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Financial reporting news - axe hangs over UK GAAP
As reported in the UK section of this month’s round up, the days of UK Financial Reporting Standards seem to be numbered. By Nick Topazio, financial reporting specialist, CIMA.
South Africa has become the first country in the world to adopt the small to medium sized enterprise reporting standard for immediate use. All non-publicly accountable South African entities can use the new SME international financial reporting standard. All companies listed on the Johannesburg Stock Exchange are required to use full IFRSs. For more information on the new IFRS for SMEs see August Insight financial reporting news.Read the SA statement of GAAP.
The International Federation of Accountants has launched an online survey designed to give it an insight into the needs of lenders to SMEs, the challenges to SMEs seeking finance and how the accountancy profession can support lenders and SMEs. The online survey can be accessed via the IFAC home page in the ‘Of special interest’ section.
Both international and American standard setters have been under political pressure to develop new and amended standards in response to the financial crisis. The American Financial Accounting Standards Board is making urgent changes to its fair value rules following pressure from the US congress and the IASB has committed to revising its financial instruments standard (IAS 39) by ‘the end of the year’. Not long ago IASB board members estimated that this project would take years rather than months.
But now the American Bankers Association has published a white paper 'The current pace and direction of accounting standard setting' which urges caution. The ABA said: ‘We recognise that the FASB and the IASB are under pressure to finalise their rules quickly. However, we do not believe this should be done at the expense of undermining the foundations of financial reporting. It is extremely important that these new standards be developed jointly by the FASB and IASB, with proper due process and open consultation with a wide range of constituents that ensures a holistic review.’
This further illustrates the tightrope that the IASB has to walk to improve accounting standards following appropriate due process yet still satisfy political demands for urgent change.
Read the ABA white paper.
The IASB has published an exposure draft ‘Discount rate for employee benefits’. IAS 19 ‘Employee benefits’ currently requires entities to discount employee benefits using a discount rate derived from the yield on high quality corporate bonds. When there is no deep market in corporate bonds the yield on government bonds is to be used. The financial crisis has led to a widening of the spread between the yields on corporate and government bonds. As a result, according to the IASB, entities with similar employee benefit obligations may report very different liability amounts.
To address this issue the board proposes that, in the absence of a deep corporate bond market, entities estimate the yield on high quality corporate bonds and base their discount rate on that estimate. In view of the urgency of the issue the IASB has set a tight timetable for responses to the exposure draft with comments due by 30 September.
View the IASB press release and access the exposure draft.
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Many rights issues are denominated in currencies other than the functional currency of the issuer. The global financial crisis has led to an increase in the number of such issues as entities seek to raise additional capital. New IASB proposals seek to clarify the accounting treatment in such cases. Current practice is to account for these issues as derivative liabilities. The exposure draft states that if they are issued pro rata to an entity’s existing shareholders for a fixed amount of currency, they should be classified as equity regardless of the currency in which the exercise price is denominated.
The exposure draft is open for comment until 7 September.
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Securities and Exchange Commission chairman Mary Schapiro has announced the appointment of James Kroeker as the SEC’s new chief accountant. Kroeker will oversee accounting interpretations, professional practice issues, and international accounting matters.He served as staff director of the SEC's Congressionally-mandated study of fair value accounting standards, and has led the efforts of the Office of the Chief Accountant to address the current economic turmoil, including steps to improve off-balance sheet accounting standards.View the SEC press release.
Some entities are renegotiating the terms of financial liabilities with their creditors in light of the credit crunch. In some circumstances, the creditor agrees to accept an entity’s shares or other equity instruments to fully or partially settle the financial liability. IFRIC D25 'Extinguishing financial liabilities with equity instruments' proposes that:
These proposals are open for comment until 5 October 2009.
Each year the IASB publishes a series of ‘non-urgent but required’ changes to various international standards in a single exposure draft. This year’s changes include clarification of the measurement of non-controlling (minority) interests in business combinations. The IASB requests comments by 24 November.
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The days of UK Financial Reporting Standards and the even older Statements of Standard Accounting Practice seem to be numbered. The Accounting Standards Board’s (ASB) reaction to the new IFRS for SMEs (see July Insight’s financial reporting news) is to propose that all FRSs and SSAPs would be withdrawn and replaced with the new IFRS.Entities in the UK and Ireland would then be faced with using either IFRS as adopted by the EU, IFRS for SMEs or the Financial Reporting Standard for Smaller Entities (FRSSE). The basis for deciding which category an entity falls into will be largely ‘public accountability’.The exception to this rule would be that small companies would still be able to apply the FRSSE. Other entities that are publicly accountable will need to apply EU adopted IFRS whereas those that are not publicly accountable would use the IFRS for SMEs.
An entity is regarded as being publicly accountable if:
The ASB consultation paper sets out a useful comparison of the new IFRS for SMEs and current UK GAAP and potentially significant differences exist in the following areas:
The deadline for comments on the consultation paper is 1 February 2010. Following consideration of the responses received, the ASB aims to publish an exposure draft outlining its recommendations for the future of UK GAAP with an anticipated transition date for financial years beginning on or after 1 January 2012.
The consultation paper can be downloaded from the ASB website. CIMA will be responding and is very keen to hear your views on the proposals which can be given either through the financial reporting section of our online community CIMAsphere or directly to firstname.lastname@example.org.
The UK Financial Reporting Review Panel has published the results of its review of 326 sets of accounts. Of those reviewed the FRRP approached about a third of the companies concerned for further information or explanation and subsequently 68 companies have, to date, agreed to reflect the panel’s comments in their future reporting. Only two companies were required to restate amounts reported.
The panel’s conclusion is that the current standard of compliance in the UK is good and that the general quality of IFRS and UK GAAP corporate reporting continues to improve. AIM companies were required to report under IFRS for the first time during the review period and the FRRP findings were again encouraging. Although there is still room for improvement, it does seem that AIM companies have successfully built upon the experiences of their listed peers in their transition.
The panel also noted that all companies need to continue to improve their disclosures of financial risks, judgements related to the application of accounting policies and sources of estimation uncertainty.
The panel also reminded companies of the need for informative specific disclosures about the effects of market uncertainty on the amounts reported in their accounts. In addition, UK listed companies will need to apply IFRS 8 Operating Segments for the first time in their June 2009 reports. The panel believes that applying the new standard is likely to give rise to more reportable segments and that many companies will find it necessary to explain the different accounting policies that they use to measure segment performance.
Read the full FRRP findings and recommendations.
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