by Dr Matthew Stroh, Associate Director, Assurance
The ASB (the UK’s Accounting Standards Board) has taken an unexpected decision at its latest Board meeting, which marks a significant shift in its proposals for the future direction of UK GAAP, and means that the UK version of the IFRS for small and medium sized entities might well have a much wider application than originally expected. Until now, their proposals had been based on a three tier structure for UK financial reporting (discussed further here):
• Companies Act small companies applying the current FRSSE (the Financial Reporting Standard for Small Entities);
• ‘publicly accountable’ entities applying full IFRS; and
• the middle tier applying the ASB’s interpretation of the IFRS for SMEs, entitled the FRSME.
After receiving nearly 300 comment letters on these proposals the ASB has responded by announcing its change in direction. One of the most controversial areas in the original proposals was the definition of ‘public accountability,’ but rather than clarifying the definition the ASB has decided that it will remove the Tier 1 requirement completely as discussed by my colleague on this blog . This means that all non-small companies are likely to have to apply the FRSME and, in my view, is really going to stretch the team involved in re-drafting the FRSME as they have to accommodate a much wider range of applications
I, like a number of commentators, had concerns about the number of widely-adopted UK accounting policy choices that the exposure draft of the FRSME withdrew. For example, the FRSME removed the option to revalue fixed assets and did not allow borrowing costs to be capitalised, which will significantly change the shape of many of my clients’ accounts. The notes from the Board meeting suggest that these concerns have been taken on board, with the ASB asking its staff to redraft the FRSME to permit accounting policy options in current UK GAAP where they align with EU-adopted IFRS.
Whilst welcome in many respects, this approach means that it is not clear, however, what will happen to other areas of accounting policy choice, such as the treatment of development costs, because
• these can optionally be capitalised in UK GAAP,
• have to be capitalised in full IFRS,
• but the draft FRSME required them to be expensed.
I do hope that the UK GAAP option is reinstated, but this would be at odds with full IFRS so seems unlikely unless the ASB has another change of heart.
What does all this mean? Well, the ASB’s recent decision means that they will now need to modify significantly the IFRS for SMEs when it’s adopted as the UK FRSME in order to accommodate these accounting policy options that they wish to see reinstated. Whilst their new approach removes some of the most problematic differences between the FRSME and current UK accounting standards, it puts significantly more pressure on the timetable. In that regard, the ASB has also decided to defer the effective date by a further six months, to accounting periods beginning on or after 1 January 2014.
I fear that the reintroduction of such options – and the amount of redrafting required – exposes the limitation of the FRSME and the IFRS for SMEs on which it is based. By their very nature, as simplified versions of full IFRS, the standards could not cater for all eventualities and had to take away some accounting policy options in order to achieve the aim of simplification. By reintroducing the options, the FRSME will have to become more complex and will move further away from the IFRS for SMEs, which will add to the burden of keeping it updated in future years.
Whilst the ASB’s response to commentators is welcome in that it proves that they are listening, I am concerned that it significantly adds to the uncertainty in an already unsettling period for many businesses. Adopting the FRSME/IFRS is significant in the context of long-term earn-out arrangements, loan covenants and, inter alia, bonus schemes, so the impact of delaying changes and introducing uncertainty should not be under-estimated.