Retirement benefits

The ASB expects to issue in December an FRS on retirement benefits. In the light of the responses to the exposure draft FRED 20 some relatively minor changes have been made to the proposals. The FRS will, however, retain the basic principles of measurement at fair value and immediate recognition of all gains and losses (the ongoing cost in the profit and loss account and market fluctuations in the statement of total recognised gains and losses).

Accounting policies

In December 1999, the ASB published FRED 21 ‘Accounting Policies’, which set out proposals on the selection, application and disclosure of accounting policies. In March, the ASB published a Supplement to the FRED, proposing disclosures relating to compliance with Statements of Recommended Practice. Most respondents were broadly supportive of the proposals set out in the two documents, but a number of issues of detail were raised. The ASB has been considering how best to address these in a standard based on the FRED, and expects to issue an FRS before the end of the year.

Year-end financial reporting

In February the ASB published a Discussion Paper ‘Year-end Financial Reports: Improving Communication’, which considered how it might be possible to adapt financial statements to improve communication with private investors. Its main conclusion was that listed companies should send summary financial statements (SFSs) to all shareholders by default, with the preliminary announcement retaining its existing role as a means of early communication to the market. The full financial statements would continue to be used for filing purposes and be available on request. The option of providing a further simplified financial review to shareholders not opting to be sent full financial statements or SFSs would also be made available to companies.

Respondents were broadly supportive of the proposals. There was widespread agreement that the interests of private shareholders would be better served by some form of shortened financial statements. Less clear was what form such statements should take. While some agreed with the proposal to send SFSs to shareholders by default, others favoured the use of a statutory preliminary announcement (as proposed by the Company Law Review in March) or a further simplified financial review not necessarily containing any tabulated financial information. A large majority of respondents were of the opinion that, if the proposals were adopted, the ASB should produce some form of best practice guidance covering the contents of SFSs and the simplified financial review. There was also support for the general direction of the proposals detailing what such guidance might look like, as long as it retained flexibility for companies to decide the best way of communicating with their own shareholders.

The main points raised by respondents have been communicated to the Secretary of the Company Law Review and a consultation document including revised proposals is expected in late November.

Revenue recognition

Work has continued on the ASB’s revenue recognition project, which builds on certain concepts from the Statement of Principles and, in particular, on the idea of the ’critical event in the operating cycle’. One of the project’s main aims is to clarify and unify the principles underlying the recognition of revenue and profits from trading activities. The project focuses on how the recognition of revenue is related to contractual performance, and it also considers the recognition of profits in other circumstances, such as where liquid and active markets exist for a business’s products. The ASB hopes to publish a Discussion Paper around the end of the year.

Leases

The Discussion Paper ‘Leases: Implementation of a New Approach’ was published in December last year. Responses showed a large measure of support for the proposal that a single method should be used to account for all leases, and that assets and liabilities arising under those leases at present treated as operating leases should be recognised. Respondents also, however, raised a number of issues that are now being analysed and alternative approaches that are being explored. It is unlikely that an exposure draft will be published before the middle of next year. The ASB is continuing to exchange views and information with other members of the G4+1 on this topic.

Deferred tax

In December last year, the ASB published FRED 19 ‘Deferred Tax’. The FRED proposed that the present partial provision method of accounting for deferred tax should be replaced by a full provision method, primarily to align UK requirements more closely with international practice. The full provision method proposed in the FRED is not, however, identical to that required by International Accounting Standards (IASs). In particular, the FRED proposed that deferred tax should not be provided for on revaluation gains, reflecting the ASB’s view that the mere revaluation of an asset does not give rise to an obligation to pay more tax. Further, the FRED proposed that long-term deferred tax balances should be discounted: discounting is prohibited in the IAS.

The ASB is now close to completing its discussion of the responses it received to the FRED. Most respondents agreed with the ASB that, in the light of recent international developments, the proposed move to full provision accounting was necessary. Further, most supported the full provision method proposed, and in particular the decision not to adopt the method used in IASs. The FRS’s requirements will therefore be similar to those proposed in the FRED.

Opinion was very much divided over whether long-term deferred tax balances should be discounted. Most respondents commenting on this issue agreed that it was conceptually correct to discount deferred tax, but noted that the calculations could be complicated and that the benefits of discounting might not outweigh the costs. Given this, and the fact that the UK is pioneering discounting for deferred tax, the ASB decided that the FRS should permit discounting but not require it.

The ASB has also decided to add a requirement for deferred tax to be provided for on timing differences arising when assets are marked to market with gains and losses being recognised in the profit and loss account. It hopes that the FRS will be issued before the end of the year, with the requirements coming into effect for financial years ending on or after 22 June 2001.

Derivatives and other financial instruments

In 1996, the ASB concluded in a Discussion Paper ‘Derivatives and other Financial Instruments’ that, in principle, all financial instruments should be measured in the financial statements at current value and that the use of hedge accounting techniques should be regulated more closely. It also concluded that the issues involved needed to be debated further, both in the UK and internationally, before it would be appropriate to develop a UK standard on the subject. With that objective in mind, a year later it joined forces with eight other national standard-setters and the International Accounting Standards Committee (IASC) in a joint working group (the JWG) tasked to develop a comprehensive set of proposals on accounting for financial instruments.

The JWG’s paper is now nearly finalised, and is likely to propose that:

• all financial instruments should be carried at fair value. Fair value for these purposes means the estimated market exit price.

• all gains and losses arising from changes in the fair values of financial instruments should be recognised immediately in the profit and loss account.

• hedge accounting should not be permitted if the hedging instrument is a financial instrument.

The JWG will also be setting out proposals on the recognition and derecognition of financial instruments. It is building its proposals on a components approach, which is a very different approach from the one set out in FRS 5 ‘Reporting the Substance of Transactions’, though in many cases the end result will be similar.

The JWG’s paper is expected to be published towards the end of the year in the form of a discussion paper by each of the participating standard-setters. The intention is that all the comments received will be shared among JWG members and that the participating standard-setters will, when subsequently developing their own standards on financial instruments, do their best to achieve a harmonised approach to accounting for financial instruments.

Intangibles

As part of its proposals for improving UK competitiveness, the DTI asked the ASB to consider whether further guidance was necessary on certain aspects of the Statement ‘Operating and Financial Review’. In particular, the DTI was keen for companies to use the OFR to discuss forward-looking, strategic information and aspects of their worth not reflected in the primary financial statements. The ICAEW has offered to undertake a project to survey existing best practice in this area and will develop a report on the results, with suggested guidelines for best practice. As a separate exercise, the ASB is taking a closer look at the recognition and measurement rules applied to various kinds of intangible assets under UK GAAP, particularly FRS 10 ‘Goodwill and Intangible Assets’ and SSAP 13 ‘Accounting for research and development’. The review will include an assessment of the approaches taken in other jurisdictions, especially in IAS 38 ‘Intangible Assets’.

Reporting financial performance

The ASB has considered the responses received, including those from constituents of the other members of the G4+1, on the Discussion Paper ‘Reporting Financial Performance: proposals for change’. The ASB is now developing a FRED, which will, it is hoped, be published before the end of the year. The FRED will, in due course, lead to an FRS that will revise FRS 3 ‘Reporting Financial Performance’.