Purchases and Sales of Own Shares

Abstract 37 ‘Purchases and sales of own shares’ was issued on 28 October 2003. It requires a holding of an entity’s own shares to be accounted for as a deduction in arriving at shareholders’ funds, rather than being recorded as assets. Transactions in an entity’s own shares are similarly recorded as changes in shareholders’ funds and do not give rise to gains or losses. The requirements are consistent with International Accounting Standards.

Abstract 37 takes effect for accounting periods ending on or after 23 December 2003 and therefore applies where a company purchases treasury shares under new legislation that came into effect in December. It also applies, in consolidated financial statements, where the holding company’s shares are held by subsidiaries (as reported in October 2003’s Inside Track).

Accounting for ESOP Trusts

On 15 December 2003 the UITF issued Abstract 38 ‘Accounting for ESOP trusts’, which supersedes Abstract 13. Abstract 38 changes the presentation of an entity’s own shares held in an ESOP trust from requiring them to be recognised as assets to requiring them to be deducted in arriving at shareholders’ funds. Transactions in an entity’s own shares by an ESOP trust are similarly recorded as changes in shareholders’ funds and do not give rise to gains or losses. This treatment is in line with the accounting for purchases and sales of own shares set out in Abstract 37 (and the draft revised Abstract 13 issued in May 2003 in Information Sheet 60).

Abstract 38 does not include any requirements concerning the recognition of the cost of awards to employees that take the form of shares or rights to shares. Those accounting requirements are now covered by Abstract 17 (see below). Abstract 38 will be mandatory for accounting periods ending on or after 22 June 2004.

Employee share schemes - Amendment to Abstract 17

Also on 15 December the UITF issued an amendment to Abstract 17 ‘Employee share schemes’. Abstract 17 is amended by Abstract 38 to reflect the consequences for the profit and loss account of the changes in the presentation of an entity’s own shares held by an ESOP trust. Amended Abstract 17 requires that the minimum expense should be the difference between the fair value of the shares at the date of award and the amount that an employee may be required to pay for the shares (ie the ‘intrinsic value’ of the award). The expense was previously determined either as the intrinsic value or, where purchases of shares had been made by an ESOP trust at fair value, by reference to the cost or book value of shares that were available for the award. The revised treatment is in line with the supplementary consultation note issued in October 2003 (Information Sheet 63).

The full text of the amended Abstract 17 has been published as Abstract 17 (revised 2003). It will be mandatory for accounting periods ending on or after 22 June 2004.

Emission Rights

In May 2003 the UITF issued a draft Abstract on accounting for emission rights (Information Sheet 61). It addresses the accounting by participants in an emissions trading scheme that applies a ‘cap and trade’ model. The UK’s Emissions Trading Scheme, launched in 2002, is an example of such a scheme. Participants accept a cap on their carbon dioxide emissions and receive tradable emission allowances corresponding to the amount of the cap. An EU-wide scheme will start in 2005.

The proposed Abstract presents the text of a draft Interpretation from the IASB’s International Financial Reporting Interpretations Committee (IFRIC), together with the changes that the UITF proposed to reflect accounting requirements in the UK where they differed from international accounting standards. It proposes that a participant should recognise separately an asset (for emissions allowances held), a liability (for the obligation to deliver allowances for emissions that have been made) and a government grant (where allowances are allocated by government for less than fair value).

The UITF is concerned that the proposed accounting model is not consistent as regards measurement and reporting of changes in these component assets and liabilities. Respondents to the UITF’s consultation have shared this concern. The IFRIC has responded to similar concerns of respondents to its consultation by requesting the IASB to consider an amendment to IAS 38 Intangible Assets. IFRIC’s recommended amendment would require emissions allowances to be measured at fair value, with changes in value reported in the profit and loss account. The IASB decided at its meeting in December 2003 to propose changes to IAS 38 on the lines recommended by IFRIC and to consider proceeding to withdraw IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. The UITF will monitor the progress of IFRIC’s debate in the light of changes proposed by IASB, before deciding on the next steps.