The Accounting Standards Board (ASB) has been considering its plans for convergence with International Financial Reporting Standards (IFRS) for some time now. This has included a significant amount of public consultation, but as the ASB moves to finalising its proposals it would like to obtain the further views from its constituents.

Some tentative proposals

The ASB’s current thinking, on which it would like views, is:

1. All UK Public Quoted and other publicly accountable companies would be required to apply full IFRS, irrespective of turnover and whether they present group accounts or not. This would mean that approximately another 1,000 to 1,500 companies would be require to report under IFRS.
2. The use of the ASB’s Financial Reporting Standard for Smaller Entities (FRSSE), which enables small entities to take advantage of simplified requirements, would be extended beyond small companies to include medium-sized entities. This would mean that approximately another 30,000 companies would be able to use the FRSSE.
3. UK subsidiaries of group companies that apply full IFRS would also be required to apply full IFRS in respect of measurement and recognition, but with reduced disclosure requirements (yet to be defined). This would affect approximately 14,000 companies.
4. There has not yet been a decision on companies that do not fall within 1, 2 or 3 above. There are approximately 7,000 companies in this “gap”. The alternatives seem to be (i) extend the application of the FRSSE further, (ii) apply IFRS to more companies, (iii) maintain UK GAAP for them, or (iv) some combination of these three alternatives.

UK Public Quoted and other publicly accountable companies

The ASB’s current thinking is that this will include AIM, OFEX and Investment Trust companies. The ASB is also minded to adopt the same definition of public accountability as that used by the IASB:

“An entity has public accountability if:

(a) there is a high degree of outside interest in the entity from non-management investors or other stakeholders, and those stakeholders depend primarily on external financial reporting as their means of obtaining financial information about the entity; or

(b) the entity has an essential public service responsibility because of the nature of its operations.”

The ASB will be carrying out further work to determine how this definition might be operationalised.

FRSSE

Currently, the FRSSE may be applied by entities that meet the legal definition of a small company or group (ie those meeting at least two out of the following three criteria: turnover not exceeding £5.6 million; balance sheet total not exceeding £2.8 million; and not more than 50 employees). The ASB is considering whether it might extend the permitted use of the FRSSE beyond small companies and small groups to include medium-sized companies; thereby enabling more entities to take advantage of the simplified requirements it contains. The qualifying conditions for medium-sized companies and groups are based on meeting at least two of the following three criteria: turnover not exceeding £22.8 million; balance sheet total not exceeding £11.4 million; and not more than 250 employees.

Subsidiaries

The ASB is aware that some UK subsidiaries of group companies that apply full IFRS continue to report under UK GAAP. Such companies currently have a choice under UK law whether to use IFRS or UK GAAP. The ASB considers that future reporting for these subsidiaries should be based on IFRS, but with derogations from a number of disclosure requirements.

The International Accounting Standards Board’s (IASB’s) Small and Medium-sized Entities (SME) project

The ASB recognises that final decisions on these matters should not be made until it has a clearer understanding on the outcome of the IASB’s project on an IFRS for SMEs. An Exposure Draft (ED) on this subject is due in the next few months and this should give the Board a preliminary idea of what such a standard may look like. The ASB would then be able to consider its applicability to UK companies. Possibilities seem to include replacing the FRSSE with it or using it for the “gap” that has been identified above.

Costs and benefits

In making any of these changes the ASB needs to consider the costs and benefits involved. The ASB will prepare a Regulatory Impact Assessment (RIA) when it issues firm proposals. To inform this exercise, the ASB would be grateful for constituents’ (particularly preparers and users) views on these costs and benefits.

Views

We urge UK entities that will be affected by such changes to consider the proposals carefully and make their views known to the ASB. In particular views on the following matters would be helpful:

1. The extension of IFRS to more companies.
2. The proposal that medium sized companies be allowed to use FRSSE.
3. Reduced disclosure requirements for subsidiaries using IFRS.
4. The best financial reporting for those approximately 7,000 companies in the “gap”.
5. The operationalisation of the IASB definition of “publicly accountable companies”.
6. The costs and benefits of the proposals.

It would be helpful if the comments could be received by 31 July 2006. Comments should be sent to Peter Godsall, preferably by email (p.godsall@frc-asb.org.uk) or in writing sent to the address shown above.

1. In March 2005, the ASB published an Exposure Draft (ED) of a Policy Statement on its future role, including proposals for achieving the convergence of UK accounting standards with IFRS.
2. The ASB stated in the ED that it believes that there can be no case for maintaining differences between the principles underlying UK accounting standards and IFRS. In the ED, the ASB had proposed to bring UK standards into line with IFRS using a phased approach, bringing a number of standards on related topics into effect each year over a 3-4 year period. The respondents expressed a variety of views on this and – at a public meeting held in January 2006 – the ASB proposed that further UK standards should be introduced with a common effective date, currently estimated to be financial years beginning on or after 1 January 2009. The papers for that public meeting, and a note of proceedings, can be accessed on the ASB website at: http://www.frc.org.uk/asb/about/pub1002.html.
3. At the public meeting, the convergence strategy generated a significant amount of debate. Differing views were expressed about whether full IFRS should be applied to more entities than those that are required to adopt them by the EU Regulation. Some thought large private companies should be required to report under full IFRS, others thought it was not about size but public accountability and yet others thought full IFRS should not be required by those that are not legally required to adopt it. It was generally agreed that there was a case for having a simpler alternative for the smallest companies. Whether that would be IASB’s IFRS for SMEs or a FRSSE would depend on progress with the IASB’s project and its outcome.
4. One of the key issues for the ASB in setting a workable strategy for convergence is determining where the boundaries should be between full IFRS and any simplified alternative. The proposals set out in the Notice reflect the ASB’s initial considerations on this issue. The ASB’s estimates of company numbers affected have been derived from the Financial Analysis Made Easy (FAME) database.
5. The ASB is an operating board of the Financial Reporting Council (FRC). The FRC is a unified, independent regulator. Its mission is to promote confidence in corporate reporting and governance. The FRC incorporates six operating boards: the ASB, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Accountancy Discipline and Investigation Board and the Professional Oversight Board for Accountancy.
6. The role of the ASB is to issue accounting standards. The ASB collaborates with accounting standard-setters from other countries and the International Accounting Standards Board (IASB) both in order to influence the development of international standards and in order to ensure that its standards are developed with due regard to international developments.
7. The ASB has up to ten Board members, of whom two (the Chairman and the Technical Director) are full-time, and the remainder, who represent a variety of interests, are part-time.