UITF Abstract 41 'Scope of FRS 20 (IFRS 2)'

Abstract 41 was issued on 7 April. It has the effect of implementing IFRIC Interpretation 8 'Scope of IFRS 2' in the UK and the Republic of Ireland for entities preparing their financial statements in accordance with UK accounting standards and, in doing so, are applying FRS 20 (IFRS 2) 'Share-based Payment'.

FRS 20 'Share-based Payment' requires an entity to recognise sharebased payment transactions in its financial statements. Transactions in which an entity receives goods or services as consideration for equity instruments of the entity (including shares or share options) are sharebased payment transactions. Such transactions give rise to expenses (or, if applicable, assets) that should be measured at fair value.

IFRIC 8 was developed to address situations in those parts of the world where, for public policy or other reasons, companies give their shares or rights to shares to individuals, organisations or groups that have not provided goods or services to the company. An example is the issue of shares to a charitable organisation for less than fair value, where the benefits are more intangible than usual goods or services. Abstract 41 confirms that such arrangements fall within the scope of FRS 20 (IFRS 2). It is effective for accounting periods beginning on or after 1 May 2006.

UITF Abstract 42 'Reassessment of Embedded Derivatives'

Abstract 42 was issued on 7 April. It has the effect of implementing IFRIC Interpretation 9 'Reassessment of Embedded Derivatives' in the UK and the Republic of Ireland for entities preparing their financial statements in accordance with UK accounting standards and, in doing so, are applying FRS 26 (IAS 39) 'Financial Instruments: Measurement'. FRS 26 (IAS 39) describes an embedded derivative as a component of a financial instrument that has the features of a stand-alone derivative; that is, it causes cash flows under the instrument to vary with a specified interest rate, market price, foreign exchange rate or other financial variable. FRS 26 (IAS 39) requires an embedded derivative to be separated from the non-derivative elements of the contract, and accounted for as a standalone derivative, unless the derivative features are 'closely related' to the nonderivative features of the compound instrument.

Abstract 42 (IFRIC 9) addresses the question of whether it is necessary to reassess the treatment of an embedded derivative throughout the life of a contract if certain events occur after an entity first becomes a party to the contract. It concludes that reassessment is not permitted unless there is a significant change to the terms of the contract. Abstract 42 is effective for accounting periods beginning on or after 1 June 2006.

The interpretation of equivalence for the purposes of section 228A of the Companies Act 1985

With effect for accounting periods commencing on or after 1 January 2005, the Companies Act 1985 has been amended to include a new section 228A. This exempts, subject to certain conditions, an intermediate parent undertaking from the requirement to prepare consolidated accounts where the parent entity is not established under the law of an EEA state. The new exemption extends to UK companies an optional exemption in the EU Seventh Company Law Directive that was not taken up when its provisions were originally enacted through the Companies Act 1989.

The new exemption complements the well established exemption in section 228 for intermediate parent undertakings where the parent entity is established under the law of an EEA state.

Exemption is conditional upon compliance with various conditions, including that the intermediate parent and all of its subsidiaries are included in consolidated accounts for a larger group drawn up in accordance with the provisions of the Seventh Directive or in a manner equivalent to consolidated accounts so drawn up.

Questions have been raised as to whether financial statements drawn up in accordance with IFRS, US GAAP and other GAAPs meet the requirement for 'equivalence' with the Seventh Directive.

The UITF has been discussing this issue with a view to developing a draft Abstract, which it is hoped will be issued soon for consultation. It is not expected that the draft Abstract will address specialised industries.

The UITF takes the view that the reference to equivalence in s228A does not mean compliance with every detail of the Seventh Directive. The UITF believes that a qualitative approach, i.e. with a focus on compliance with the basic requirements of the Directive, is more in keeping with the deregulatory nature of the exemption than a requirement to consider the detailed requirements on a checklist basis.