounts of group companies. Where the parent company uses IFRS for its group accounts, the individual subsidiaries will in any case be preparing IFRS financial information for group consolidation purposes. Statutory accounts based on IFRS would not therefore be imposing a burden on these subsidiary companies. We envisage that the existing disclosure reductions for subsidiaries in UK GAAP might continue, for example related party transactions and cash flow statements. There might also be appropriate reductions in terms of financial instrument disclosure.

The exact status of the accounting standards being complied with would have to be made clear – not IFRS, but a form of converged UK standards. These standards could take the form presumably of a requirement to follow all IFRS, but with a list of disclosure exemptions.

No suggestions yet for ‘Gap’ companies

We do not support the continued existence of a third ‘middle’ layer corresponding to existing main UK standards.

In the future as noted above there should be two main systems for UK companies. IFRS for publicly accountable entities (and subsidiaries as noted above) with UK standards based on the IASB SME standards for everyone else.

We note that the IASB intend that, while leaving the definition of an SME to national jurisdictions, economically significant entities should be included among those that are publicly accountable. We agree that very large privately-held entities in the UK should be obliged to comply with IFRS. We accept that there is a legitimate wider interest in such entities and note that the relative cost of compliance for such entities would be moderate.

For all other companies we expect that UK standards based on the IASB “SME” standards should suffice. Our main reasons for this are

• A key factor with the IASB in determining the disclosure reductions and any recognition and measurement differences will be different user needs. Different user needs are the critical distinction between publicly and non-publicly accountable entities. The size of an entity is only indirectly related to, or is a proxy measure for, different user needs.
  
  
• The IASB SME standards seem likely to provide a comprehensive set of high quality standards omitting relatively few applicable topics and with relatively few recognition and measurement differences compared to full IFRS. In this way it would be similar to the existing FRSSE and its relationship with full UK standards.
  
  
• The IASB standards however are not going to be the same as the FRSSE – they are likely to cover a more complete range of subjects (for example financial instruments, consolidation and cash flow statements).
  
• In the IASB SME standards (as in the FRSSE)  there seems likely to be a ‘fall back’ clause to the main standards if any topic is not dealt with.
  
  
• The IASB SME standards need not be adopted without any modification or addition. They would be a blueprint and ASB could make additions or changes to them for the UK context.
  
  
• Complying with full IFRS will remain an option for all UK companies.

Costs and benefits

It is difficult to assess the costs and benefits of the different solutions. We would, however, make the following limited observations.

• Change costs money, but some change is unavoidable. The current UK reporting requirements cannot simply stand still, so it is a question of choosing between alternative changes.
  
  
• Maintaining UK GAAP as the third middle layer would probably be the most expensive option.
  
  
• Alignment of UK accounting standards with IFRS especially in terms of recognition and measurement, will achieve savings in training and education.
  
  
• Cost of capital type benefits from more comparable financial reporting will be harder to assess for these companies than for listed.
  

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