What's Changing?
Since 2005 listed groups in the UK have been required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Almost all other groups and companies have a choice. They can choose to follow IFRS or UK GAAP. If they are small, they have a further option to use the Financial Reporting Standard for Smaller Entities (FRSSE). But, from 2012, the options will change. UK GAAP is expected to be replaced with something new, the IFRS for Small and Medium-sized Entities (IFRS for SMEs).
What is IFRS for SMEs?
Until now, the International Accounting Standards Board (IASB) has focussed on developing standards suitable for entities trading on public capital markets. The resulting standards are relatively complex and contain many disclosure requirements.
Over a hundred countries make use of IFRS but there has been a growing demand for the IASB to produce a regime more suited to entities without public accountability. The IASB has taken six years to develop this and the IFRS for SMEs was issued on 9 July 2009 (www.iasb.org or www.iasb.org/IFRS+for+SMEs/IFRS+for+SMEs.htm ). Despite the title, the standard is applicable not only to SMEs but to all entities which do not have public accountability. This means that it will be suitable for most subsidiaries of listed companies as well as large private entities, as long as they are not publicly accountable.
IFRS for SMEs is a much simplified version of full IFRS. It takes into account the needs of users of financial statements of non publicly accountable entities and the costs and benefits of compliance. It is small, at 230 pages, in comparison to the full bound text of IFRS and has a tenth of the 3000 disclosure requirements contained in full IFRS. To make it easier to follow, it is set out by topic, as used in the current FRSSE. The following table illustrates the main format differences.
While its detailed accounting provisions are broadly consistent with full IFRS, there are key differences and simplifications. The following are the key simplifications made:
- some topics in full IFRS are omitted because they are not relevant to typical SMEs e.g. segmental reporting, assets held for sale and earnings per share;
- some accounting policy treatments in full IFRS are not allowed because a simplified method is available to SMEs e.g. the revaluation model for property, plant and equipment and intangible assets is not allowed; and
- easing of recognition and measurement principles that are in full IFRS e.g. simplified calculation of defined benefit pension plan obligations in some circumstances.
The detailed provisions are discussed further on pages 7 to 10.
When will UK accounting standards die?
In recent years, the UK Accounting Standards Board (ASB) has consulted with its constituents over the future of UK GAAP. The ASB believes only one accounting framework is needed in the UK and it should be based on IFRS. To date, commentators have broadly supported the ASB's view.
The ASB is expected to issue in August 2009 its Paper seeking views on its proposal to replace current UK GAAP by adopting the IFRS for SMEs. The Paper is expected to propose that the new regime takes effect for accounting periods beginning on or after 1 January 2012, an ambitious target. The IFRS for SMEs will then be available for use by all UK companies except those with public accountability who will use full IFRS.
What does 'public accountability' mean? An entity has public accountability if:
- its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market; or
- it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, building societies, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.
A major selling point of the ASB's plans is that the FRSSE will continue to be available to the two million or more small companies and businesses in the UK. They are therefore not facing any significant changes over the next three years. The entities directly affected by these plans are the 50,000 or so larger companies currently using full UK GAAP. These entities include:
- companies which are listed and have not adopted IFRS in their individual financial statements;
- subsidiaries in listed groups who have not adopted IFRS throughout the group;
Where consolidated accounts are prepared using IFRS, company law allows a free choice of using UK GAAP or IFRS for the company's individual financial statements. Deloitte research shows that half of UK listed companies still use UK GAAP in their parent company only accounts and thus use UK GAAP for their UK subsidiaries. Many others use IFRS for the parent company only accounts but continue to use UK GAAP for subsidiaries.
- all public limited companies which are not publicly accountable; and
- all private groups and companies, except those which may qualify as small by having two out of three of:
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- turnover less than £6.5m (£7.8m gross in groups);
- balance sheet total less than £3.26m (£3.9m gross in groups); and
- not more than 50 employees.
Why will the ASB drop UK accounting standards?
Maintaining UK GAAP and IFRS frameworks, which are partly converged, is not desirable in the long term and is challenging for those who have to keep up to date with the two sets of accounting requirements. The number of entities within the scope of full UK GAAP has been decreasing in recent years as groups traded on AIM and public sector entities move to IFRS. The ASB has not sought to develop UK GAAP since 2004 and so it has become a patchwork of very old SSAPs, FRSs issued by the ASB as an independent standard setter in the 1990s/early 2000s and FRSs based on their international equivalents and issued from 2004. IFRS is seen as the global language of accounting. With the IFRS for SMEs being available, it is now time to drop UK accounting standards.
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