PwC Channel Islands Understanding what lies ahead The future of UK GAAP October 2010 Jersey speakers Lisa McClure - PwC CI – Jersey Claire Berry - PwC UK PwC Agenda Current status update What are the GAAP choices How we are working with entities The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 2 Current status update Summary IFRS/IFRS for SMEs is a suitable basis to replace UK GAAP ED expected end of October 2010 – 6 month comment period Years beginning on or after 1 July 2013 will now be first affected, with early adoption permitted The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 3 What are the GAAP choices? Summary TIER 1 TIER 2 TIER 3 Listed companies & Publicly Accountable entities All other entities Small entities* Eligible to apply FRSSE Apply EU-adopted IFRS Apply UK adopted IFRS For SME or EU IFRS Subsidiaries Subsidiaries (Tier 1S) (Tier 2S) Reduced disclosures Reduced disclosures Apply Financial Reporting Standard for Smaller Entities (“FRSSE”) * As defined by the UK Companies Act The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 4 What are the GAAP choices? Publicly accountable entities An entity is considered publicly accountable if: • Debt or equity instruments are traded in a public market (or planning to) • It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses or is a deposit taking entity If any “publicly accountable entity” meets all 3 of the UK Companies Act small company criteria and they are prudentially regulated they will be permitted to use IFRS for SMEs. The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 5 What are the GAAP choices? Industry specific options Industry Publicly accountable GAAP Trust Yes Full IFRS Open ended funds Yes Full IFRS IMA SORP Yes/No? AIC SORP Banks Yes Full IFRS UK Pension schemes Yes Full IFRS SORP General Partners/Managers No FRSMEs Closed ended funds / Partnerships Other Licensees : Administrators etc. The Future of UK GAAP PricewaterhouseCoopers Yes/No? October 2010 Slide 6 What are the GAAP choices? IFRS for subsidiaries Disclosure exemptions for subsidiaries whose Parent prepares consolidated financial statements under full IFRS or equivalent GAAP • Consolidation • Cash flows • Group managed areas where information disclosed in parent financial statements: • Financial instruments (IFRS 7) • Employee benefits • Share-based payments • Certain comparative information (eg PP&E) • Related parties (IAS 24) – still under discussion The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 7 What are the GAAP choices IFRS for Small and Medium-Sized Entities (“IFRS for SMEs”) or FRS for Medium Sized Entities (“FRSME”) The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 8 What are the GAAP choices? The SME Standard and its main characteristics Key characteristics of the IFRS for SMEs standard compared to IFRS General characteristics Measurement specialities Stand–alone Standard – but based on IFRS principles Fair value is not the default for most FI “Go your own way” (not all IFRICs / no annual improvements ….. Removed complex options … and only bi-annual maintenance) Measurement simplifications Simplified disclosure requirements Circumstance-driven approach Plain English Undue cost or effort The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 9 What are the GAAP choices? The SME Standard and its main characteristics First-time adoption of IFRS for SMEs • Full retrospective application of the IFRS for SMEs effective at the reporting date for an entity's first financial statements prepared in accordance with the IFRS for SMEs • Comparative information is prepared and presented on the basis of the IFRS for SMEs • Adjustments arising from the first-time application of the IFRS for SMEs are recognised directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to the IFRS for SMEs The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 10 What are the GAAP choices? The SME Standard and its main characteristics UK amendments to IFRS for SMEs • IFRS for SMEs called FRSMEs (FRS for Medium Sized Entities) • Definition of publicly accountable – included ‘deposit taking entities’ and provided more guidance on scope • Technical changes: • IAS 12 replaces tax section • Removed fair value option for associates and JVs • Remove certain presentation options • Period of goodwill amortisation reduced to 5 years • Retain exemptions: cash flow & consolidation The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 11 What are the GAAP choices? What are the key differences? Area Statement of changes in equity A combined statement of income and retained earnings Cash flow statement FRSME maintains cash flow exemption Financial assets & liabilities IFRS for SMEs distinguishes between basic and complex financial instruments Investment property Investment property should be measured at fair value where this can be done reliably without undue cost or effort Lease incentives No guidance Splitting of land/buildings No guidance Property, plant & equipment Classes of PPE are carried at cost less accumulated depreciation and any impairment losses. The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 12 What are the GAAP choices? What are the key differences? (continued) Area Borrowing costs Expensed Consolidation “Power to Control” Associates & Joint Ventures Choice cost & equity model Transaction costs – Acquisitions Included in acquisition costs Intangible assets All intangible assets are considered to have finite lives and amortised Goodwill Considered finite and amortised over 5 years The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 13 What are the GAAP choices? FRSSE - Financial Reporting Standard for Smaller Entities All financial statements intended to give a true and fair view of the financial position and profit or loss (or income and expenditure) of all entities that are: • Small companies or small groups • Entities that would also qualify as small if they had been incorporated, with the exception of building societies Small company Turnover £6,500,000 Balance sheet total £3,260,000 Average number of employees 50 The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 14 What are the GAAP choices? FRSSE - Financial Reporting Standard for Smaller Entities What are the benefits of applying FRSSE vs FRS? FRSSE is the simplified version of FRS. A small company prepares its financial statements in accordance with FRSSE are exempted from the requirement: • To prepare cash flow statement • To present a reconciliation of factors affecting the tax charge for the financial year (FRS16 / FRS19) • To show movement in shareholders' funds in the notes to the financial statements • Other statutory disclosure required under UK GAAP The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 15 How we are working with entities Initial impact assessment eg - Control - Capital adequacy - Cost impact Training / Embedding IFRS Systems review/ Standardising Chart of accounts One or a combination of: Understanding opportunities and implications Considering implication of transition to IFRS in current projects/ agreements What help do you feel you may need? Current tools and publications The Future of UK GAAP PricewaterhouseCoopers October 2010 Slide 17 Local contact Lisa McClure Tel: 01534 838315 Email: lisa.mcclure@je.pwc.com © 2010 PricewaterhouseCoopers CI LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers CI LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. PwC