On 18 October the ASB issued UITF Abstract 31 'Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or associate'. The Abstract addresses the accounting treatment in consolidated financial statements of increasingly common transactions where an entity (A) exchanges a business or other non-monetary assets for an interest in another entity (B). Entity B, not being a subsidiary initially, may become a subsidiary after the transaction or it may be, or become, a joint venture or associate. An important issue is whether such transactions should be reported by entity A at fair values or book values; this affects the amounts of profits or losses and goodwill that are recognised in relation to the exchange. The Abstract is based on a draft published in May, refined in the light of comments made by respondents. The Abstract requires such transactions to be analysed in terms of net changes in ownership interests. The part of the business exchanged that is owned by A directly before and indirectly (through its interest in B) after the transaction should remain at book value. In contrast, A's share of net assets acquired through its new interest in B should be accounted for at fair value. Goodwill should be recognised in respect of A's new interest in B; a gain or loss should be recognised in respect of the part of the business that is no longer directly or indirectly owned by A.

Abstract 31 is effective for transactions first accounted for in accounting periods commencing on or after 23 December 2001. Earlier adoption is encouraged.

In the light of questions that have been raised, the UITF has discussed whether it should issue guidance on accounting for the effect of the terrorist attacks on the USA on 11 September. The UITF decided not to issue special guidance because it believes that the accounting issues are adequately covered by accounting standards in the UK and the Republic of Ireland. For example, under FRS 3, losses resulting from the events of 11 September will be classified as part of ordinary activities, with additional disclosure as exceptional items if such losses meet FRS 3's definition of that term.

In December of last year the UITF reported that it had, on several occasions, considered the appropriate balance sheet classification (ie as liabilities, shareholders' funds or, in consolidated financial statements, minority interests) of various capital instruments under FRS 4 'Capital Instruments'. The UITF has decided that further guidance is necessary on how the principles of FRS 4 and FRS 5 'Reporting the Substance of Transactions' should be applied to complex capital instruments, particularly those that have characteristics of both debt and equity.

The UITF's proposals are set out in a draft Abstract published in UITF Information Sheet 49 on 11 October. FRS 4 sets the principle that capital instruments should be presented in the balance sheet in a way that reflects the obligations of the issuer. Among several issues addressed in the draft Abstract is the presentation of capital instruments that oblige the issuer either to transfer economic benefits or to issue shares. The draft Abstract proposes that such instruments are treated as a liability if (a) there is no genuine commercial possibility that the option to issue shares will be exercised or (b) there is a genuine commercial possibility that the issuer will transfer economic benefits or issue shares, but the holders of the instrument in any event have a right to a fixed monetary value. The UITF also proposes that such instruments should not be treated as equity if a company does not, at the balance sheet date, have authority to issue sufficient shares to settle the obligation.

Comments on the proposed Abstract should be addressed to Hans Nailor and sent to arrive by 22 November. Comments may be sent by email to uitf@asb.org.uk.

A draft Abstract, published in July in Information Sheet 48, is intended to clarify how the principles of FRS 5 and UITF Abstract 13 apply when an entity sets up and funds a trust to remunerate some or all of its employees or when other, similar intermediate payment arrangements are entered into. The draft Abstract addresses two important issues: (a) what assets and liabilities the sponsoring entity should recognise and (b) when the entity should recognise an expense.

A particular issue is whether assets held in trusts can be under the de facto control of the sponsoring entity. The draft Abstract upholds the principles in FRS 5 that are already reflected in Abstract 13. The UITF's view is that assets held by intermediate payment vehicles are under the de facto control of the sponsoring entity if there are, in practice, no significant encumbrances to the sponsoring entity's wishes being carried out. Where this is the case, the sponsoring entity should report those assets as its own and a payment to the intermediate payment vehicle is not an immediate expense. Comments were requested by 17 August and the UITF is considering issues raised by respondents.