Disposal of non-current assets

FRED 32 ‘Disposal of Non-current Assets and Presentation of Discontinued Operations’ was published in late July. The FRED presents proposals for a UK accounting standard based on the IASB’s Exposure Draft ED 4 of the same title. The closing date for comment is 24 October.

The key principles of the IASB’s proposals on the measurement and presentation of discontinued operations are consistent with existing US Generally Accepted Accounting Principles (US GAAP). These include:

• the classification ‘held for sale’ for non-current assets meeting certain criteria;

• the concept of a disposal group;

• the requirement that assets and disposal groups held for sale should be measured at the lower of carrying value and fair value less costs to sell;

• non-depreciation of assets held for sale, either individually or within a disposal group (even if the assets are still in use);

• separate presentation on the face of the balance sheet of assets held for sale or the assets and liabilities within a disposal group; and

• the definition of discontinued operations.

In its Preface to FRED 32, the UK Board expresses reservations about the proposals, for example questioning the suspension of depreciation on assets awaiting disposal that continue to be used. The ASB is also concerned that some confusion may arise from the early identification of businesses or assets held for sale, which may in due course remain as part of continuing operations.

Share-based payment

Last year, the IASB issued ED 2 ‘Share-based Payment’, which proposed that all entities should be required to recognise an expense, measured at fair value, whenever a share-based payment is made. The ED envisaged that a final standard would be issued in 2003 and would come into effect from 2004.

The IASB’s timetable has since slipped, and it is now envisaged that the final standard will be issued in the first quarter of 2004 and will come into effect from 1 January 2005.

On the date that the IASB issued its ED, the ASB issued FRED 31 ‘Share-based Payments’. FRED 31 proposed that all UK entities (listed and unlisted) should adopt the standard to account for all share-based payments (including SAYE-type arrangements) as soon as the standard is implemented internationally. But in the light of the delay in the IASB’s timetable, the UK Board will need to reconsider the timing of an equivalent UK standard -as part of its overall thinking on converging UK and international standards.

It is worth noting that the US standard-setter (FASB) also has a project on stock-based compensation and the objective of that project is to co-operate with the IASB to achieve convergence to one single, high-quality standard on share-based payments. FASB’s current intention is to issue an exposure draft on the subject in the first quarter of 2004. Based on tentative decisions taken to date, the proposal is likely to be that a mandatory US standard should be issued requiring the recognition of a fair value expense for share-based payment transactions. The requirements of that standard seem likely to be similar to those in the international standard.

Consolidation and Special Purpose Entities (SPEs)

At its September meeting, the IASB returned to its project on consolidation and tentatively accepted the proposition that consolidation should reflect control. This is in line with the findings of research into world-wide consolidation arrangements carried out in 2001/2 by the ASB and our subsequent recommendations. The indications are that the IASB will develop a control-based consolidation model. The Board tentatively decided that the concept of control should require satisfaction of three criteria:

• the ability to set strategic direction and to direct financing and operating policy and strategy (the ‘Power Criterion’);

• the ability to access benefits (the ‘Benefit Criterion’); and

• the ability to use such power so as to increase, maintain or protect the amount of those benefits.

Insurance accounting

From 2005, listed companies are likely to be required to follow the IFRS developed from ED 5 ‘Insurance Contracts’. ED 5’s closing date for comments is 31 October, with a final standard planned for March 2004.

In its Preface to the consultation on these proposals, the ASB has expressed concern at the lack of guidance on accounting policies to be followed and that this might lead to increased diversity in accounting for insurance contracts in the UK. The IASB is, for example, proposing withdrawing certain aspects of its framework for accounting standards, so that accounting policies for insurance contracts would not, for example, need to lead to accounting solutions which are either relevant or reliable. The ASB is recommending some tightening of the circumstances in which existing accounting policies should be accepted as being consistent with international requirements.

Meanwhile, the ASB continues to encourage the ABI to complete the final version of its Statement of Recommended Practice (SORP) for insurance entities. The exposure draft (for which the comment period ended in February 2003) proposed the abolition of several accounting alternatives to improve consistency and included improved proposals on financial reassurance and recommendations for dealing with estimation techniques, uncertainty and contingent liabilities.