Factsheet 320 - January 2012

The ASB plans to replace UK GAAP with a new financial reporting regime from 2015. How will this affect your business?

What are the proposals for UK GAAP?

The ASB (Accounting Standards Board) proposes the following

approach:

EU-adopted IFRS The FRS FRSSE

Listed group

(LSE or AIM)

Private Companies

Individual listed

companies

Listed parents

Not-for-profit entities

Eligible

small

entities

Reduced Disclosure

Framework for

qualifying

parent/subsidiary

Disclosure

exemptions for

qualifying

parent/subsidiary

Any entity can elect to use EU-adopted IFRS, or an eligible

small entity could chose The FRS (the Financial Reporting

Standard Applicable in the UK and Republic of Ireland) or

EU-adopted IFRS rather than the FRSSE.

When will the changes come into effect?

The ASB proposes to adopt the new regime for financial years

beginning on or after 1 January 2015 at the earliest (which

would require 2014 comparatives to be restated).

What is The FRS?

The FRS will replace all current UK accounting standards. It is

based on the International Financial Reporting Standard for

Small and Medium-sized Entities (IFRS for SMEs). However,

a number of amendments have been made to the IFRS for

SMEs, to make it more suitable for use in the UK. These

include introducing accounting treatment options such as the

revaluation of own-use property, which are not permitted by

the IFRS for SMEs.

The FRS is based on an IFRS framework, but is designed to be

simplified and streamlined compared to EU-adopted IFRS or

current UK GAAP. The whole standard is around 200 pages

long, and has far fewer disclosure requirements than EU-

adopted IFRS. It is planned to be updated only once every

three years, providing more stability in financial reporting.

What will happen to the FRSSE?

It is proposed to retain the FRSSE for the next few years for

small companies as defined by the Companies Act 2006. The

ASB has committed to a full consultation on the financial

reporting requirements for small companies.

What are the disclosure exemptions for

parent companies and subsidiaries?

The proposals include exemptions from a number of disclosure

requirements in The FRS for qualifying parent companies and

subsidiaries. Also available is an option of applying EU-

adopted IFRS with reduced disclosures, called the Reduced

Disclosure Framework. This will be beneficial for groups

applying EU-adopted IFRS, as it will allow consistent

recognition and measurement to be used across the group with

relief from some of the most onerous IFRS disclosures.

To qualify, an entity must be included in consolidated financial

statements which are publicly available and there must be no

objection from any shareholder. There is no percentage

ownership requirement, and subsidiaries of overseas parents

will be eligible if they meet the criteria. However, certain of the

disclosure exemptions are conditional on 'equivalent'

disclosures being provided in the group accounts. Although

this does not mean that each and every disclosure is needed, the

basic disclosure requirements will need to be met.

Will the proposals mean more use of IFRS?

The ASB has concluded that it is not for the Board to decide

which types of entity should be mandated to apply EU-adopted

IFRS. Instead, businesses will look to company law and to

applicable regulations to determine whether IFRS is required.

Listed single entities and parent companies of listed groups will

be able to apply The FRS in their individual accounts, with

additional disclosure requirements through cross-references to

IFRS 8 Operating Segments and IAS 33 Earnings per share.

What about not-for-profit entities?

The proposal for not-for-profit (now called public benefit)

entities is to include supplementary paragraphs within The FRS

where additional guidance is needed or where different

accounting is required for public benefit entities. The three

not-for-profit SORPs will be retained and updated.

Highlights

• The ASB proposes to replace UK GAAP from January

2015

• Current UK accounting standards will be replaced by a

single standard, The FRS

• Disclosure exemptions will be available for most parent

company and subsidiary individual accounts

• There are a number of issues to be considered before

transition

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What will be the effect of using The FRS?

It will be simpler to apply and understand The FRS than

current UK GAAP, especially as UK GAAP has become ever

more complex with different standards applying to different

types of entity.

A key benefit of adopting The FRS will be increased stability, as

it will only be amended every three years. However, there will

inevitably be disruption caused by the changeover.

Is there anything I need to think about nownownownow?

There are definitely some issues that can be addressed now, to

avoid causing unnecessary problems on transition.

Loan covenants When bank loans and associated covenants are being

negotiated, it will be important to consider the impact that

adoption of The FRS is likely to have on a number of financial

measures. For example, interest rate swaps will need to be

recognised at fair value, which could alter balance sheet

measures such as the current ratio.

Bonus agreements Alterations in accounting policies may affect the measures used

to calculate a bonus, for example foreign exchange contracts

will be recognised at fair value on the balance sheet with

movements recognised in the income statement, which could

have a significant effect on profit before tax.

Corporation tax The effect of The FRS on corporation tax in the UK is not yet

clear, but it is likely that there will be some issues and

potentially some beneficial elections available. More

information will become available over the coming months.

Loan terms The terms of any loan will determine whether the loan is a

‘basic’ or an ‘other’ financial instrument under The FRS. Basic

loans will be measured at amortised cost, but ‘other’ loans will

need to be measured at fair value at each reporting date which

will require additional work.

Terms and conditions of shares The exact terms and conditions of shares that have liability

features will determine whether they will be classified as ‘basic’

or ‘other’ financial instruments. As for loans, ‘other’ financial

instruments will need to be measured at fair value at each

reporting date. It will be necessary to review the terms of such

shares and it may be possible to modify them to avoid the need

for fair value measurement.

Resource planning It will be beneficial to start planning early for the extra

workload involved over the transition period, so that resources

can be managed appropriately. As the experience of transition

to full IFRS has shown, the additional time and work required

should not be underestimated.

Group structure As all companies within a group will need to undergo transition

at the same time (other than dormant companies), this may be a

good time to think about simplifying the structure and reducing

the number of companies within the group.

What are the potential costs to my business?

There will be extra work involved during the transition,

particularly in terms of setting up a new format for the financial

statements and making any fair value assessments. In addition,

transition will require restating the 2014 UK GAAP numbers

for The FRS, essentially requiring the production of two sets of

financial statements for that year. Changes to the accounting

systems may be needed in order to provide the required

information.

The finance department is likely to require additional resources,

mainly during the transition period. Some formal training on

The FRS and how to apply it may also be beneficial. External

assistance may be needed on an ongoing basis, particularly with

any fair value measurements required under The FRS.

What will be the impact on distributable

profits?

Individual company accounts prepared under The FRS will

form the basis for determining distributable profits, in the same

way as under the current requirements. The principles set out

in ICAEW/ICAS Tech 02/10 will apply, but further guidance

may be issued.

Can I have my say on the ASB’s proposals?

Grant Thornton will be responding formally to the ASB’s

Financial Reporting Exposure Draft. We welcome your input

and suggestions which we can take into account for our

response. Alternatively, you can contact the ASB directly at

asbcommentletters@frc-asb.org.uk.

Any questions?

This factsheet can serve only as an introduction to the main

issues raised by the Future of UK GAAP project. The impact

of these changes will vary from business to business. If you

wish to discuss this further, then please contact your usual

Grant Thornton representative to discuss how we can help you

assess the implications of these proposals. Alternatively, please

contact our office location nearest to you for assistance, which

can be found on our website at www.grant-thornton.co.uk.