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The Future of UK Financial Reporting Standards

The Future of UK Financial Reporting Standards. Ian Mackintosh & David Loweth UK Accounting Standards Board Dublin 6 August 2010. Coverage. Overview of the policy proposals Review of what respondents said Status of ASB redeliberations. ASB’s aim. Role of the ASB: Standard-setting.

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The Future of UK Financial Reporting Standards

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  1. The Future of UK Financial Reporting Standards Ian Mackintosh & David Loweth UK Accounting Standards Board Dublin 6 August 2010

  2. Coverage Overview of the policy proposals Review of what respondents said Status of ASB redeliberations

  3. ASB’s aim Role of the ASB:Standard-setting To contribute to the establishment and improvement of standards for financial reporting

  4. The Future of UK GAAP: The Debate So Far ASB has consulted ….extensively March 2004 Discussion Paper March 2005 Policy Statement Exposure Draft May 2006 Tentative Proposals April 2007 Consultation Paper on the IASB’s proposed IFRS for SMEs Initially a phased approach – now thinking more ‘big bang’ Strong view that we cannot sustain two different accounting frameworks.

  5. ASB published a Policy Proposal: ‘The Future of UK GAAP’ on 11 August 2009 The consultation period closed 1 February 2010 Over 150 responses received What did the ASB propose?

  6. What did the ASB propose? ASB proposed a role for the IASB’s IFRS for SMEs standard IASB published the IFRS for SMEs on 9 July 2009 Which could result in future UK/Irish reporting requirements as follows:

  7. Tier 1 Publicly Accountable entities Tier 2 All other entities Tier 3 Small entities eligible to apply FRSSE Apply FRSSE Apply IFRS for SMEs Apply EU-adopted IFRS What did the ASB propose?Framework 7

  8. Under these proposals all entities will have the option to adopt a higher tier voluntarily No reduced disclosures for subsidiaries No exceptions to public accountability What did the ASB propose?Framework

  9. Strong support for public accountability determining which entities in Tier 1 But: Subsidiaries What did the respondents say?Framework

  10. ASB Tentative Decisions:Framework Tier 2 All other entities Tier 1 Publicly Accountable entities Tier 3 Small entities eligible to apply FRSSE Apply FRSSE Apply UK adopted IFRS for SMEs Apply EU-adopted IFRS Subsidiaries (Tier 2S) Reduced disclosures Subsidiaries (Tier 1S) Reduced disclosures 10

  11. What did ASB Propose:Tier 1 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 (a domestic or foreign stock exchange or an over-the-counter market including local and regional markets); OR - It is a deposit-taking entity and/or 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, credit unions, insurance companies, securities brokers/dealers, mutual funds or investment banks.

  12. What did respondents say?Tier 1 More clarity required about definition Questions about application to certain entities, pension plans/co-operatives Concerned about very small public accountability i.e. credit unions

  13. ASB Tentative Decisions:Tier 1 • Provide application guidance on definition • Highlight information in IFRS for SMEs basis for conclusions • Clarify certain entities have public accountability

  14. ASB Tentative Decisions:Tier 1 • Provide an exception for small entities with public accountabiity: Where an entity meets all of the criteria for small companies but is not eligible to apply the small companies regime because it is regulated by the Financial Services Markets Act and then it may apply the IFRS for SMEs • Provide application guidance on definition

  15. What did ASB propose:Tier 2 Apply the IFRS for SMEs Wholesale adoption of the IFRS for SMEs

  16. What did respondents say?Tier 2 Good support for Tier 2 Yes adopt wholesale but .... What about compliance with EU Directive Tax

  17. ASB Tentative Decisions:Tier 2 • Amend IFRS for SMEs using the following guidelines: • Changes to the IFRS for SMEs should be minimal • Changes should be consistent with the EU-adopted IFRS and • Use should be made of existing exemptions in company law such that there is no gold-plating.

  18. ASB Tentative Decisions:Tier 2 • Proposed amendments are for: • Compliance with Directives • Tax – use IAS 12

  19. What did ASB propose:Tier 3 Keep FRSSE Transitional period or how long What about EU proposals on micro-entities

  20. What did respondents say?Tier 3 Agreement that FRSSE should remain for the immediate future, but what to do next? Move to IFRS for SMEs Rewrite FRSSE based on IFRS for SMEs Await outcome of EU debate on micros

  21. ASB Tentative Decisions:Tier 3 • Retain FRSSE • Review after period of implementation of IFRS for SMEs • Wait for outcome of micro-entities • Consequential amendments • References to current FRS removed • Update to look to IFRS for SMEs for reference

  22. What did the ASB propose:SORPs Is there a future role for SORPs? Is there still any benefit in terms of having SORPs? Future of the majority of SORPs dependent on the progress of IASB’s initiatives e.g. Insurance Remaining SORP’s should be withdrawn and replaced by IFRS e.g. LLP’s, Investment Companies

  23. What did respondents say?SORPs SORPs play a useful role Have increased comparability by providing guidance Strong preference to retain certain SORPs

  24. ASB Tentative Decisions:SORPs • Streamline number of SORPs, in the longer term retain • Pensions • Authorised Funds • Association of Investment Companies

  25. What did ASB Propose?Public Benefit Entities Policy Proposal suggested that an standard should be developed addressing “gaps” in IFRS for SMEs for PBE Role for the Charities SORP

  26. What did respondents say? Public Benefit Entities Strong support for the PBE standard Comparability important for the sector Role of the SORPs

  27. ASB Tentative Decisions:Public Benefit Entities • Develop standard in the mid-term for PBEs • Retain SORPs for • Charities • Registered Social Landlords • Education

  28. General Implications: ASB is compiling impact analysis, including costs and benefits Fundamental to success of ASB proposals

  29. Impact Analysis Reason for change now Current GAAP Uncomfortable mismatch of ASB and IASB standards Lacks strong, cohesive underlying principles Move to one framework Proportional framework for entities Creates efficiencies, training and education Clarity for users and preparers

  30. Impact Analysis Entities: Cost neutral Entities currently applying FRSSE Entities currently applying EU-adopted IFRS Entities: Cost benefits Subsidiaries

  31. Impact Analysis Entities: Longer term benefit exceeds cost Entities moving to IFRS or SMEs Cost: Transition/implementation Benefit: More concise preparer friendly standard Simplicity in application Improve comparability for users Improve financial instruments reporting

  32. Impact Analysis Entities: Longer term benefit exceeds cost Entities moving to Tier 1 (entities with public accountability) Cost: Transition/implementation Ongoing application cost Benefit: Increase transparency Improved financial instrument reporting Improve information to users Potential reduction in cost of capital

  33. Next Steps Draft FRED (including impact analysis) Issue FRED for comment Further constituent input Develop PBE FRED

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