FRSSE hangs in the balance
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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AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.