AAT RESPONSE TO THE ASB FINANCIAL REPORTING EXPOSURE DRAFT
“THE FUTURE OF FINANCIAL REPORTING IN THE UK AND THE REPUBLIC OF
IRELAND”
The AAT is pleased to comment on the ASB’s Financial Reporting Exposure Draft
“The Future of Financial Reporting in the UK and the Republic of Ireland” issued in
October 2010. The AAT is a registered charity one of whose object clauses is to
advance public education and promote the study of the practice, theory and
techniques of accountancy and the prevention of crime and promotion of the sound
administration of the law.
The AAT is a global organisation and enjoys a total membership in excess of
120,000 worldwide, which is made up of over 46,000 full and fellow members. The
balance consists of student and affiliate members.
Of the full and fellow members there are approximately 2,900 Members in practice
providing
accountancy
and
taxation
services
to
individuals,
not-for-profit
organisations and the full range of business types. Whilst members permeate all
levels and sectors of the market they are most active in the Small and Medium Sized
Entity market.
INTRODUCTION
The AAT has previously provided comments on the ASB’s earlier Consultation Paper
on “The Future of UK GAAP” in January 2010 which are largely not reflected in the
current FRED on which the ASB has requested fundamental comments, as well as
comments on details.
Consequently the following comments do consider the
fundamental principles rather than details.
We fully support the introduction of the FRSME for Tier 2 entities, although we have
concerns as to the definitions of Tier 1 and Tier 3 entities, in that we believe that the
definition of “public benefit” for Tier 1 entities should be extended and the size limit
for Tier 3 entities should be significantly lowered. Fundamentally, we consider that
there is little difference in the levels of disclosures required by the FRSME and
FRSSE. Larger Tier 3 entities could apply the FRSME with no greater burdens than
applying the FRSSE but smaller Tier 3 entities could obtain benefits from a reduced
level of disclosure requirements.
QUESTION 1
Do you agree that a differential financial reporting framework, based on public
accountability, provides a targeted approach to relevant and understandable
financial information that contributes to discharging stewardship obligations?
QUESTION 2
Do you have any further comments on the proposed application of the tier system?
QUESTION 3
Appendix 1 ‘Note on the Legal Requirements in the United Kingdom and Republic of
Ireland’ to this FRED sets out a note on legal matters that are applicable to the tier
system. Do you have any comments or queries on the scope or content of this
Appendix?
We fully support the concept of financial reporting requirements based on public
accountability with appropriate levels of disclosure dependent upon the expectations
and requirements of the stakeholders of the entities concerned and subject to certain
de minimus concessions.
We have no comments on the scope or content of Appendix 1 except to express the
view that we do not consider it appropriate for Tier 3 entities to be defined by
reference to Companies Act criteria for a small company. In order to maximise
potential benefits for small companies the size criteria needs to be substantially
lower (possibly to £2 million turnover and 25 employees) with substantially relaxed
financial reporting standards and disclosure requirements. “Small” companies (as
defined by Companies Acts) which would fall into Tier 2 would apply the FRSME
instead of the FRSSE, but as there is little difference in the levels of disclosure
requirements between the two Standards, there would be no greater burdens for
such entities, with only a one off transitional exercise to be faced while smaller
entities in Tier 3 could obtain benefits from a reduced level of disclosure
requirements.
QUESTION 4
Should entities that have public accountability, satisfy all three of the size conditions
of a small company or small group, and are prudentially regulated, be permitted to
apply the FRSME?
It is our contention that all publicly accountable entities should fall within Tier 1,
except for de-minimus limits to enable the smallest to opt to fall within Tier 3. It is
our view that Tier 3 limits should be substantially reduced and this might be an
appropriate de-minimus limit for small publicly accountable entities.
QUESTION 5
Are the definitions of public accountability and the accompanying application
guidance sufficiently clear to enable an entity to determine if it has public
accountability? If not, why not?
We consider that “Public Benefit” entities, by their nature, clearly must be publicly
accountable and their exclusion from the definition of public accountability cannot be
justified. We believe it is desirable for the Financial Reporting Standards to be
applicable to “Public Benefit” entities so as to be an integral part of the total
framework for Standards within the UK to ensure consistency of accounting
principles. The FRED refers to the proposals to develop a Public Benefit Entity FRS
but does not appear to provide a definition of a Public Benefit Entity. It is desirable
to include such a definition to ensure that no such entity is able to avoid the
appropriate level of reporting expected by users of their financial statements. Even
though there will be separately published Standards for Public Benefit entities they
should be based on the Standards and framework applicable to other entities
generally, adapted as appropriate to recognise the special disclosure needs of the
users of Public Benefit entities financial statements.
However, there should be reduced reporting requirements for the smallest Public
Benefit entities so that the burden on those entities is commensurate with their size,
possibly in line with the Tier 3 limits we have suggested previously.
It is also our view that the definition of public accountability should encompass other
entities which should be considered publicly accountable such as public service
providers, users of significant public funds (such as government grant recipients) and
not for profit entities funded by public donations (whether in money or in kind) as well
as entities which are major employers, have a significant impact on the environment,
or have a majority share of a particular market.
While this extension of the definition of publicly accountable entities will bring some
entities currently using the FRSSE into the full Tier 1 IFRS reporting regime, it is
proper that this should be the case if they are “publicly accountable”.
Subject to these amendments we agree that the definition and accompanying
guidance are sufficiently clear for entities to determine their responsibilities for
financial reporting.
QUESTION 6
The ASB is proposing to amend the IFRS for SME’s to comply with Company Law.
Do you agree with the amendments? If not, please explain your reason for
disagreement and, if appropriate, suggest an alternative.
We agree with the principle that the FRSME should comply with Company Law but
that it is desirable to seek changes in Company Law rather than to amend the IFRS
for SME’s where possible, in order to retain optimum compatibility with IFRS’s
However, in the response to question 3 above, we have already commented
specifically on our opinion that the definition of Tier 3 entities should not follow that
for Small Companies for Company Law purposes.
QUESTION 7
The ASB decided to evaluate possible amendments to the IFRS for SME’s using
three guidelines:
a) changes should be minimal;
b) changes should be consistent with EU-adopted IFRS; and
c) use should be made, where possible, of existing exemptions in Company Law
to avoid gold-plating.
Do you agree with these guidelines? If not, please explain why.
QUESTION 8
The ASB has amended the IFRS for SME’s to:
a) replace section 29 Income Tax with IAS 12 ‘Income Taxes’,
b) provide transitional relief for dormant entities with intra-group balances;
c) exempt an entity preparing consolidated financial statements from including a
parent company cash flow statement; and
d) revise the scope of section 9 such that an entity is required to prepare
consolidated financial statements only when required to do so by Company
Law.
Do you agree with the amendments? If not, please explain your reason for
disagreement and, if appropriate, your proposed alternative.
We agree that it is desirable for the FRSME to differ from the IFRS for SME’s as little
as possible while being consistent with EU adopted IFRS and exemptions available
in UK Company Law.
As stated in our response to question 6, we consider that amendments to the FRS
for SME’s should be minimised if possible, by seeking amendments to Company
Law where necessary. However, if this is not feasible, we agree with the principle of
the suggested amendments to the IFRS for SME’s set out in Question 8.
QUESTION 13
The reduced disclosure framework was developed in response to the feedback on
the ASB’s policy proposal issued in August 2009. Qualifying subsidiaries applying
the reduced disclosure framework look to EU-adopted IFRS and the Appendix to the
draft Application FRS to prepare their financial statements. Does this proposal
adequately address preparers’ needs?
In principle we consider that subsidiaries should have the same disclosure
requirements as other entities, primarily so that users and stakeholders who rely on
the financial statements of subsidiaries without any concern for the group situation,
can have access to the same level of information relating to the subsidiaries as
individual entities, subject only to de minimus limits for reduced disclosures.
This approach would also ensure any entities having subsidiaries which would fall
within the definition of publicly accountable cannot avoid full reporting on those
individual subsidiaries.
Furthermore, if subsidiaries accounts are to form part of a group’s consolidated
financial statements, it is more efficient and cost effective for the subsidiaries
financial statements to be produced in the same format and apply the same
accounting policies as the parent entity.
As regards the detailed proposed disclosure exemptions we do not believe that
these provide qualifying subsidiaries with any significant benefit in preparing
accounts and only deprive users of information which would be available in the
financial statements of individual entities and so defeats the objective of the FRSME
providing comparability between the financial statements of different entities.
QUESTION 14
Do you have any further suggestions for disclosure exemptions for qualifying
subsidiaries? If so, please explain why you consider the disclosure is not required in
the subsidiary financial statements.
As stated previously, we do not support the proposals for any subsidiaries to have
the benefit of disclosure exemptions.
QUESTION 15
Do you agree with the detail of the ASB’s proposal to streamline the number of
SORP’s for profit-seeking entities? If not, why not?
We support the proposal to reduce the number of SORP’s for profit-seeking entities.
However, the present status of SORP’s needs to be considered, especially in
respect of the weight of authority of SORP’s and in the light of the proposal not to
retain all of the existing SORP’s. The SORP’s to be retained should be considered
as subsidiary to the main full Standards, providing variations and interpretations
specific to the sector concerned, and should carry the same authority as the full
Standards. If SORP’s providing “guidance” only and are not enforceable, the entities
concerned have an undesirable leeway in being able to “cherry pick” from the SORP
resulting in inconsistencies for comparison between different entities. If SORP’s are
to be enforceable, they need to be the direct responsibility of the ASB and not just
subject to ASB’s “negative” approval.
Furthermore, where the subject matter of any SORP has international relevance, the
IASB should be lobbied to introduce an International Standard.
QUESTION 16
Do you agree with the benefits that have been identified as arising after adoption of
the proposed Financial Reporting Framework? If not, why not? Please provide
examples, including quantification where possible, of any benefits you believe have
not been taken into account.
QUESTION 17
In relation to the case study scenarios identifying the likely costs of transition for
certain entities, do you agree with the nature and range of costs identified? If not,
please provide details of any alternatives you would propose, including any
comments on the assumptions underlying the calculation of the costs.
QUESTION 18
The (draft) Impact Assessment also gives an indication of the impact on the ‘main
affected groups’. Do you agree with this analysis? If not, why not?
QUESTION 19
The benefits are hard to quantify; do you agree that they outweigh the costs of
transition, and any ongoing incremental costs? Do you have any comments on the
estimates used?
QUESTION 20
The ASB is proposing an effective date of July 2013, with early adoption permitted,
which assumes an 18 month transition period. The ASB’s rationale for this date is
set out in paragraphs 11.121 to 11.126. Early adoption will permit entities to secure
benefits as soon as possible, however other entities may wish to defer the effective
date to permit businesses more time to prepare for transition. Do you agree with the
proposed effective date and early adoption? If not, what would be your preferred
date, and why?
QUESTION 21
Please provide any other comments you many have on the (draft) Impact
Assessment.
We generally agree with the benefits which have been identified as arising from the
proposed Financial Reporting Framework but we consider that there is also an
opportunity to achieve major benefits for small entities.
We consider that there are insufficient differences between the levels of disclosure
requirements of the IFRS for SME’s and the FRSSE to justify the continued use of
FRSSE’s.
Consequently this leads us to the view that the FRSSE should be abandoned as
soon as the proposals become effective so as to avoid confusion between the two
Standards by compilers of financial statements which could result in poor quality
compliance.
One of the objectives of the proposals is stated as creating “reporting arrangements
proportionate to an entity’s obligations and size” and in this respect we consider that
the proposals do not go far enough to ease the reporting burdens on small entities
with less than 25 employees which represent a large number of entities in the UK.
Such small entities also suffer problems of accessibility to cost effective accounting
skills required to comply with reporting requirements.
Feedback from our Members indicates that there are concerns that the burdens and
compliance costs falling on small entities are disproportionate to their responsibilities
to their stakeholders and users of their accounts.
We consider that entities with less than, say, £2 million turnover are unlikely to have
in-house accounting and reporting expertise but have to buy in such expertise at
relatively expensive professional fee rates. In particular, for small entities without in
house accounting creates significant difficulties, while usually requiring subjective
evaluations by management, they also require advice and guidance from external
professional advisors on the appropriate interpretation of “Fair Value” and the
implications.
We consider that the turnover limit for a small entity should be no more than, say, £2
million turnover or 25 employees.
Entities larger than this who are not publicly
accountable should have the option of applying the IFRS for SME’s but it would be
appropriate for smaller entities to have available a simplified version of the IFRS for
SME’s and, in particular, simplification which results in a significant reduction in the
disclosure notes in accounts.
This would necessitate a Tier 3 standard being
developed ideally by the IASB but if the IASB are not willing to produce a Tier 3
standard, in view of the large number of entities who would benefit from such a
statement, we consider it warrants the resources of the ASB being applied to such a
project for use in the UK. A simplified Tier 3 statement would significantly reduce the
accounting burden for the smaller SME’s who are not likely to have in-house
accounting expertise and, compared to larger entities, have to pay expensively to
buy in professional services. There is already a suitable framework in existence,
being the “Accounting and Financial Reporting Guidelines for Small and Medium
Sized Enterprises – Level 3” developed by the United Nations Conference on Trade
and Development and already adopted in some parts of the world.
It is smaller entities which can benefit most pro rata from an easing of disclosure
requirements, without a significant risk of disadvantage to the users of their financial
statements.
Apart from the benefits of consistency and comparability with International Standards
it appears that most entities affected by the proposed changes to UK GAAP will
benefit from reduced disclosures with only those publicly accountable entities not
currently required to report under the full IFRS which will face an increased burden,
which can be justified on the basis that the present reporting requirements are
inadequate to meet public expectations and rights to information.
In addition, the benefits from the changing role of the ASB, particularly in the
reduced burden of maintaining and updating standalone UK Standards should not be
understated.
We have doubts as to the validity of the basis of projected costs as well as to the
nature of costs to arise from the introduction of the FRSME which are set out under
various scenarios in the Draft Impact Assessment on pages 117 to 140 of the FRED.
On page 117 it is stated that “it is not possible to determine with any accuracy an
average cost for entities implementing the proposal” and we entirely agree with this
conclusion. We also have serious doubts as to the feasibility of identifying and
costing the additional work arising. Such would be significantly influenced by the
levels of preparation and training investment by preparers and their external
accountants and auditors.
We do not believe that there will be any ongoing
incremental costs as Tier 2 entities should benefit from a reduced accounting
burden. Costs for Tier 3 entities can also be reduced if our suggestions for such
referred to earlier are adopted. Much of the other costs of introduction would be
absorbed in ongoing accounting routines without incurring additional costs and may
not be significantly different from those arising on a regular basis from the routine
updating of reporting standards.
We consider that there will inevitably be exceptional transitional costs primarily in
training of those involved in preparing and advising on the preparation of accounts
but that the benefits of the introduction of the FRSME will justify these exceptional
costs.
The argument for the introduction of the FRSME has to be based on the need for
international consistency and comparability and the relief from burdens borne by
entities under current UK GAAP requirements, rather than attempting to evaluate
cost benefits. Any attempt to evaluate costs which are not soundly based (such as
those illustrated on the case studies included in the FRED), diverts attention from the
real purposes of the changes, and can lead to challenges to the credibility of the
document as a whole.
As regards the proposed effective date for the FRSME, we support the concept of
introduction at the earliest possible date. Recognising the preponderance of entities
with financial year ends of 31st December and 31st March, we would consider that
the FRSME could be effective as from 1st January 2013 to ensure that consistency
is achieved at an early date, which otherwise for many entities may not be seen until
financial statements for the year ended 31st December 2014 or 31st March 2015 are
produced if the implementation date suggested in the FRED is adopted.
As there is an intention for the FRSSE to be replaced in due course, we consider
that it would be beneficial for that to take place at the same time as the FRSME so
as to provide smaller entities with the benefits of reduced disclosure and simplified
accounting requirements at the earliest date.
QUESTION 22
Do you agree that all the entities that the ASB has identified as falling within Tier 1
should be in Tier 1, or do you agree with the Alternative View that some could move
to other tiers? If you do think some entities could be moved – which entities and to
which tier?
QUESTION 23
Are you aware of any information that users of financial statements of publicly
accountable entities require which would not be disclosed in financial statements
prepared using the FRSME (the IFRS for SME’s adapted for use in the UK)? If so,
please identify such information and explain why it is required.
QUESTIION 24
Do you believe that the ASB’s proposals for the FRSME should be changed to
reduce complexity? If so, what changes would you suggest? Please explain how
such changes would improve the balance between costs and benefits.
QUESTION 25
If the FRSME was changed in accordance with your response to Question 24, would
it still be suitable for use by some publicly accountable entities? If not, why not?
QUESTION 26
The current cut-off point for the FRSSE is the small company threshold (turnover
£5.6m, Balance Sheet £2.8m, Employees 50). Do you think the cut-off could be
raised to permit all companies defined as medium-sized (turnover £22.8m, Balance
Sheet £11.4m, Employees 250) under the Companies Act to use the FRSSE without
any additions to the FRSSE? If not, can you identify an intermediate level for the
cut-off, and what would it be?
QUESTION 27
If you consider that the upper limit of the FRSSE could not be raised without
amendment, what additional topics would the FRSSE need to cover if it was
extended to include medium-sized entities, and why?
We consider that, apart from de-minimus consideration, no publicly accountable
entities should fall outside of Tier 1.
As indicated previously it is our view that the definition of Tier 1 entities should be
expanded and not reduced as suggested by the Alternative View. If the concept of
Tier 1 entities being fully accountable on the basis of public accountability, all of
those entities which can have a significant impact on the lives of the public generally
should fall within Tier 1.
The question of “information that users of financial statements of public accountable
entities require which would not be disclosed in financial statements using the
FRSSME” is highly subjective and to a large extent not a relevant consideration if the
basic concept of UK GAAP is to adopt International Standards as fully as possible.
There is clearly greater detail provided in financial statements prepared under the full
IFRS as compared to the FRSME and there could be an argument for a number of
individual items of detail not being “required”. However, all of these details together
provide a larger picture to assist the understanding of the users of the statements.
Albeit on a subjective basis, the IASB has determined the level of detail to be
disclosed to provide an appropriate level of understanding by users and significant
benefits are lost if these principles are not applied to all publicly accountable entities.
The argument for reducing the complexity of the FRSME follows the same lines as
that relating to reduced disclosures for Tier 1 entities as discussed above. Any
variations to the IFRS for SME’s need to be the minimum necessary for effective
application within the UK accounting and legal framework.
We have already expressed our view that the band of Tier 2 entities eligible to apply
the FRSME should be widened by lowering the size threshold (rather than raising the
threshold) with Tier 3 entities able to apply simplified reporting standards in place of
the FRSSE, which we consider to be too similar to the FRSME as regards level of
disclosures and an unnecessary burden on the smallest entities.
The extension to the definition of Tier 1 entities we have proposed is likely to bring a
number of large entities who are major employers, users of public finance, have an
impact on the environment or have a majority market share into public accountability.
It would not be rational for such entities to be treated as Tier 2.
The FRSME should follow as clearly as possible the requirements of the IFRS for
SME’s in order to maintain international consistency and comparability so that any
proposals for simplification need to be initiated through the IFRS.
CONCLUSION
Fundamentally, the proposed reporting structure outlined in the FRED gives us
cause for concerns and we would summarise our views as follows:-
1.
All publicly accountable entities, including public benefit entities should report
under the full IFRS as Tier 1.
2.
Public Benefit entities reporting requirements should be supplemented by
separate supporting Standards, with reduced reporting requirements for the
smallest.
3.
Publicly accountable wholly owned subsidiaries should not be entitled to escape
responsibility for reporting under Tier 1 (other than under de minimus
concessions).
4.
Small entities (possibly under £2 million turnover and 25 employees) should
report under Tier 3 requirements based on a simplified IFRS for SME’s with
restricted disclosure requirements replacing the FRSSE.
5.
All other entities, as Tier 2, should apply the IFRS for SME’S.
6.
Detailed supporting Standards are required for specific sectors, (currently
SORP’s).
7.
The evaluation of implementation costs included in the FRED indicate a lack of
realism and compromise the credibility of the document, while not being
relevant to the justification for the proposed fundamental changes to UK GAAP.
8.
All of the foreseeable changes to the UK reporting requirements should become
effective on one date at the earliest practical opportunity, and including the
replacement of the FRSSE.
9.
The overriding objective of the proposed changes to UK GAAP should be to
achieve convergence with International Standards, with any variations being
only those which are unavoidable, and where possible, influencing changes to
UK law and International Standards to minimise those variations.
As a consequence, the ASB will be able to relinquish responsibilities for FRS’s
generally, but change its emphasis of effort to providing supporting Standards where
the IFRS’s are deficient, or in influencing the IASB to provide or amend Standards as
appropriate.
These proposals to change the structure of UK reporting requirements should
provide the opportunity to facilitate improvements in the quality of compliance in
reporting, especially in smaller entities, and at the same time to reduce the costs of
reporting to smaller entities as well as being accommodated by the levels of
accounting skills readily available and affordable to such entities.