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Comments from ACCA
August 2007

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the above Exposure Draft (ED). The ED was considered at a recent meeting of ACCA's Financial Reporting Committee and I am writing to give you their views which are set out as responses to the questions raised for comment in the ASB's accompanying consultation paper.

However, I must emphasise that discussions are continuing within ACCA which will culminate in our final response to the IASB ED, a copy of which we will send you when ready.

These views reflect both our current views on the ED as a whole, but also how this document, after taking into account those responses, fits into the ASB's convergence plan.

We previously wrote in July 2006, in response to the Board's press release, regarding the 'Future application of reporting requirements for UK companies'. Our response to the consultation paper, reflects the views outlined in that response.

ACCA general comments and overall proposals

We believe that the present label of SME, could be misleading, as the scope for the standard appears to be far broader. The IASB standard in effect encompasses all non publicly accountable entities, as there is no size distinction made in the scope of the proposed standard. As such, we believe that the title of the standard should be changed to reflect this, perhaps replacing SME with NPAE (Non-Publicly Accountable Entity), when applied to the UK and Ireland.

We reiterate our continuing belief in the long term convergence of UK GAAP with IFRS, replacing the current situation whereby the two systems are in use in the UK and Ireland. As we have previously stated, the objectives of the Board's convergence plan with IFRS should not keep the three main tiers 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
• a UK and Ireland form of the standard emerging from the IASB's IFRS for SME document and therefore closely related to IFRS in principle. Throughout this response, we will refer to this tailored standard for short as the 'UK NPAE' standard.

ACCA's responses to questions raised by ASB

Our responses to the five questions set out in the preface to the consultation paper develop these suggestions in more detail and are set out below.

Q1 Do you believe that the proposed IFRS for SMEs would be suitable for 'middle-tier' entities that fall between applying full IFRS and the FRSSE?

We wish to reiterate that our envisaged two tier system would necessarily mean that many of these 'middle-tier' entities would be expected to adopt IFRS in full. The compulsory use of IFRS in the UK/Ireland should be extended 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)

We believe that the above categories reveal the facets of publicly accountable entities, either in terms of size or through the nature of their business.

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 NPAE standard.

All other entities would then fall within the remit of the UK NPAE, which would therefore include the remaining 'middle-tier' firms, along with those entities that are currently applying the FRSSE. These companies would retain an option to use full IFRS. We would point out that the EU simplification proposals might radically reduce the number of companies using FRSSE (see Q3 below).

Q2 If the proposed IFRS for SMEs were to be considered suitable for middle-tier companies, what specific changes do you think the ASB should be proposing; for example is it too long, is there too much cross referencing to full IFRS, are there sufficient simplifications, etc?

1. Size of ED

   We do not consider size to be critical to the standard, and indeed, at just about 250 pages compared to the 2500 pages of full IFRS it represents a considerably shorter document. Furthermore, in the context of our proposals for middle-tier companies, who currently use UK GAAP, the UK NPAE would be a significant reduction in size.

   The text of the ED is mostly based on the same principles for accounting for items as in full IFRS. The text is shortened mainly by dealing with some matters by cross reference and the exclusion of much explanatory material - in the standards and the various appendices (basis for conclusions, application guidance etc.). This is not unreasonable in general, although please refer to point b) below, where we propose that the ED will require additional material to be drafted in from full IFRS in certain circumstances.

   The fact that the basic principles underlying full IFRS have been substantially incorporated into the ED suggests that this document should form the basis of the ASBs convergence plan, along the lines that we have proposed above.

2. Cross reference to full IFRS

   We are not against the cross reference approach of the IFRS for SMEs in principle.

   We believe that there are two main areas when the ED makes reference back to full IFRS, that require consideration

   • Subjects which are thought to be rarely encountered by these entities
   • Optional treatments in full IFRS which are thought to be more complex and so less appropriate to SMEs in general (for example paragraph 16.13).

   We consider it appropriate for a level of cross-reference to full IFRS. The use of cross reference for matters which are likely to be rarely occurring is a reasonable and concise way of dealing with these items, without placing an undue burden on the majority of proposed users of the standard in the UK.

   Specifically, we think the UK NPAE might eliminate the areas where there is no current requirement under IFRS (such as Earnings Per Share), whilst retaining the cross reference for those areas that are genuinely rarely occurring (such as finance leasing as a lessor).

   As for more complex options which are dealt with by cross reference to full IFRS, the main examples of these are set out in BC110 to 115. We believe that the Board needs to consider on an individual basis, when considering the take up of this standard in the UK

   • The fair value alternative for investment property
   • The revaluation alternative for property plant & equipment (PPE)
   • The revaluation alternative for intangible assets
   • Capitalisation of borrowing costs
   • Capitalisation of government grants.

   Certainly in the case of the fair value alternative for investment properties, we would recommend that the adopted standard should include appropriate extracts from IAS 40, given that there is a high potential uptake for this treatment.

   For the revaluation of PPE and Intangibles, we would not consider this to be of particularly significant relevance to UK SMEs, and would therefore keep this option as a cross reference.

   With regards to the capitalisation of borrowing costs, and in context of the proposed amendments to IAS 23 to prohibit the expense model, we believe that the option to choose either the expense model or the capitalisation model should be retained, with the capitalisation model being retained as a cross reference to IFRS. Any proposed elimination of the expense model is likely to prove quite burdensome for preparers in SMEs, without any noticeable benefits.

   The Board could retain the option for capitalisation of government grants as a cross reference.

3. Recognition and measurement simplification

   The main simplifications of recognition and measurement are explained in BC70 to BC93 of the ED. In general the level of simplification appears to be reasonable, and we are broadly in favour of them (eg goodwill impairment).

   We have a number of suggestions for further simplification (eg deferred tax) and on some amendments we do not support (eg impairment) which will be set out in our letter to the IASB. In our view the ASB should consider the final version of the standard when available after the consultation responses have been incorporated (or otherwise). While we would not rule out recognition and measurement differences between the final IFRS for SMEs and the UK NPAE, we think these would need to be considered very carefully and would need to be relatively few and or quite distinct matters.

Q3 Do you believe that the proposed IFRS for SMEs would be a suitable replacement for the FRSSE?

As stated in our response to question 1 above, we believe that the long term goal for the Board, should be to develop a standard based on the IFRS for SMEs, which would encompass all non-publicly accountable entities, including those that currently apply the FRSSE.

Both the IFRS for SMEs and the FRSSE represent a condensation of the principles of the main standards. We do not see any point in having two distinctly different versions, although we would see that there might be some further derogation from the UK NPAE when it comes to application by small or micro companies.

We have considered the differences between the FRSSE and the IFRS for SMEs outlined in the Board's consultation paper and comment on these below. Other significant recognition and measurement differences are few, and it is evident that the IFRS for SMEs includes some helpful simplifications not in the FRSSE (eg use of the cost model for investment properties). We are of the opinion that the disclosure differences noted in the consultation paper are overstated in terms of practical impact.

We consider the particular hurdles for the Board in reconciling the two standards would include

• Consolidation requirements
• Financial instruments
• Company law

Consolidation is not covered by the FRSSE because it is not required by law for small companies. We would suggest that the UK NPAE should include this aspect, but retain an option for smaller companies not to consolidate, similar to that currently within the FRSSE.

The current FRSSE has limited guidance on financial instruments due to the nature of the entities which are in scope for this standard. The reference to financial instruments within the FRSSE, such as in sections 6.30 and 12 are few and do not go much beyond simple definitions.

We consider that the additional guidance in the IFRS for SMEs should be incorporated into the UK NPAE. The guidance on financial instruments in the SME standard is relatively well structured to facilitate understanding, but could be improved further by emphasising historical cost and commonly occurring types of financial instrument. We would again propose the adoption of this element of the standard subject to those improvements.

The FRSSE currently incorporates both company law and standards for small entities, effectively making it a 'one stop shop' for those entities currently using this standard.

We believe that the Board should therefore consider adopting a standard for the UK/Ireland on the basis of the SME standard, which would apply to all entities (other than those required to use full IFRS), replacing existing UK full standards and the FRSSE. This should include the sections related to consolidation and other key elements currently missing from the FRSSE but without the company law requirements, as it would be too complex to incorporate the requirements for the varying size of entities.

We do however acknowledge that before any final standard is published by the ASB, further research needs to be conducted, on users' needs. The clear distinction between the needs of the users for financial statements for publicly accountable entities and those for non publicly accountable entities should be reflected in the differing recognition and measurement principles - a point clearly indicated by the IASB in the ED. However, we believe that further changes need to be made, and expect additional examination to be conducted in order to ascertain what changes would best serve users of micro entities' financial statements.

In this context, we also draw to the Board's attention to the potential impact of the EU simplification proposal, whereby general purpose financial statements (and so accounting standards) would not be necessary for micro sized entities. Such entities would only be preparing accounts for tax purposes or to meet the specific shareholder requirements.

We believe that the further analysis of user needs will not hamper progress, as we do not envisage the IFRS for SMEs being finalised for over a year, and there should be further consultation on the UK NPAE. However, we believe that the Board should take this opportunity to set forth a clear strategy on the aims and scope for a UK NPAE, and how it intends to replace the existing FRSSE.

Q4 If the proposed IFRS for SMEs were to be considered a suitable basis for the FRSSE, what specific changes do you think the ASB should be proposing; for example is it too long, is there too much cross reference to full IFRS, are there sufficient simplifications, etc?

Our response to question 2 in relation to the ED being a suitable basis for middle tier firms, certainly holds true in its broadest sense for FRSSE using entities also.

As regards the question of cross reference in this context, we would point out that the FRSSE does not preclude cross reference to full UK GAAP, and as such we do not consider the ED approach to be a major new imposition on these users.

As set out in our response to question 3, we believe that further simplification (through specific exemptions or more simple options) to a UK NPAE may be required for small entities which currently use the FRSSE.

Q5 What do you consider should be the costs and benefits of the ASB adopting the proposed IFRS for SMEs either as i) a standard for 'middle tier' companies or ii) a replacement for the FRSSE? Are there any specific areas in the ED that would, in your view, impose particular costs on companies? It would be helpful if any significant costs that would arise or any of the specific areas could be identified and quantified?

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

• Costs for a change of accounting platforms are unavoidable. A move to the UK NPAE would be a significant one-off expense, which will include changes to systems as well as the education and training requirements. However, we don not consider that the current UK reporting requirements can simply stand still, so some costs are inevitable.
• Although the burden on smaller firms is likely to be more significant proportionally, it may well be that some of the costs would be spread over longer periods given that the initial costs will be borne by their third party accountants, or by the accounting software providers for their accounting systems, both of which smaller firms are reliant on in their financial reporting processes.
• In the long term, alignment of UK accounting standards with IFRS especially in terms of recognition and measurement, will achieve savings in training and education together with the benefits of international comparability.
• However, 'cost of capital' type benefits flowing from more comparable financial reporting across borders will be harder to assess for these companies than for listed entities.

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