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FRSSE hangs in the balance

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8th Feb 2010
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The finest technical accounting minds in the nation have delivered their thoughts on the move to international accounting standards and the future of the Financial Reporting Standard for Smaller Entities – but are divided on whether or not FRSSE should be retained beyond 2012.

During the summer, the Accounting Standards Board (ASB) put out a consultation paper about the future of UK GAAP (390k PDF) seeking opinions on a proposed three-tier approach to IFRS convergence. Listed companies that already use EU-approved IFRS should continue; small and medium-size companies should apply the new IFRS for SMEs standard and microbusinesses would be allowed to continue using FRSSE.

The ASB received more than 150 responses to the paper, reflecting the intense interest and controversy that continues to surround the road to IFRS convergence, and in particular FRSSE.

The result of several years' development work, the IFRS for SMEs is based on the main international accounting standards, but takes a FRSSE-like approach by leaving out more arduous requirements, including those covered by IAS 33 'Earnings per Share', IAS 34 'Interim Financial Reporting', IFRS 8 'Segment Reporting', IFRS 5 'Assets which are held for sale' and IFRS 4 'Insurance'. But companies adopting the new international SME standard will have to comply with its mandatory requirement to produce a cashflow statement.

ICAEW: Fans of FRSSE; big firms not so keen
The ICAEW (PDF) broadly welcomed the ASB's outline approach to convergence while pointing out a number of technical anomalies. The institute was particularly keen on introducing the IFRS for SMEs to replace the "uncomfortable mishmash of converged and non-converged standards, lacking any strong underlying cohesion or principle" that currently applies to mid-tier UK entities not eligible for FRSSE.

The ICAEW commended FRSSE for "meeting the information needs of the users of small company financial reporting at a reasonable cost" and argued for its retention while the future of small company reporting goes through another cycle of consultation. While this happens, the principles of the FRSSE should remain unaltered, even if the decision is made to adopt the IFRS for SMEs for Tier 2, the institute said. 

But PwC's technical experts gave short shrift to the UK's existing small company standard. "We believe the time has come for practice in the UK to move fully to either full IFRS or IFRS for SMEs," they wrote. "Compared to UK GAAP, the IFRS for SMEs is shorter, well written in plain English and more manageable for the target population."

PwC also pointed out that the ICAEW and ICAS now teach students on international standards rather than UK GAAP so that "IFRS is now the accounting language of choice".

The view from HMRC
One of the most interesting responses to the ASB consultation came from the HMRC Commissioners' advisory accountant, Matt Blake.

HMRC retains a close interest in the issue because Corporation Tax levies are based on accounts prepared according to UK GAAP. Adopting the IFRS for SMEs as a basis for UK GAAP yet retaining FRSSE as it is will open up differences between FRSSE and UK GAAP, HMRC argued. A farming business applying the IFRS for SMEs will end up with different accounting for livestock and crop inventories (biological assets) than a farm using an unchanged FRSSE, it noted.

The ultimate effect of the ASB's proposed compromise "will be to create a larger divide than currently exists between FRSSE small business accounts and non-FRSSE small business accounts", HMRC concluded. Given the huge number of businesses involved, its response added, "More consideration and explanation needs to be given to the impact of the proposals on the accounting needs of small businesses, their accountants and users."

In particular, HMRC is concerned that the proposed 2012 switch date will complicate accounts preparation just when companies will be getting to grips with filing CT returns online with accompanying accounts and computations in the proposed iXBRL format.

"We suggest that it would be helpful to companies if the change date was, say, a year later so that preparations for the first mandatory iXBRL filing and the change to the future UK GAAP did not coincide," HMRC's accountant argued.

In an interview with AccountingWEBco.uk, IFA chairman (and FRC board member) Eric Anstee dismissed HMRC's argument as a red herring: "I personally don't see why IFRS for SMEs should be held back for that. They are separate issues. There's a big programme of work to do to launch IFRS into the mainstream and we need to get on with it."

A generational change
Financial reporting lecturer and AccountingWEB.co.uk contributor Steve Collings speculated that the ASB's consultation exercise was paving the way for a period of transition before FRSSE was eventually aligned with IFRS. The horror struck responses to this prospect were exaggerated and reflected the generational attitudes of accountants who had grown to love it, he said.

But with professional bodies examining students on IFRS, there was little point in going for the three-tier approach, he argued. "I say get rid of FRSSE. Not many will agree with me, but if you're going to apply IFRS for SMEs, it's better to just have two tiers than three."

Delaying implementation for a year, as HMRC suggested, would give preparers an opportunity to do dummy runs in advance of the switch. But they would have to run duplicate accounts during that period and still have to restate the previous year when they reported under the new framework. "That would take away advantage of doing dummy runs and I doubt that many practices would do that in reality," said Collings.

He added that with the right software available, it was probably easiest to do the switch at the same time as implementing iXBRL filing: "People don't like change, but they'll get used to it."

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Replies (20)

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By Edward Beale
10th Feb 2010 11:28

Plain English?

PWC's opinion of what constitutes "plain english" is obviously coloured by their experience of IFRS.  While the IFRS for SMEs may be easier to understand than full IFRS, a lot of it would still be complete gobledegook to the man in the street.

I would like to see accounting standards that can be used by anyone and not just a closed shop of trained accountants.

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By nickja
10th Feb 2010 11:54

One size fits all?

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By Carl Rogers
10th Feb 2010 12:01

FRSSE and IFRS

Why are these discussions always led by the big boys (PWC etc) who have probably NEVER dealt with the small companies which the bulk of the practising members of the profession are concerned with?  They have absolutely no understanding or empathy with our concerns, absolutely zero!  Does anyone represent us? Does anyone know of the needs or concerns of our "micro" clients regarding the layout of the financial statements and whether the prooposed IFRS would mean anything at all to them?  Try consulting the end-users for a change before lumbering them with providing information and disclosures which are totally nonsensical to them! (Just try explaining the concept of "deferred tax " to them, and you will get a flavour of things as they are now).   Get into the real world you guys and have a go at understanding what we actually do - we don't all deal with companies with millions of pounds of turnover you know!   I was shocked at the arrogance of a couple of the quotes in this article.

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By daveforbes
10th Feb 2010 12:02

Timing differences

... it was probably easiest to do the switch at the same time as implementing iXBRL filing

Mandatory iXBRL filing is for CT returns filed from April 2011 (i.e. just over a year from now), and so for accounting periods that are probably already under way. Can't see how you can do the switch to IFRS SME by then.

David Forbes

Forbes Computer Systems Ltd

p.s. Carl - only 8% of the 2M UK Ltds have a turnover over £1M.

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By User deleted
10th Feb 2010 12:23

PWC

I have lost the will to live.

The statements are so out of touch with reality and what is actually needed ! Where do they find these idiots?

Still there is nothing us little folk can do about it so we will just have to watch the trains crash.

Sad but the ACCA seem to be out of touch on this one as well.

 

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By User deleted
10th Feb 2010 12:27

FRSSE V IFRS

Following a visit from the Institute Inspector  I was advised I should be mentioning FRSSE 2007/2008 on my company accounts. I then decided to find out what was in it. I downloaded it and it was nearly 200 pages. I flicked through it and decided it was too much for my small client companies.

I now mention that the accounts are prepared in accordance with FRSSE 2008 but I have not read through it and my clients certainly haven't. Neither of us has read IFRS. So much fuss for so little benefit.

 

 

 

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Della Hudson FCA
By Della Hudson
10th Feb 2010 13:03

How many firms would end up with a mixture of SME IFRS and FRSSE

As all my clients are micro companies I'm happy to stick with FRSSE. At a mere 180 pages it is still more than enough for me. If I spoil myself with too much reading I might get indigestion.

On the other hand I've not seen a copy of the IFRS for SMEs. If it is simpler still I'm in favour of it (after a period of moaning about the hassle of switching over).

 

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By [email protected]
10th Feb 2010 13:22

IFRS for SMEs

If the IFRS for SMEs is simpler then it should involve less work preparing the accounts and be easier to understand - but why must it include the necessity to prepare a cashflow statement?  This will be very time consuming to prepare and of no use to our smaller clients or the users of their accounts - and they will not appreciate increased fees for something of no use to them!

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By cfield
10th Feb 2010 13:55

Whatever happened to thinking small?

I agree with Carl Rogers. It's about time that the large firms like PCW understood what accounting entails for the average small company and the local firms that look after them. The FRSSE was designed for a reason. It was because much of UK GAAP is totally inapplicable to them, and so is a lot of the so-called IFRS SME from what I've seen of it. For example, why are Cash Flows necessary for the average micro business? The owner-managers already know what their cash flow is. Nobody else ever looks at their accounts that closely, certainly not the taxman and not even the owners themselves sometimes, which is understandable when you have to put things like deferred tax in there. The banks only want them to tick their boxes. In any case, the accounts are nothing more than a history lesson. The only time they are ever relevant apart from the annual tax bill is if a business is being sold, and even then the buyers are more interested in up-to-date management accounts. If we have to use IFRS SME for micro businesses, we'll be back to a one-size fits all scenario before long with constant revisions shifting the disclosure requirements ever upwards. I bet the people advocating this are the same ones who argued for so long that every tiny little company had to have an annual audit. Having a 3 tier structure is not over-complicating accountancy. It is a sensible recognition of the fact that a micro business is totally different from a large private company with a multi-million pound turnover and requires simpler rules. Why should they have to suffer even more red tape just to avoid accountants having to remember a different set of rules? Incidentally, I wonder how all this will tie in with the recent EU proposal that small companies should not have to file accounts at all.

To the poster who thought that even the FRSSE was too long, I would suggest downloading model FRSSE accounts from his professional body. You cannot rely totally on them in all situations but they work for most businesses.

Chris F

 

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By tony metcalf
10th Feb 2010 13:56

FRSSE
Its funny how the "top 4" continue to think they know whats best for every other accounting firm and SME in the country. PWC would turn away most of the companies using a FRSSE because the fees would be to small. Most of the disclosure requirements for smaller companies are not understood by the owners and anything that makes their accounts simpler has got to be a good idea.

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By nkwayne
10th Feb 2010 14:20

Who Cares?

I think Fiona hits the nail on the head.  The standards should be geared to the needs of the users of the accounts. In the last 10 years I have been a non executive director of a FTSE 350 plc while at the same time running a general practice with all but one of my limited company clients owner managed. 

As a NED I applaud the moves towards converged standards, they are not easy to get to grips with even for us so-called experts, but the more tightly defined such things are, the less there is room for the likes of Enron to re-cur, although to be fair, if the Executive Board are intent on presenting a particular picture, then in a lot of companies there are enough 'subjective' areas which mean that its not that difficult to get the auditors to sign off on it.  So there is a limit to what these standards achieve, but measuring and reporting uniformly is a laudable aim, where there are hundreds or thousands of people who are intended to read the accounts.  They should be able to analyse them consistently.

But the accounts I produce for my owner managed businesses are not read by hundreds or thousands of people.  I fear that in the majority of cases, they may not even be read by the owner managers!  The public record comprises an abbreviated set of accounts only, and no really useful information is contained there.  The bank manager inevitably wants more up-to-date management accounts anyway.  And the tax man is more interested in the pages which start with the phrase 'These pages do not form part of the statutory accounts'.

It would be great if there were not less tiers, but more.  All fundamental concepts like revenue recognition should still be covered by an accounting standard, and that does seem to be adequately covered by the FRSSE, (which I do wish they would stop messing about with - another issue) and that should I feel be everything that a company which is eligible to file abbreviated accounts should be required to follow. 

And then for every standard that applies beyond FRSSE there should be a threshold for when it should apply (or an "exemption" qualification if you want to put the onus the other way round).  Up to any listed company which should have to follow them all.

Waving a flag which says all companies should do IFRS or similar is really missing the point of what we, as accountants, are all about.  Our job is communication, preparing documents to communicate the results and position of an entity.  That has two component parts to it - the sender of the information and the receiver of the information, and in between is the bit we do - compile the message.  And it seems to me that the majority of receivers are trying to read in English, something that we are being forced to send out in Martian (and an obscure dialect at that).

 

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
10th Feb 2010 14:41

Good point raised by daveforbes

Dave is right to highlight that companies should already be considering how to prepare final accounts to be ready for CT filing from 1 April next year. The potential conflict between the 2012 IFRS for SME start date and iXBRL CT returns after 1 April 2011 is at the heart of HMRC's call to delay the move to IFRS for FRSSE for mid-tier firms, but will depend on will companies' year end dates and whether or not they opt to file 2010 accounts before or after 1 April next year

Accounting periods ending after 31 March 2010 will be the first to be covered by mandatory iXBRL filing, so April 2010 month ends will be the first accounting periods for which iXBRL-compliant output will be needed. The mandatory online rule applies to returns delivered after 31 March 2011, so you can avoid mandatory online filing by submitting returns and accounts early, advises Rebecca Benneyworth.

So for year ending 30 June 2010, the due filing date for the CT return will be 30 June 2011, when online filing will be mandatory. However if the return is filed early, say on 15 March 2011, then it is not caught by the new requirement.

Rather than disrupting your normal accounting cycles, it may be advisable to check with your accoutant (or software provider) if their accounts production and Corporation Tax systems are ready for iXBRL. I'm going to be researching this issue further with software developers, but part of me is thinking that if there are going to be disruptions, maybe it would be better to install the new systems in one "Big Bang". IFRS will be a major culture switch, especially for small businesses, but if what the software companies are saying, for preparers and CT filers, iXBRL should just be a different output mechanism.

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By daveforbes
10th Feb 2010 15:34

cashflow statements and micro clients

I have to agree with the comments about cashflow statements at the micro end of the spectrum.

Of the 2 million UK Ltds an estimated 65% (1.3M)  have a turnover below £60,000.  If you are using accounts production software it may well be one tick box to say "I want iXBRL" and another "I want a cashflow statement". Post mandation for iXBRL and IFRS SME these will both always be ticked. Not everyone uses AP software, but however the cashflow statement is produced I suspect it will work out to be a lot of wasted sheets of paper at the "small but numerous" scale of companies.

David Forbes

Forbes Computer Systems

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collings
By Steven Collings
10th Feb 2010 15:39

Interesting comments (particularly about cash flow statement)

I can fully understand why practitioners, especially those with clients in the SME sector might be exascperated at the thought of preparing cash flow statements - particularly for Jo Bloggs Joinery Ltd down the road who is an owner-managed business with a relatively low turnover.  This is where I do feel the mandatory cash flow statement is not really appropriate (but he might be able to be classed as a 'micro-entity').  Companies that qualify as 'small' have trotted along perfectly fine so far, but the IASB set these rules and when IFRS for SME's is brought in, then along comes the cash flow statement for those within its scope.  However, many software packages now do include the option to prepare a cash flow statement, though sometimes you do have to (for want of a better word) "fiddle" with the numbers a bit.

One of the ASB's "options" is to keep FRSSE, but only allow very small companies to apply it (those that the EU term 'micro-entities').  The other "option" the ASB is looking at is eventually aligning it to IFRS for SME's, so if they're going to align it to IFRS for SME's, then why not do it when they bring the new standard in instead of making those 'very' small companies apply further changes in the future?  It is also proposed that Micro-entities are to be exempt from applying any accounting standards and most clients' eyes, who would qualify for classification as a micro-entity, would light up at that prospect, but fear not, HMRC require financial statements to be prepared to GAAP so the option for clients to sack their accountant and prepare their accounts using their own standards on the back of an envelope isn't quite on the horizon!

I have written several articles on the new SME standard and I can say that it is easy to understand, like the current FRSSE is, and those practitioners with reliable accounts production software should find the switch relatively painless.  Those without reliable accounts production software may struggle a bit with new terminology/prior period restatements and the much-hated cash flow statement!

So in the meantime, we'll just have to watch this space and see what the ASB decide for all our clients in the SME sector!

 

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By Carl Rogers
10th Feb 2010 16:54

FRSSE and so on

The fact that "reliable accounting software" can manage the proposed changes is not the issue; it's whether the financial statements are meaningful to the owner-managers of small businesses.  Who has consulted the 92% of companies whose turnover is below £1 million about what they think is useful information? 

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By Ayesha Bham
10th Feb 2010 17:11

92 per cent of the UK
Surely if the ASB consulted the clients they would just say "speak to my accountant". I've attended courses on this very subject and I believe most firms of accountants are blowing all this out of proportion. If the new standard is tailored to SME then why all the fuss? Fair enough I don't agree with the cashflow statement but we will just have to grit our teeth and get on with it which is what we get paid to do.

At the end of the day if the standard setters want this new standard they'll have it. We are just asked our opinion for the record.

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By User deleted
10th Feb 2010 17:19

source and application of funds

SSAP 10 , a distant memory now.

That was far more use to a small company than the following cashflow statement.

Quite a lot of the profession simply ignores accounting standards (frsse or otherwise) anyway or has not even read them.

Why would a client be so stupid to pay for a load of non compliant Rubbish.

Although I was suprised to read a post above from an institute member, just shows how standards have slipped.

and are likely to slip further, if the rot is not stopped soon there will be no accountancy profession left.

HMRC do not care ! Companies house even less ! no one can even be bothered to collect the £5000 fines,

what a state of affairs!

 

 

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By User deleted
10th Feb 2010 22:40

FRSSE

Glad to hear the ICAEW is in tune with its many small practitioner members - the ones who deal mostly with SMEs and supports the continuance of FRSSEs.

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By User deleted
11th Feb 2010 09:33

Advancements

It does look as if Micro entities in the future will be able to prepare what ever accounts they see fit using whatever rules they like, Hmrc are unable to police this and there will in effect be no need for accountants at all.

As we have seen with self assesment a taxpayer can complete a load of rubbish on line and this will be accepted.

So the arguement about standards is pointless.

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By daveforbes
11th Feb 2010 10:22

HMRC won't be able to police it ?

Once we are in the brave new land of iXBRL the HMRC computers will be able to check a lot more.

The computers will be able to check for instance that on the cashflow statement the entry for increase(decrease) in stocks is arithmetically the difference between the balance sheet stock figures for the current and previous years. This is what iXBRL is all about - it gives you a set of accounts that a human can look at, but also can be looked at by computer.

When will this happen and what will be the consequences ? Not before "full tagging" in 2013 - up until then only a subset of the figures on the accounts have to be tagged. As for the consequences - until last September in the developer's test service the HMRC were including arithmetic checks at submission time and rejecting the returns. This will not be the case now in the live service and the CT return would not be rejected, but any oddities in the accounts will probably, in due course (a few years away!), contribute to the HMRC systems calculation of "risk score".

David Forbes

Forbes Computer Systems Ltd

 

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