Public accountability bites the dust?

Friday, June 24, 2011 | Posted by: Grant Thornton
Categories: Future of UK GAAP | Tags: IFRS, IFRS for SMEs, UK GAAP, SMEs, ASB

It seems that the ASB has had a dramatic change of heart on the issue of public accountability and the adoption of ‘full’ IFRS.

In the published draft, the proposed tier structure required that businesses meeting the ‘publicly accountable’ definition would be in Tier 1 and required to adopt ‘full’ EU-adopted IFRS. Non-publicly accountable companies would then fall into Tier 2, and apply the FRSME, based on the IFRS for SMEs.

But the notes from the June Board meeting suggest that the tier structure has been thrown away. The tentative decision is that the requirement for publicly accountable entities to apply full IFRS will be removed from the new standards.

This issue of public accountability has proved controversial, with complaints about cost from those such as credit unions who would be pushed into IFRS, and much debate about how the definition would apply in practice. And extending the use of IFRS beyond the requirements set out in EU law could be considered ‘gold-plating’, currently a dirty word in political circles.

However, personally I’m not convinced that this is the right decision. FRSME accounts will have significantly less information than current UK GAAP accounts, particularly for listed companies which currently have enhanced requirements (as they are required to apply FRS 26 etc). And the FRSME is based on the IFRS for SMEs which explicitly states that it isn’t suitable for publicly accountable companies. Is it really wise to allow a listed single entity or a building society to prepare financial statements using a standard which was never designed with the users of such accounts in mind? Is EU law so well-drafted that ‘gold-plating’ is always bad?

Of course, the listing authorities and regulators, such as the FSA, will still have the power to require the use of IFRS - and hopefully they will carefully consider whether use of the FRSME would provide sufficient information to allow investors to make fully informed decisions. Personally, I doubt whether it does - but do you agree?