In addition to consolidation policy (page 3), the ASB is working on the following projects.
Reporting financial performanceFRED 22 'Revision of FRS 3 "Reporting Financial Performance"', published last December, proposed a single statement of financial performance replacing the existing profit and loss account and the statement of total recognised gains and losses. The statement would contain three sections:
- operating
- financing and treasury
- other gains and losses.
Responses to the FRED have been received and analysed and the ASB is continuing to develop its thinking on the subject. The IASB has meanwhile included a first-priority project on reporting performance on its agenda and is considering a report from the former IASC's Steering Committee on the subject. This report has also been considered by the ASB, which is to work on the topic in partnership with the IASB.
Operating and Financial ReviewThe ASB is starting to review its Statement 'Operating and Financial Review', issued in 1993 as a formulation and development of best practice. The ASB believes that, in view of improvements in non-financial reporting, an update is now desirable. The IASB has indicated that such a project could pave the way for international guidance. The Company Law Review has recommended that an OFR should be mandatory for listed and very large private companies; however, the present project is not aimed at developing the extent of guidance that the proposed mandatory statement might require. A working party of experts has been formed to help the ASB with this project and the aim is to publish an exposure draft in the first half of next year.
Financial Reporting Standard for Smaller Entities (FRSSE)The ASB's Committee on Accounting for Smaller Entities has considered the implications for the FRSSE of the ASB's recent projects. A complete revised FRSSE, taking account of the four FRSs and eight UITF Abstracts issued since the last revision was proposed in July 1999, is scheduled for issue in December.
When the ASB first issued the FRSSE in November 1997, it stated its intention to review how the FRSSE, as a whole, was working in practice after two full years of operation. To begin the review the ASB published a Discussion Paper 'Review of the Financial Reporting Standard for Smaller Entities (FRSSE)' in February 2001. The responses have been analysed and possible developments are being considered. The IASB has included 'Accounting by Small and Medium Entities and in Emerging Economies' in its list of potential projects. The ASB is considering how it might best contribute.
LeasesThe ASB is reviewing, and developing in the light of the comments received, the proposals in the Discussion Paper 'Leases: Implementation of a New Approach', published in December 1999. The Paper proposed that the distinction made in present accounting standards between operating and finance leases should be discarded and that all leases should be accounted for in the same way. It also sought to explain how this approach might be applied in practice. Responses to the Paper showed significant support for the idea of a single method of accounting for all leases. However, respondents raised concerns about how such an approach might be implemented. The ASB will continue to consider issues raised by respondents, focusing on lessee accounting initially. Its work will include consideration of the responses to the proposal to introduce a general ban on the use of interest methods of depreciation and amortisation. The IASB has included leases in its list of future projects and has asked for regular reports on progress with the ASB's project.
Debt/equityFRS 4 'Capital Instruments' contains provisions on the allocation of capital instruments between equity and liabilities. The UITF has considered the classification of various types of capital instrument. The ASB therefore decided in 2000 to carry out a high priority review of FRS 4. However, as questions concerning the appropriate balance sheet classification of various capital instruments have arisen in many jurisdictions, the ASB subsequently decided to join with other standard-setters in an international review of the principles underlying the distinction between debt and equity. This work is expected to take some time to complete.
Financial instruments— Measurement and hedge accountingFollowing the publication of the ASB's own Discussion Paper 'Derivatives and other Financial Instruments' in 1996, staff from the ASB joined with nine other standard-setters in setting up the Financial Instruments Joint Working Group (JWG). The JWG's proposals, published in December 2000 as a Consultation Paper 'Financial Instruments and Similar Items' were that: all financial instruments should be carried on the balance sheet at fair value; all changes in fair values should be recognised immediately in the profit and loss account; and hedge accounting should be prohibited. The Board has spent much time this year forming its own views on the JWG's proposals. It has now started to consider the UK and international responses.
The ASB strongly supports the development of an internationally agreed comprehensive standard on financial instruments, and therefore looks to the IASB to play a central role in taking the project forward. The ASB intends to contribute fully in the international debate; it has no plans to issue its own exposure draft based on the JWG's proposals. Even if those proposals were widely supported, it seems unlikely that a standard could be in place in under five years.
In July the IASB announced a short-term high priority improvements project on IAS 39, the existing 'mixed model' international standard on financial instruments. That, together with the long gestation period necessary to develop a standard from the JWG's proposals, suggests that the standard that companies will be applying from 2005 is likely to be the improved IAS 39, rather than the existing IAS 39 or a standard based on the JWG's proposals. The ASB intends to participate fully in the IASB's IAS 39 improvements project and it encourages UK commentators to participate.
DerecognitionThe ASB has begun a review of FRS 5 'Reporting the Substance of Transactions', which deals with the derecognition of financial instruments and other balance sheet items. There are two main reasons for the review.
The first is convergence. Although FRS 5 is working reasonably well, derecognition pronouncements elsewhere, largely focused on financial instruments, have adopted an approach that is fundamentally different. International agreement is needed for a common approach. IAS 39 'Financial Instruments: Recognition and Measurement' provided the first opportunity to develop an approach around which accounting for the derecognition of financial instruments could converge; this has, however, proved problematical. The IASB's improvements project will provide a further opportunity to encourage convergence in the derecognition of financial instruments. As part of this work, the ASB will on behalf of the JWG and the IASB analyse the global responses to the convergence proposals on derecognition contained in the JWG Consultation Paper (see previous item).
The second reason to reconsider derecognition is that whilst FRS 5 deals with all types of asset and liability, there is no IAS equivalent. Therefore, the move to IASs could mean that there would no longer be requirements covering the derecognition of non-financial instruments. Fortunately, the IASB has acknowledged this gap and has asked the ASB to undertake the wider derecognition project, using its experience of FRS 5.
Revenue recognitionThere is no accounting standard in the UK and the Republic of Ireland that deals with the top line of the profit and loss account (usually called 'turnover' but referred to by the ASB as 'revenue'). Although not a problem in the past, the increasing complexity of business activities and the absence of a framework underlying existing practices have allowed inconsistencies to arise between industries and even between companies within a single industry.
These inconsistencies are not merely the result of practical difficulties in deciding how to proceed: they also reflect different views of what revenue should represent, and of how financial statements should portray a business's operating activities. There is a need for a coherent framework that can be used consistently to address revenue issues in different contexts. The Discussion Paper 'Revenue Recognition', published in July, was the first step in this process.
The ASB recognises that revenue recognition issues are not unique to the UK and the Republic of Ireland. It therefore sees its Discussion Paper as a contribution to the international debate. It hopes to develop, in conjunction with the IASB and other standard-setters, a framework that can be used as the basis for a standard dealing with general revenue principles.
Share-based paymentIn July 2000 the ASB published a G4+1 Discussion Paper 'Share-based Payment', prepared by the ASB's staff. The Paper proposed that share-based payment transactions should be recognised in the financial statements and measured at the fair value of the share-based payment consideration at vesting date. An estimate of the transaction amount should be accrued over any performance period involved and finalised on vesting date. Responses to the Paper were evenly divided on the proposal to recognise an expense, with substantial support from the users of financial statements and substantial criticism from preparers. Of those supporting the proposal, most thought the expense should be measured at fair value, but only a minority thought it should be fair value on vesting date—many supported grant date instead.
In July the IASB announced that one of its priority projects would be share-based payment. The ASB has therefore shifted the focus of its work on the subject to participate in the international debate that the IASB will generate. The ASB has no plans to develop its own accounting standard on share-based payment. The IASB announced in September that it had reopened the comment period on the July 2000 Discussion Paper. The ASB will ensure that the IASB is made aware of all the letters that the ASB received during the original comment period.
Statement of Principles for the public and not-for-profit sectorsFollowing the issue of the ASB's Statement of Principles for Financial Reporting in December 1999 the project to develop a parallel Statement of Principles for the public and not-for-profit sectors has begun, under the aegis of the ASB's Public Sector and Not-for- profit Committee. Some initial work has been completed, with contributions received from a number of interested parties. The next steps include preparing an Exposure Draft for public consultation, with due regard to international developments.
