ASB issues Amendment to FRS 26 'Financial Instruments: Measurement - Recognition and Decrecognition
This month, the ASB has issued an Amendment to FRS 26. This amendment will implement the recognition and derecognition material as included in the international financial reporting standard IAS 39 'Financial Instruments: Recognition and Measurement'.
In the exposure drafts preceding FRS 26 the Board had decided not to implement in the UK the sections of IAS 39 relating to recognition and derecognition of financial instruments as it doubted the validity of the method of derecognition being considered by the IASB. Consequent to the IASB revising the derecognition model the Board decided to bring FRS 26 fully in line with IAS 39 by implementing the IAS 39 recognition and derecognition material into the standard.
For entities within the scope of FRS 26, the existing requirements of FRS 5 'Reporting the Substance of Transactions' would be superseded for transactions in financial assets and liabilities that fall within the scope of the new requirements, but FRS 5 would continue to apply to transactions in non-financial assets and liabilities.
Entities within the scope of FRS 26 also need to comply with the disclosure requirements of FRS 25 (IAS 32) 'Financial Instruments: Disclosure and Presentation' or, from 2007, FRS 27 (IFRS 7) 'Financial Instruments: Disclosures'. The amendment inserts disclosure requirements relating to derecognition into these two standards.
In the exposure draft setting out these amendments the Board had also proposed to extend the scope of FRS 26 to all entities, excluding those applying FRSSE, in the UK. The Board agreed to defer a decision on the extension of the scope until it had reached conclusions on the wider issue of convergence of UK standards with IFRS.
The amendments are effective for accounting periods commencing on or after 1 January 2007, with earlier adoption permitted. Transitional provisions are also set out for initial adoption of the amendments.
ASB issues Reporting Statement on the Operating and Financial Review (OFR)
In January, the ASB issued a Reporting Statement 'The Operating and Financial Review'.
The Reporting Statement has been issued in the light of the Government's decision to remove the statutory requirement on quoted companies to publish OFRs. Following the repeal of the legislation, the ASB has withdrawn Reporting Standard (RS) 1 'The Operating and Financial Review' and has converted RS 1 into a statement of best practice on the OFR.
Legislation remains in place requiring companies to prepare an enhanced review of their business (the Business Review) in the directors' report, in line with the provisions of the 2003 EU Accounts Modernisation Directive.
Many major companies already publish an OFR on a voluntary basis and the ASB is keen that they should continue to do so, which is why it has issued the statement as an up-to-date and authoritative source of best practice guidance for companies to follow. The guidance set out in the statement is more specific than the requirements set out in legislation, in particular with regard to forward-looking information.
In preparing this statement, the ASB has sought to limit the changes to those required as a consequence of the repeal of the OFR legislation and to make the language consistent with a voluntary statement of best practice rather than a standard. Given the extensive consultation that took place in developing RS 1, and the need to continue to give entities guidance in preparing voluntary OFRs, the ASB has issued this as a final Reporting Statement, rather than engaging in a further round of consultation.
In the meantime, the Government has been consulting on whether the legal provisions on the Business Review or other provisions contained in the Company Law Reform Bill should be clarified or amended so as to ensure effective, forward-looking narrative reporting by quoted companies. That consultation closed on 24 March.
ASB issues Discussion Paper Heritage Assets - Can Accounting Do Better?'
In January, the ASB published a Discussion Paper setting out proposals to improve the consistency and transparency of the financial reporting of heritage assets. The proposals will be relevant to entities such as museums holding collections of art, antiques and books and also entities which own and manage landscape or buildings for their environmental or historical qualities.
The ASB's work in developing the proposals was led by its Committee on Accounting for Public-benefit Entities (CAPE). The Discussion Paper has been developed in collaboration with the International Public Sector Accounting Standards Board, which published the ASB paper separately in February.
The Discussion Paper proposes that entities should adopt a policy of recognising heritage assets where it is reasonably practical. Specifically, a capitalisation approach is to be required where it is practicable to obtain valuations which, when supplemented with appropriate disclosures, provide useful and relevant information sufficient to assist in an assessment of the value of heritage assets held by an entity.
However, where it is clear that practical considerations prevent this, a 'non-capitalisation' approach should be adopted. Entities would be required to provide relevant disclosures (including the reasons why valuation is not practicable) and consistently apply a policy of reporting heritage transactions in a way that does not distort financial performance.
Example disclosures are included in the Discussion Paper to illustrate the proposals.
The ASB is seeking comments on the Discussion Paper by 31 May. A copy of the Discussion Paper can be downloaded from the ASB's website.
ASB issues proposals to update the FRSSE
This month, the ASB has issued an Exposure Draft of an Amendment to the Board's Financial Reporting Standard for Smaller Entities (FRSSE). Since the FRSSE was last updated, eight new FRSs have been issued. There have also been two amendments to FRSs and two new UITF Abstracts. In considering whether these changes in financial reporting are appropriate for smaller entities, the Board has been advised by its specialist Committee on Accounting for Smaller Entities (CASE).
The Exposure Draft also considers FRS 20 (on share-based payment), which was not addressed in the last amendment to the FRSSE, and recent changes in company law financial reporting requirements. In particular, the Board is seeking views on its proposal to apply in full the requirements of FRS 20.
The Exposure Draft is expected to lead to the fifth periodic revision to the FRSSE. It is proposed the amendment will be effective for accounting periods beginning on or after 1 January 2007. Comments on the Exposure Draft are requested by 31 July 2006.
Proposals issued on Share-based Payment
In February the IASB issued an exposure draft of amendments to IFRS 2 'Share-based Payment', clarifying the treatment where a share option is cancelled by the employee.
Under the standard, where share options are granted to employees, the value of the options (at grant date) is treated as an expense over the period in which services are received from the employee - normally the period until the options can be exercised. Where the employer cancels the option, the standard requires the unamortised balance of the cost to be expensed immediately at the date of cancellation.
However, the standard is silent on how to treat cancellations by the employee (other than where the employee leaves the employment). Cancellations by the employee are common in schemes such as save-as-you-earn (SAYE) or similar savings-related share option schemes, where the employee must make regular payments into a savings account to remain entitled to the options. Employees may decide to cancel for a number of reasons even though this may mean forgoing valuable options.
Under the proposed amendment, such cancellations would be treated in the same way as cancellations by the employer - the unamortised balance of the cost would be recognised immediately. The likelihood of cancellations would also need to be taken into account in determining the fair value of the options at the grant date.
The ASB has some concerns over this proposal, as it results in the recognition of a cost in the period a cancellation occurs even though no additional services are received from the employee in that period. However, as IFRS 2 has been implemented in the UK as FRS 20 (IFRS 2) 'Share-based Payment', a corresponding amendment to FRS 20 will be needed to keep the standards converged if the IASB proceeds with its amendment. The ASB has therefore issued the proposals as a UK exposure draft, for comment by 2 June (the same date as the IASB comment deadline).
