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Even more financial reporting problems and solutions

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28th Oct 2010
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Steve Collings continues his financial reporting refresher course with a look at share-based payments, the small companies exemption statement, and a relatively unknown, but strict audit requirement.
The last article in this series looked at the financial reporting problems faced by practitioners when dealing with accounting policies, investment properties and post-balance sheet events. This article will focus on share-based payment transactions, small companies exemption statement, the differences between merger and acquisition accounting, and a relatively unknown, but strict audit requirement.
Share-based payment transactions
Share-based payment transactions are increasingly popular and are dealt with under the provisions in FRS 20 Share-Based Payment. The UK standard is essentially a mirror image of IFRS 2 Share-Based Payment, which classifies share-based payment transactions into three types:
  • Equity-settled share-based payment transactions where the entity receives goods or services as consideration.
  • Cash-settled share-based payment transactions where the entity acquires goods or services by incurring liabilities to the supplier of those goods or services.
  • Transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in either cash or by issuing equity instruments.
Example: share-based transaction
Company A grants 2,000 share options to each of its three directors on 1 January 2010. The terms of the option are that the directors must still be in employment of the company on 31 December 2013 when the options vest. The fair value of each option as at 1 January 2010 is £10 and all of the options are expected to vest. The options will only vest if Company A’s share price reaches £16 per share. As at 31 December 2010 the share price was only £7 per share and is not expected to rise in the next two years. It is also anticipated that only two directors will be employed by 31 December 2013.
The increase in the share price should be ignored for the purposes of calculating the value of the share options as at 31 December 2010. The fact that only two directors will be employed come 31 December 2013 will be taken into consideration so the amounts to be recognised in the accounts as at 31 December 2010 should be 2,000 options x 2 directors x £10 x 1/3 = £13,333.
 
Small companies exemption statement
When preparers of small company accounts take advantage of the provisions available to smaller entities (for example using FRSSE), the financial statements must contain a statement at the foot of the balance sheet confirming the company has taken advantage of small companies exemption. 
In the past, typical statements have included:
“The financial statements have been prepared in accordance with the special provisions of Part 15 of the Companies Act 2006 relating to small companies and with the Financial Reporting Standard for Smaller Entities (effective April 2008).”
 
However, Companies Act 2006 now requires this wording to be changed to read:
“These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies regime.”
 
Acquisition and merger accounting
In current UK GAAP (specifically Schedule 6 to SI 2008/410 and FRS 6 Acquisitions and Mergers), the use of acquisition accounting should be used if the criteria for merger accounting are not met. The international regime does not consider merger accounting because the standard-setters do not consider they have a sufficient basis to distinguish a merger from a business combination. So IFRS 3 Business Combinations only recognises the acquisition method of accounting for business combinations.
In UK GAAP, an acquisition will consist of a parent and a subsidiary – the concept of which is governed by the power to control (for example when the parent acquires 51% or more of the voting rights of the subsidiary). The consolidated financial statements will reflect the acquired entity’s results from the acquisition date which should involve the identifiable assets and liabilities of the acquired business to be stated at fair values. 
In merger accounting, the consolidated financial statements include the results of all companies in the merger as if the companies had always been combined – in other words it is not an acquisition of one entity by another, it is the forming of a new entity where no party is dominant. FRS 6 contains strict tests which have to be satisfied as follows:
  • Offers to shareholders test
  • 90% holding test
  •  Immaterial cash or non-equity consideration test
  •  No identifiable acquirer or acquiree test
  • Joint participation in management test
  • Relative size test
  • Full participation in future performance test.

Senior statutory auditor

Auditors are now required to sign the auditor’s report in the personal name of the auditor in the capacity of “senior statutory auditor”. The requirement to sign in the auditor’s own name clearly would not give rise to any difficulty here; however, care must be taken. In the United Kingdom, all statutory auditors and audit firms are placed on the Register of Statutory Auditors and Audit Firms and the senior statutory auditor must sign the auditor’s report in their name as it appears on the statutory audit register, for example I would sign an auditor’s report as follows:
Steven John Collings FCCA not Steve Collings or Steven Collings.
I am led to believe from a reliable source that regulators are becoming increasingly keen on this issue and it is a relatively unknown requirement.
Steve Collings is the auditor and technical director at Leavitt Walmsley Associates and a partner in AccountancyStudents.co.uk. He is also the author of ‘The Interpretation and Application of International Standards on Auditing’ and lectures on financial reporting and auditing issues.
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collings
By Steven Collings
28th Oct 2010 22:10

Paragraphs Missing

There seems to be a couple of paragraphs omitted in the publication process relating to share-based payments, the small companies exemption statement and the acquisitions and mergers paragraph.  Hopefully this will be resolved soon!

Regards

Steve

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
29th Oct 2010 09:06

Sorry Steve...

And to any other frustrated readers who looked at this item on Thursday afternoon. During the posting process I somehow swapped the copy between two boxes, so that unregistered visitors could see the whole article and logged in AccountingWEB members only saw the edited highlights.

My apologies again, and thanks for bringing this to light, Steve. Your article has now been restored to its rightful state.

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