Financial Reporting – executive summary
1
Accounting Standards Board
(a)
Approaching 2005
ASB is proposing, prior to 2005, to replace a number of existing UK standards with
new standards based on International Financial Reporting Standards (IFRSs).
As part of the process towards harmonising UK GAAP with International Accounting
Standards, ASB has issued the following exposure drafts:

FRED 23 – Financial instruments: hedge accounting;

FRED 24 – Effects of foreign exchange rates; Financial reporting in
hyperinflationary economies;

FRED 25 – Related party disclosures;

FRED 26 – Earnings per share;

FRED 27 – Events after the balance sheet date;

FRED 28 – Inventories; Construction and service contracts;

FRED 29 – Property, plant and equipment; Borrowing costs;

FRED 30 – Financial instruments: Disclosure and presentation;
Recognition and measurement;

FRED 31 – Share-based payment.
(b)
Other statements issued
Amendments to FRSs
Amendment to FRS 17, Retirement benefits and Financial Reporting Standard for
Smaller Entities (effective June 2002).
Statements
Operating and financial review.
Consultation Papers

IASB proposals to amend certain International accounting standards
[the IASB ‘Improvements project’];

IASB proposals for first-time application of International Financial
Reporting Standards [IASB statement ED1];

IASB proposals on Business combinations, Impairment and
Intangible assets [IASB statements ED3, IAS 36 and IAS 38].
(c)
Review of current ASB projects
Inside Track, January 2003 (Issue 34) (www.asb.org.uk/publications) includes an
article setting out all extant UK accounting standards and their IAS equivalents,
together with brief comments on the present status of the relevant IAS statements.
In addition, Inside Track includes a brief update on the following four projects:
Revenue recognition
This project is concerned with the question of when a sale (or ‘turnover’) is
recognised, and at what amount it should be stated. A key area of focus is how
revenue recognition links in with the recognition of assets and liabilities created
through contractual arrangements between a seller and customer in the course of the
seller’s business activities.
ASB hopes that its work will provide a useful contribution to the joint project
presently under way between IASB and the US’s Financial Accounting Standards
Board.
However, in view of on-going questions and issues concerning revenue recognition,
ASB is considering whether it should issue more general guidance as an interim
measure.
In February 2003 ASB issued an exposure draft of an amendment to FRS 5,
Reporting the Substance of Transactions: Revenue Recognition. Comments are
invited by 30 May 2003. The intention is that this amendment will be mandatory for
accounting periods ending on or after 22 September 2003.
Performance reporting
This joint project between ASB and IASB aims at developing a single statement of
comprehensive income.
Presently, the intention is to introduce a ‘matrix format’ which would require items to
be allocated into one of four categories.
The format would make a distinction between ‘business’ and ‘financing’. It would
also require separate presentation of gains and losses resulting from the
remeasurement of assets and liabilities (for example, fixed asset revaluations and
actuarial gains and losses on defined benefit pension schemes).
ASB/IASB hope to publish an exposure draft in mid-2003.
Measurement
Two separate standard-setting groups are developing proposals relating to
measurement:

Standard-setters from Australia, New Zealand, South Africa and the
UK are considering a model to provide a consistent basis of
revaluation internationally – this would involve an amendment to
IAS 16, Property, plant and equipment;

The Canadian standard-setter is looking initially at the basis that
should first be used when assets are first recognised.
Leases and service concessions – Rights of use
ASB is continuing to develop an approach to leases that would eliminate the
distinction between operating leases and finance leases.
2
UITF developments
On 28 November 2002, UITF published proposed Abstract, Contracts for sales of capacity.
This deals with certain issues related to the accounting by providers of network capacity (for
example, in the telecommunications and electricity industries) that enter into contracts to
provide rights to use capacity on their networks.
The final version of this Abstract was issued as UITF Abstract 36, Contracts for sales of
capacity on 27 March 2003.
On 19 December 2002 UITF withdrew Abstract 10, Disclosure of share options.
3
Financial Reporting Review Panel
FRRP published Press Notice 75, dealing with the 2001 accounts of Finelot plc, on 31
January 2003.
4
Company law update
During January 2003, DTI published a number of papers relating to post Enron initiatives:

Derek Higg’s review of the role and effectiveness of non-executive directors;

Sir Robert Smith’s review on combined code guidance for audit committees;

Co-ordinating Group on audit and accounting issues;

Review of the regulatory regime of the accountancy profession.
5
International Accounting Standards Board developments, including Consultation Paper
issued by DTI
(a)
Recent developments
The IAS Regulation
The ‘IAS Regulation’ requires all EU-listed (publicly traded) companies to prepare
their consolidated accounts in accordance with IAS for financial years commencing
on or after 1 January 2005. This includes AIM and OFEX companies.
The Regulation applies only to the detailed accounting provisions. Domestic law will
continue to apply in other areas, for example:

the requirement to prepare accounts;

auditing;

enforcement;

the directors’ report.
Recently issued exposure drafts
IASB has issued the following exposure drafts:

Improvements to various International Accounting Standards (May
2002);

Amendments to IAS 32 and 39 on Financial Instruments (June 2002);

ED1, First-time application of International Accounting Standards
(July 2002);

ED 2, Share-based payment (November 2002);

ED 3, Business combinations (December 2002);

Improvements to IAS 36, Impairment of assets, and IAS 38,
Intangible assets (December 2002).
UK consultation
In July 2002, ASB published a consultation paper dealing with IASB’s proposals for
first-time application of IFRSs.
On 30 August 2002, DTI published a Consultation Document on the possible
extension of the European Regulation on International Accounting Standards. Under
the Regulation, each Member State may either permit or require:

Publicly-traded companies to prepare their individual accounts in
accordance with adopted IAS;

Some or all non-publicly traded companies to prepare their
consolidated and/or individual accounts in accordance with adopted
IAS.
The Consultation Document asks a number of questions, for example:
Q2
(b)
If you think that the Regulation should be extended, do you consider that
this should be:
(a)
on a voluntary basis whereby the Government permits some or all
companies to comply with adopted IAS?
(b)
on a compulsory basis whereby the Government requires some or
all companies to comply with adopted IAS?
Convergence Handbook update
In August 2002 ICAEW published ‘The implications of IAS for UK companies – the
second update to the Convergence Handbook’ (first published in December 2000).
This refers to a number of differences between current UK GAAP and current IAS,
for example:

Cash flow statements;

Deferred tax;

Development costs.
The update can be accessed from ICAEW’s web site.
(c)
IASB/FASB activity and progress towards ‘Global GAAP’
Memorandum of understanding
The US’s Financial Accounting Standards Board and the IASB issued a joint press
release on 29 October 2002, referring to the issue of a ‘memorandum of
understanding, marking a significant step towards formalising their commitment to
the convergence of US and international accounting standards’.
The two bodies have agreed to:

Undertake a short-term project aimed at removing a variety of
individual differences between US GAAP and IFRSs /IASs;

Remove other differences between IFRSs and US GAAP that will
remain as at 1 January 2005;

Continue progress on the joint projects which they are currently
undertaking;

Encourage their respective interpretative bodies to co-ordinate their
activities.
Joint projects
Topics for review under the joint FASB/IASB convergence project include:

Construction contracts (IAS 11);

Accounting in hyperinflationary economies (IAS 29);

Taxes (IAS 12);

Pensions (IAS 19);

Government grants (IAS 20);

Interim financial reporting (IAS 34);

Discontinued operations (IAS 35);

Provisions (IAS 37).
Examples of areas of difference
An article in Accountancy, November 2002, page 97, by Paul Pacter of Deloitte
Touche Tohmatsu contains a highly useful topic by topic comparison between IAS
and US GAAP.
(d)
IASB project update and timetable
Rough projections for arrival of key documents are as follows:
Topic
2002
2003
First-time application of International
Financial Reporting Standards
Improvements to existing IASs
Amendments to IAS 39/32
Activities of financial institutions:
disclosures and presentation
Business combinations, Phase 1
ED 1 published
IFRS
ED published
ED published
ED due
IFRS
IFRS
IFRS
ED 3 published
December 2002
IFRS
Insurance contracts
Accounting for share-based payment
Reporting performance
ED 2 published
November 2002
ED on Phase 1 –
Q1
IFRS
ED due first half
2003
Audit and Assurance – executive summary
1
Auditing Practices Board (APB)
In November 2002, APB issued a 63-page publication entitled ‘Audit Quality’.
APB issued an alert in February 2003 concerning issues associated with the inclusion of pro
forma information in preliminary announcements.
2
International Auditing and Assurance Standards Board (IAASB)
IAASB issued the following exposure drafts in October 2002:

ISA 400, Understanding the entity and its environment and assessing the risk
of material misstatement;

ISA 401, The auditors ‘ procedures in response to assessed risks;

ISA 500, Audit evidence;

Reporting on compliance with International Financial Reporting Standards;

Amendment to ISA 200, Objective and general principles governing an audit
of financial statements;

Audit risk, proposed international standards on auditing.
In November 2002, the following were issued:

Proposed terms of reference;

Preface to the international standards on quality control, auditing, assurance
and related services;

Operations policy No 1 – Bold type lettering.
3
Audit exemption
The DTI White Paper on Modernising Company Law, published July 2002, stated:

The Government did not propose to introduce a statutory Independent
Professional Review (IPR) as a replacement for statutory audit;

There would continue to be a threshold below which no audit is required;

The Government intended to consult further and assess the impact of raising
the turnover threshold in July 2000 from £350,000 to £1m before making a
final decision on whether to increase the level further.
Subsequently, in the pre-budget report, the Chancellor announced that the Government would
consult during 2003 on audit exemption deregulation for medium-sized firms.
More recently, the DTI has launched a research programme to assess the impact of extending
the turnover threshold from £350,000 to £1m. The results of this research will be used as part
of the consultation referred to above.
Currently, under EU law, the audit exemption turnover threshold could be raised as high as
£4.8m.
4
ICAEW pronouncements
ICAEW’s Audit and Assurance Faculty has issued the following guidance statements:

Management representation letters – explanatory note (November 2002);

The audit report and auditors’ duty of care to third parties (January 2003) issued following the Bannerman case decision in 2002.
5
Department of Trade and Industry
In January 2003, DTI issued the following reports as part of its post Enron initiatives:

The Higgs review of the ‘Role and effectiveness of non-executive directors’;

The Smith review on ‘Combined code guidance for audit committees’;

The final report of the Co-ordinating Group on Audit and Accounting Issues;

The report of the ‘Review of the Regulatory Regime of the Accountancy
Profession’.
These can be accessed from the Company Law part of the DTI web site
(www.dti.gov.uk/cld/).
Appendix 1 – Key dates
The Statements below are mandatory for financial years ending on or after the dates indicated (except
Abstract 31 which applies to periods commencing on or after):
22 January 2002
FRS 19
Deferred tax
23 March 2002
Abstract 33
Obligations in capital instruments
FRS 17
Retirement benefits – memorandum disclosures for
defined benefit schemes (second year transitional
arrangements)
Pre-contract costs
Death-in service and incapacity benefits
22 June 2002
Abstract 34
Abstract 35
23 December 2001 (periods commencing on or after)
Abstract 31
Exchanges of businesses or other non-monetary
assets
Appendix 2 – UK GAAP status report as at 31 January 2003
Note – ASB’s Inside Track, Issue 34, January 2003, includes a list of the International Accounting
Standard equivalent of each of the UK GAAP statements referred to below, with a brief comment
on the status of each IAS statement as at the start of 2003.
Statements of Standard Accounting Practice
Number
Title
Status/Developments
SSAP 4
The accounting treatment
of government grants
Accounting for value added
tax
Stocks and long term
contracts
Accounting for research
and development
Accounting for deferred
taxation
FRED 28 – Inventories; Construction
and service contracts
SSAP 5
SSAP 9
SSAP 13
SSAP 15
SSAP 17
SSAP 19
SSAP 20
SSAP 21
SSAP 24
SSAP 25
Superseded by FRS 19 for accounts
periods ending on or after 23 January
2002
Accounting
for
post FRED 27 – Events after the balance
balance sheet events
sheet date
Accounting for investment
properties
Foreign
currency FRED 24 – The effects of changes in
translation
foreign exchange rates; Financial
reporting
in
hyperinflationary
economies
Accounting for leases and Under review – Discussion Paper
hire purchase contracts –
amended in relation to
treatment of tax-free grants
Accounting for pension Superseded by FRS 17 – must be
costs
adopted in full for accounts periods
beginning on or after 1 January 2005;
detailed memorandum disclosures
required for accounts periods ending
on or after 22 June 2001
Segmental reporting
Financial Reporting Standards
Number
Title
FRS 1
FRS 2
Cash flow statements
Accounting
for
subsidiary
undertakings
Reporting financial performance Under review: FRED 22 Revision of FRS 3
Capital instruments
Abstract 33 – Obligations in
capital instruments
FRS 3
FRS 4
FRS 5
FRS 6
FRS 7
FRS 8
FRS 9
FRS 10
FRS 11
FRS 12
FRS 13
FRS 14
FRS 15
FRS 16
FRS 17
Status/Developments
FRED
30
–
Financial
Instruments: Disclosure and
presentation; Recognition and
measurement
Reporting the substance of Exposure draft – Revenue
transactions
recognition
Acquisitions and mergers
Consultation Paper on Business
combinations
Fair values in acquisition Consultation Paper on Business
accounting
combinations
Related party disclosures
FRED 25 – Related party
disclosures
Associates and joint ventures
Goodwill and intangible assets
Consultation Paper on Intangibles
Impairment of fixed assets and Consultation
Paper
on
goodwill
Impairment of assets
Provisions and contingencies
Derivatives and other financial FRED
30
–
Financial
instruments
Instruments: Disclosure and
presentation; Recognition and
measurement
Earnings per share
FRED 26 – Earnings per share
Tangible fixed assets
FRED 29 – Property, plant and
equipment; Borrowing costs
Current tax
Retirement benefits
Abstract 35 – Death-in service
and incapacity benefits
Mandatory
date
for
full
implementation postponed to
2005
FRS 18
FRS 19
FRSSE
Other
Accounting policies
Deferred tax
Financial reporting Standard for
Smaller Entities (effective June
2002)
Statement of principles for A cornerstone of UK GAAP
financial reporting
although it does not have the
mandatory status of an FRS
Financial Reporting Exposure Drafts
Number
Title
FRED 22
Revision of FRS 3, Reporting Unlikely to progress to FRS
Financial Performance
Financial instruments: Hedge
accounting
The effects of changes in foreign
exchange rates
FRED 23
FRED 24
FRED 28
Financial
reporting
in
hyperinflationary economies
Related party disclosures
Earnings per share
Events after the balance sheet
date
Inventories
FRED 29
Construction
and
service
contracts
Property plant and equipment
FRED 25
FRED 26
FRED 27
FRED 30
FRED 31
Borrowing costs
Financial
Instruments:
Disclosure and presentation;
Recognition and measurement
Share-based payment
Status/Developments
Abstracts issued by UITF
Number
Title
Abstract 4
Presentation of long term debtors
in current assets
Transfers from current assets to
fixed assets
Accounting for post-retirement
benefits other than pensions
Accounting for operations in
hyperinflationary economies
Accounting for issuer call options
Accounting for ESOP trusts
Disclosure
of
substantial
acquisitions
Employee share schemes
Pension costs following the 1997
tax changes in respect of dividend
income
Tax on gains and losses on foreign
currency borrowings that hedge an
investment in a foreign enterprise
Accounting issues arising from the
proposed introduction of the Euro
The acquisition of a Lloyd’s
business
Application of transitional rules in
FRS 15
Accounting for start-up costs
National Insurance contributions
on share option gains
Barter transactions for advertising
Revisions to estimated useful
economic life of goodwill and
intangible assets
Operating lease incentives
Web site development costs
Date of award to employees of
shares or right to shares
Exchanges of businesses or other
non-monetary assets for an interest
in a subsidiary, joint venture or
associate
Employee benefit trusts and other
intermediate payment
arrangements
Obligations in capital instruments
Pre-contract costs
Death-in service and incapacity
benefits
Abstract 5
Abstract 6
Abstract 9
Abstract 11
Abstract 13
Abstract 15 (revised)
Abstract 17 (revised)
Abstract 18
Abstract 19
Abstract 21
Abstract 22
Abstract 23
Abstract 24
Abstract 25
Abstract 26
Abstract 27
Abstract 28
Abstract 29
Abstract 30
Abstract 31
Abstract 32
Abstract 33
Abstract 34
Abstract 35
Status/Developments
Superseded by FRS 17
FRED 24
FRED 30
FRED 31
Superseded by FRS 17
FRED 24 – The effects of
changes
in
foreign
exchange rates
Read in conjunction with
Abstract 17 and Abstract 25
FRED 30
Appendix 3 – Status of Audit and Assurance documents
Statements of Auditing Standards (SASs)
Number
Title
Status/Developments
SAS 100 Objectives and general principles governing an
audit of financial statements
SAS 110 Fraud and error
SAS 120 Consideration of law and regulations
SAS 130 The going concern basis in financial statements
SAS 140 Engagement letters
SAS 150 Subsequent events
SAS 160 Other information in documents containing
audited financial statements (Revised)
SAS 200 Planning
SAS 210 Knowledge of the business
SAS 220 Materiality and the audit
SAS 230 Working papers
SAS 240 Quality control for audit work (Revised)
SAS 300 Accounting and internal control systems and audit
risk assessments
SAS 400 Audit evidence
SAS 410 Analytical procedures
SAS 420 Audit of accounting estimates
SAS 430 Audit sampling
SAS 440 Management representations
Supplemented by guidance in
ICAEW Technical Release
Aud 4/02
SAS 450 Opening balances and comparatives
SAS 460 Related parties
Proposed priority for APB work
programme - review in context
of ‘business empires’, recent
experience
and
proposed
changes to FRS 8
SAS 470 Overall review of financial statements
SAS 480 Service organisations
SAS 500 Considering the work of internal audit
SAS 510 The relationship between principal and other
auditors
SAS 520 Using the work of an expert
SAS 600 Auditors’ reports on financial statements
ICAEW Technical Release
Audit 1/03 (The audit report
and auditors’ duty of care to
third parties)
SAS 601 Imposed limitation of audit scope
SAS 610 Communication of audit matters to those charged Proposed priority for APB work
with corporate governance (Revised)
programme
SAS 620 The auditors’ right and duty to report to regulators
in the financial sector
Practice Notes (PN)
The auditors’ right and duty to report to the
Friendly Societies Commission
PN 8
Reports by auditors under company legislation in
the United Kingdom
PN 9
Reports by auditors under company legislation in
the Republic of Ireland
PN 10
Audit of financial statements of public sector
entities in the United Kingdom (Revised)
PN 10 The audit of central government financial
(I)
statements in Ireland
PN 11
The audit of charities in the United Kingdom
(Revised)
PN 12
Money laundering
PN 13
The audit of small businesses
PN 14
The audit of registered social landlords in the
United Kingdom
PN 15
The audit of occupational pension schemes in the
United Kingdom
PN 16
Bank reports for audit purposes
Explanatory note (ICAEW
Technical Release Audit
3/02)
PN 18
The audit of building societies in the United
Kingdom
PN 19
Banks in the United Kingdom
PN 19 Banks in the Republic of Ireland
(I)
PN 20
The audit of insurers in the United Kingdom
PN 20 The audit of insurers in the Republic of Ireland
(I)
PN 21
The audit of investment businesses in the United
Kingdom
PN 22
The auditors’ consideration of FRS 17
‘Retirement Benefits’ – Defined Benefit Schemes
PN 23
Auditing Financial Instruments
PN 24
The audit of friendly societies in the United
Kingdom
PN 7
Bulletins
1997/1
1997/3
1998/7
1998/8
1999/4
1999/6
2000/1
2000/2
2000/3
2001/1
2001/2
2001/3
2001/4
2001/5
2001/6
2001/7
2002/1
2002/2
2002/3
The special auditors’ report on abbreviated
accounts in Great Britain
The FRSSE: guidance for auditors
The auditors’ association with preliminary APB News Release 5/2/03
announcements
Reporting on pro forma financial information
pursuant to the Listing Rules
Review of interim information
The auditors’ statement on the summary financial
statement
The Combined Code: requirements of auditors
under the Listing Rules of the Irish Stock
Exchange
Supplementary guidance for auditors of
occupational schemes in the United Kingdom
Departure from Statements of Recommended
Practice for the Preparation of financial
statements: Guidance for auditors
The electronic publication of auditors’ reports
Revisions of wordings of auditors’ reports on
financial statements and the interim review report
E-business: identifying financial statement risks
Supplementary guidance for auditors of building
societies in the United Kingdom following ‘N2’
Supplementary guidance for auditors of banks in
the United Kingdom following ‘N2’
Supplementary guidance for auditors of insurers
in the United Kingdom following ‘N2’
Supplementary guidance for auditors of
investment businesses in the United Kingdom
following ‘N2’
The duty of auditors in the Republic of Ireland to
report to the Director of Corporate Enforcement
The United Kingdom Directors’ Remuneration
Report Regulations 2002
Guidance for reporting accountants of stakeholder
pension schemes in the UK
Statements of Investment Circular Reporting Standards (SIR’s)
SIR 100
SIR 200
Investment circulars and reporting accountants
Accountants’ reports on historical information in
investment circulars
Briefing Papers
Communication between external auditors and
audit committees
Providing assurance on the effectiveness of
internal control
APC Auditing Guidelines
405
Attendance at stocktaking