the future of uk gaap assessing strategy and options · key messages on the future of uk gaap •...

PricewaterhouseCoopers LLP

June 2010

Slide 1

The future of UK GAAP – assessing

strategy and options

PwC UK Real Estate conference

17 June 2010

PwC


June 2010

Slide 2

• Sandra Dowling - Welcome and introductions

• Grant Lee - What are the changes?

• Chris Jackson - Key differences and tax impacts

• Sonia Copeland - What does this mean for you?

• Questions for the panel

Agenda


June 2010

Slide 3

Welcome and introductions


June 2010

Slide 4

What are the changes?


June 2010

Slide 5

The ASB‟s proposals


June 2010

Slide 6

• ABS issued consultation paper, “Policy proposal: the Future of UK

GAAP” in August 2009

• Three-Tier structure proposed – IFRS for SMEs available to

„non-publicly accountable‟ entities

• Proposed application 2012 – now likely to be 2013

• No changes to be made in the first three years following

publication, review of the standard after two years of filings.

What is being proposed in the UK?

Feb 2010 1 Jan 2012 31 Dec 2012 31 Dec 2013

Comment

period

closed

Transition date

22 months

Report under IFRS

or IFRS SME



June 2010

Slide 7

ASB‟s proposed regime for accounting in the UK

Tier Description Type of accounting

Tier 1 Listed companies and other

publicly accountable entities

Full EU-adopted

IFRS

Tier 2 All other entities New UK GAAP

based on IFRS for

SMEs

Tier 3 Small companies (as defined

by company law)

The ASB‟s FRSSE



June 2010

Slide 8

IFRS for SMEs – five types of simplification

1. Some topics omitted – not relevant to SMEs

2. Some accounting policy options not allowed

3. Simplification of recognition and measurement principles

4. Substantially fewer disclosures

5. Simplified redrafting



June 2010

Slide 9

How did users respond to the ASB‟s consultation?

• More responses than the ASB expected (152)

• Will take time to consider

• Exposure Draft is due late summer 2010 – likely to incorporate „tweaks‟ to

make consistent with European Directives

• Final standard expected December 2010

• Support for “Tier 2A” (Full IFRS numbers, but with reduced disclosure) for

wholly owned subsidiaries

• Support for delay to 2013 so enough time to assimilate new requirements

and make relevant changes to UK Company Law



June 2010

Slide 10

What does this mean for you?


June 2010

Slide 11

Factors to consider in making timing and GAAP decision

IFRS -v- IFRS for SME

• Vertical synergies

• Comparability

• Extent of disclosures

• Simple but not IFRS

• More flexible policy choice

Now -v- Mandatory

• Opportunities

• iXBRL

• Lower cost

• Unwelcome surprises

• Compliance project

• Pressure on resources

Practical considerations

Which GAAP?

When to adopt?


June 2010

Slide 12

What does this mean for you?


Which GAAP (IFRS or IFRS for

SMEs?Now

2013

• Investors

• Legal agreements

• Subsidiaries of large groups

• Tax

• Distributable reserves

• Which GAAP?

• Impact assessment

• Project management

• Conversion

• Investment vehicles

• Size


June 2010

Slide 13

Key differences between IFRS/IFRS for

SMEs and UK GAAP


June 2010

Slide 14

Associates & JVs

Financial Instruments

Property, Plant and Equipment

Revenue

Construction Contracts

Provisions

Goodwill

Business

Combinations

Pensions

Leasing

Development Costs

Current and Deferred TaxesRelated party disclosures

Cash flow

statements

Some big and some small differences from UK GAAP……

Key differences


June 2010

Slide 15

UK GAAP* IFRS IFRS for SMEs

Revaluation of

investment properties

Required Permitted Required**

Revaluation of other

properties

Permitted Permitted Prohibited

Capitalisation of

borrowing costs

Permitted Required Prohibited

Spreading of lease

incentives

Over period to next

rent review

Over lease term

(SIC 15)

No guidance

Splitting of land and

buildings re leases

Prohibited Required No guidance

Deferred tax on

revaluations

Prohibited unless

binding sale

Required Required

Discounting deferred

tax

Permitted Required Required

* Unmodified (i.e. FRS 4 and SSAP 20)

** Assuming no undue cost or effort required in valuing properties

Some of the differences…

Key differences


June 2010

Slide 16

UK GAAP* IFRS IFRS for SMEs

Hedging –

effectiveness testing

No guidance Required Required

Financial instruments

measurement

Relatively

straightforward

Need to fair value

certain

instruments

Need to fair value

certain

instruments

Functional currency

determination

Primary economic

environment

Set methodology Set methodology

Financial guarantees

(e.g. intra-group)

Not recorded Recorded No guidance –

need to FV?

Goodwill amortisation Required unless

indefinite life

Prohibited –

tested for

impairment

Required

* Unmodified (i.e. FRS 4 and SSAP 20)

Some of the differences…

Key differences


June 2010

Slide 17

Tax consequences of changing UK GAAP

UK GAAP

IFRS

for

SME≠ ≠IFRS

Tax impacts


June 2010

Slide 18

Spreading of a UK Lease incentive

UK GAAP IFRS SME “Full” IFRS

Lease

inducement

Spread over period to

first break

Spread over life of

lease*Spread over life of lease

Example:

per half year

6 x 500 = 3,000 / 10 =

300 3,000 / 30 = 100 3,000 / 30 = 100

NPV income 65,784 66,249 66,249

A LtdLease with

rent free period

Landlord

• 15 year lease

• 5 year break

• 6 month rent free period as inducement

• Market rent £500/month

*Assumed a policy choice

Tax impacts


June 2010

Slide 19

Capitalisation of interest

UK GAAP IFRS SME “Full” IFRS

Capitalisation of

interestPermitted Prohibited Required

Tax impactDepends on accounting

treatmentDeductible as incurred

Deductible on sale or

impairment

• £100m development

• Interest over 2 years of £15m

• Building constructed in a Jersey entity

• Jersey tax resident

Tax impacts


June 2010

Slide 20

Uncertain tax positions

Enterprise P takes a deduction for 10,000 in the UK tax return.

Based on their best knowledge management estimates the

probability of the potential benefits.

They believe the outcome is “binary” - all or nothing.

• UK GAAP and full IFRS - “Best Estimate” outcome = 2,800

• IFRS for SME‟s weighted average of all possible outcomes:

hence 560 provision required = 2,240

Potential benefit ProbabilityProbability-weighted

calculation

2,800

(10,000 x 28% tax rate)80% 2,660

0 20% 0

Tax impacts


June 2010

Slide 21

• Thin capitalisation agreements

• Controlled Foreign Company

• Transfer pricing arrangements

• Functional currency

• Hedging

• Intercompany loans/derivatives

• Dormant companies

• Initial recognition exemption

Practical experience on entity conversion

• Business combinations

• Impact on tax structures

• Deferred tax

• Group simplification

• Transition rules

• iXBRL

• Senior accounting officer

controls

Key differences and tax impacts


June 2010

Slide 22

Opportunities – what does this mean for you?


June 2010

Slide 23

Treasury

• Financial instruments

and fair values

• Bank covenants

• Hedging strategy

Accounting

• Full or IFRS for SMEs?

• Timing

• Training of teams

• Conversion project

International aspects

• Shared services

• US conversion

iXBRL

• Timing

• Statutory accounts and

tax computations

Tax

• Cash

• Planning

• Deferred tax

• HMRC agreements

Distributable Reserves

• Dividend traps

• Planning

Third parties

• Suppliers/customers

• Rating agencies

• Regulators

Systems/controls

• Information quality

• IT projects

• SAO and

documentation

Business

impact

Group optimisation

• Entity reduction

• Intercompany and

dormants

More than just numbers…

Corporate reporting

• Comparability

• Extent of disclosures

Strategic

• Future direction

• Types of vehicle

• Investor requirements

Regulatory changes

• AIFMD

• Bribery Act


June 2010

Slide 24

A successful conversion – lessons learned

Key areas that need to be considered when planning for transition to IFRS

1 Start planning early to avoid surprises

2 Involve all areas of the organisation in the initial impact analysis

3Identify those areas that will affect your opening balance sheet and manage any

impacts

4 Identify and free up the right skilled resource

5 Train your finance team early in the process – and others

6 Ensure those charged with governance understand the issues

7 Consider potential systems issues and requirements

8 Do not assume IFRS is equivalent to UK GAAP! Similar is not the same!



June 2010

Slide 25

Key messages on the future of UK GAAP

• Change is coming and companies need to be proactive!

• GAAP and timing choices provide opportunities

• More than just accounting – implications for your business

• Assess the impact now



April 2010

Slide 26

This publication has been prepared for general guidance on matters of interest only, and does not constitute

professional advice. You should not act upon the information contained in this publication without obtaining specific

professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness

of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP,

its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any

consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this

publication or for any decision based on it.

© 2010 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the

PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and

independent legal entity.PwC

Q&A


June 2010

Slide 27

Contacts

Sandra Dowling

UK Real Estate Assurance Leader

+44(0) 20 7804 3972

[email protected]

Chris Jackson

Real estate structuring and transaction services leader

+44(0) 20 7804 5622

[email protected]

Sonia Copeland

Real estate assurance

+44(0) 20 7212 3030

[email protected]

Grant Lee

Real estate assurance

+44(0) 20 7213 1536

[email protected]

mailto:[email protected]

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