New UK GAAP: practitioner update

The Accounting Council of the Financial Reporting Council (FRC) has held two meetings in the month of July relating to the new Financial Reporting Standard applicable in the UK and Republic of Ireland (draft FRS 102) which is expected to be issued as a final standard towards the end of 2012. This article provides a brief summary of those meetings:

Meeting held on 5 July 2012

During this meeting, the Accounting Council considered a number of points in relation to draft FRS 102, namely:

• the principles and guidelines for amending IFRS for SMEs in the development of FRS 102;
• accounting for biological assets;
• consolidation sweep issues including the accounting requirements for Employee Stock Ownership Plans (ESOPs) and Employee Benefit Trusts (EBTs);
• financial reporting by pension schemes;
• revised definitions of performance-related conditions and restrictions in relation to income and liability recognition;
• the consideration of going concern; and
• insurance accounting.

Amendment of IFRS for SMEs and the development of FRS 102

The Accounting Council recommended that any changes to permissible accounting treatments which exist in FRSs at the date of transition are aligned with EU-adopted IFRS and that these changes should be consistent with EU-adopted IFRS.  In situations where an alternative treatment (i.e. a non-IFRS-based solution) will clearly enable the objective of providing high-quality and understandable financial reporting, suited to the size and complexity of the reporting entity, to be achieved then this should be the solution, though elements of an IFRS-based solution should still be retained.

In considering the amendments to IFRS for SMEs, the Accounting Council also recommended to FRC that existing exemptions in companies legislation should be made, wherever possible, with the objective here to be to avoid the use of ‘gold-plating’.

Finally, the Accounting Council have agreed to tentatively recommend to the FRC that changes should be made to provide clarification (with reference to EU-adopted IFRS) which will avoid unnecessary diversity in practice.

Accounting for biological assets

Biological assets are living animals and plants from which harvested produce is obtained and are dealt with in Section 34 to draft FRS 102 ‘Specialised Activities’.  The Accounting Council have tentatively agreed to recommend to the FRC that reporting entities are given an accounting policy choice on a class-by-class basis for their biological assets.  The tentative recommendation is that reporting entities that have biological assets may choose between the fair value model and the cost model which will replace paragraph 34.2(a) which says that a reporting entity will use the fair value model in paragraphs 34.4 to 34.7 for biological assets for which fair value can be obtained without undue cost or effort.  This would reduce the onerous requirement to obtain fair values for biological assets at each reporting period.

Consolidation issues

Sometimes entities may be involved in a step acquisition (where a investor acquires additional shares in an investee in stages); conversely an entity may be involved in partial disposals.  When a reporting entity is involved in a partial disposal (i.e. where the parent reduces its holding in a subsidiary).  The Accounting Council have tentatively agreed to recommend to FRC that any remaining interest following a partial disposal need not be revalued to fair value, which goes against the principles in IFRS for SMEs and EU-adopted IFRS 3 Business Combinations.  Where step acquisitions are concerned, the Accounting Council are leaning towards the possibility of using the current UK GAAP requirements in accounting for such, but this issue is still on the agenda for further discussion in subsequent meetings.

There is a considerable amount of interpretative material that have been developed for IFRS, and I feel it would be helpful, for consistency purposes if nothing else, if the draft FRS 102 were to contain an explicit requirement in this area.

ESOPs and EBTs

The Accounting Council have tentatively agreed to recommend to FRC that ESOPs and EBTs should not be treated as subsidiaries of the controlling entities (as the previous draft FRS 102 implied).  Instead the Accounting Council have tentatively agreed to recommend to FRC that such ESOPs and EBTs are accounting for consistently in accordance with existing UK requirements which would mean the assets and liabilities of an ESOP or EBT would be treated as assets and liabilities of the sponsoring entity which is a move closer to current UK GAAP treatment.

The Accounting Council also tentatively agreed to recommend that FRC continues to retain the definitions of ‘control’, ‘parent’ and ‘subsidiary’ that are contained within IFRS for SMEs despite the fact that in some circumstances, these could be wider than the definitions currently in companies legislation.

Pension schemes

The Accounting Council have tentatively reaffirmed that pension schemes will fall under the umbrella of a financial institution.  This has caused an element of controversy within the profession but, in recognition, the Accounting Council have tentatively decided to recommend that pension schemes should not be required to comply with the disclosure requirements for financial institutions.  The ‘work around’ to this issue would be that that relevant financial instruments disclosures would be added to a separate section on accounting and reporting by pension schemes.

A final tentative recommendation by the Accounting Council is that they would advise FRC to delete the requirement for a defined contribution pension plan to provide a description of its funding policy.

Performance-related conditions and restrictions

The Accounting Council have tentatively agreed to recommend revised definitions of ‘performance-related conditions;’ and ‘restrictions’ to the FRC.

The revised definition of a performance-related condition is:

‘A condition that requires the performance of a particular level of service or units of output to be delivered, with payment of, or entitlement to, the resources conditional on that performance.’

The definition of a ‘restriction’ is:

‘A requirement that limits or directs the purpose for which a resource may be used which does not meet the definition of a performance-related condition’.

Going concern

The Accounting Council have tentatively agreed to recommend that the FRC make no changes to the draft FRS 102 in relation to going concern (either in relation to disclosure requirements where there are significant uncertainties, or the period which must be reviewed in undertaking an assessment of going concern).

Insurance accounting

This area is very industry-specific, so may not ultimately affect many AccountingWEB readers or practitioners who deal with smaller companies in the UK, but the Accounting Council have tentatively agreed to recommend that the FRC adopt an interim position for insurance accounting that IFRS 4 Phase II should be regarded as the long-term option for listed companies and qualifying subsidiaries and a recommendation that a solution for companies applying FRS 102 should be considered once IFRS 4 Phase II is complete.

The Accounting Council have also tentatively agreed to recommend to the FRC to introduce IFRS 4 Phase I into FRS 102 which will require insurance companies to take into account the definition of insurance contracts contained within IFRS 4 and review the accounting requirements in UK GAAP in the light of IFRS 4 Phase II once it is implemented.

Council have also deferred a decision as to whether, or not, to retain FRS 27 Life Assurance in the new UK GAAP.

Meeting held on 26 July 2012

Financial institutions

The Accounting Council have tentatively agreed to recommend to the FRC that ‘broker-dealers’ be added to the list of financial institutions.

FRS 101 ‘Reduced disclosure framework’

The Accounting Council have tentatively agreed to recommend to the FRC that early application of FRS 101 should be permitted without any restriction but deferred discussion of the restriction for public benefit entities applying a SoRP to a future meeting.

The Accounting Council have tentatively agreed to recommend an amendment to the FRC to clarify that disclosure exemptions are available for share-based payment arrangements relating to equity instruments in another group entity, but not where the equity instruments are of the entity itself.

The Accounting Council have also tentatively agreed to recommend to the FRC that financial institutions who are qualifying entities applying the reduced disclosure framework should receive exemptions from disclosure relating to IFRS 13 Fair Value Measurement where they do not relate to financial instruments.

Interim reports

The Accounting Council have tentatively agreed to recommend to the FRC that reference should not be made in draft FRS 102 to the preparation of ‘interim reports’, but instead the ASB statement ‘Half-yearly financial reports’ should be revised with a cross-reference to IAS 34 Interim Financial Reporting.

Financial statement formats

The Accounting Council have tentatively decided to recommend that the draft FRS 102 continues to allow financial statements to be prepared under any of the formats permitted in companies legislation and also permit the use of the LLP formats in the LLP regulations.

Group disclosures

Where the parent company is not a financial institution, but a subsidiary is a financial institution and the subsidiary is material to the group, the Accounting Council have tentatively agreed to recommend to the FRC that the financial institution disclosures should be provided in the consolidated financial statements.  The Accounting Council also tentatively decided to recommend that draft FRS 102 include a fair value option enabling investments, other than those held in equities, with a readily ascertainable market value, to be held at fair value provided that there are no legal issues or unintended consequences.

Grants and donations

The Accounting Council have tentatively agreed to recommend to the FRC that accrual accounting for grants should only be available for government grants, as opposed to all grants.  This recommendation would enable grant accounting to be consistent with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.  Grants, other than government grants, would instead be accounted for using the performance method.

Pension liabilities

The Accounting Council have tentatively agreed to recommend to the FRC that draft FRS 102 should not provide an option to disclose the liability to pay pensions within the financial statements, but instead such disclosure should continue to be provided in the report of the trustees.

Taxation

Numerous matters were considered in relation to tax, and the Accounting Council have tentatively agreed to recommend to the FRC that:

• No change be made to the prohibition in draft FRS 102 to discount deferred tax balances.
• Deferred tax that arises on share-based payment arrangements, where the cumulative expense recognised in profit or loss is less than the amount recognised for the purposes of tax should be treated as a permanent difference and recognised where the related expense is recognised.
• A requirement to disclose a reconciliation between the tax expense or income and the profit or loss on ordinary activities multiplied by the applicable tax rate replaces the current disclosure of significant differences between the tax expense and the amounts reported to the tax authority.
• A requirement to disclose expected net reversals of deferred tax balances in the next financial year replaces the disclosure of expected significant differences between the tax expense and the profit or loss multiplied by the standard rate of tax for the next three years.

One final tentative recommendation is where an entity has a defined benefit multi-employer scheme (excluding group schemes) that it accounts for as defined contribution schemes, and where they have entered into an agreement to fund a deficit, to recognise a liability for the contributions.  This is consistent with the requirements of paragraph 37 to IAS 19 Employee Benefits.

Category: Accounting and standards