The European Union published the Directive on 26 June 2013, which amended Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. The Directive aimed to simplify the accounting requirements for small companies and improves the clarity and comparability of companies' financial statements within the European Union.  The Directive must be incorporated into UK law no later than 20 July 2015, but permits that the changes may first apply for financial years beginning on or after 1 January 2016. 

The FRC consultation document, ‘Accounting standards for small entities - Implementation of the EU Accounting Directive’ sets out the FRC’s proposals to amend UK accounting standards as part of the implementation of the Directive.  As explained in the parallel consultation on implementation of the Directive by the Department of Business, Innovation and Skills (‘BIS’), change is necessary because the Directive prohibits member states from requiring more than a limited set of notes to the financial statements of small companies unless their inclusion is required to give a true and fair view. Member state requirements include both law and accounting standards; therefore the FRC has to revisit its standards for small companies. 

The FRC is proposing that:

• The existing Financial Reporting Standard for Smaller Entities (FRSSE) should be withdrawn. FRS 102 The Financial Reporting Standard Applicable in the UK and Ireland will replace the FRSSE for small companies (proposed in the BIS consultation as those earning less than £10.2 million), and will be amended to include a new section for the presentation and disclosure requirements for small entities. Small companies applying FRS 102 will not need to prepare a cash-flow statement or consolidated financial statements. There will, however, be some changes to the recognition and measurement criteria for small entities as a result of moving from the FRSSE to FRS 102:
  • financial instruments within the scope of section 12 of FRS 102 must be fair valued;
  • financial instruments at non-market rates of interests will be accounted for differently;
  • transactions and balances in foreign currency may no longer be recognised at contracted forward rates. Hedge accounting may be applied which may result in a similar outcome;
  • revaluation gains and losses on investment properties will be recognised in profit and loss rather than the statement of total recognised gains and losses;
  • deferred tax will be recognised on revaluations and business combinations;
  • holiday pay accruals will be needed; and
  • equity-based share-based payment transactions will need to be accounted for when goods or services are received.
• A new Financial Reporting Standard for Micro-Entities (FRSME) will be published. Currently the FRSSE covers the requirements for micro-entitieswith paragraphs 2.40-2.42 disapplying and simplifying other parts of the FRSSE. The FRSME will only contain the requirements applicable to micro-entities, making it simpler to navigate. It will include only those disclosures required by law for micro-entities. The recognition and measurement criteria of FRS 102 (from which the FRSME will be developed from), will be simplified such that:
  • all financial instruments are accounted for at historical cost or amortised cost, with the proviso that if a derivative contract becomes onerous a provision is required;
  • there is no requirement to account for deferred taxation, equity-based share-based payment schemes (apart from any eventual issue of shares);
  • defined benefit pension schemes can be accounted for as defined contribution schemes, provide that provision is made for any agreement to fund a deficit; and
  • borrowing costs may not be capitalised.

Sections covering areas unlikely to be relevant to micro-entities (e.g. business combinations, hyperinflation and specialised activities other than agriculture) will be removed. 

• FRS 102 as applicable to large and medium-sized companies will be updated to:
  • include up-to-date legal references;
  • remove references to extraordinary items;
  • prohibit reversal of impairment losses for goodwill (a similar change will be made to FRS 101 Reduced Disclosure Framework); and
  • subject to BIS changing the law, to amend FRS 102 such that, in the rare situations where the useful economic life cannot be reliably estimated, goodwill should be amortised over a maximum of ten years (the top end of the range permitted by the Directive) rather than five years as required by current FRS 102.
• The FRC is also proposing that a new section of FRS 102 (within Section 34 Specialised Activities) will be added based on FRED 50 Residential Management Companies’ Financial Statements. This means that no separate abstract will be developed. It will not, however, include new disclosure requirements as the majority of residential management companies are small companies or micro-entities for which the Directive restricts mandating of disclosures. 

The FRC is also seeking views as to whether the increased flexibility in accounting formats offered by the Directive could allow companies adopting FRS 101 Reduced Disclosure Framework to use IAS 1 when presenting their primary statements rather than the existing Companies Act formats. If this is possible, it would remove one more complexity for the adoption of FRS 101 by subsidiaries of IFRS reporting groups. 

No draft standards are included in the consultation document. The FRC expects to issue exposure drafts of FRS 102, the FRSME and FRS 101 following considerations of responses to this consultation in time for the amended FRS 101 and 102 to be adopted from 1 January 2016 when the changes to the Companies Act will take effect; the FRSME may be adopted as soon as it is issued as there is no need to wait for a change to the law. 

Click for:

• Press release (link to FRC website).
• The FRC consultation document (link to FRC website).
• Our UK Accounting Plus news story on the BIS consultation paper
• Our UK Accounting Plus project page on FRED 50
• Our Need to Know newsletter on the consultation

In June 2002, the European Union adopted the IAS Regulation requiring European companies listed in an EU securities market to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards. In addition EU countries were given several options regarding the use of IFRSs in unconsolidated financial statements, therefore, EU member states have the option to permit or require companies to prepare separate financial statements in conformity with IFRS.

As the focus of IFRS is, generally, on the preparation of consolidated financial statements, is some cases it is sometimes unclear how some accounting issues in separate financial statements should be dealt with and a number of practical concerns have arisen in the application of IFRS to the separate financial statements.

The discussion paper published today aims to address these concerns by considering how separate financial statements are used in Europe for economic decision-making and analyses the technical financial reporting issues that arise under IFRS when preparing such financial statements. The paper also proposes solutions to the issues identified and suggestions on how to consider separate financial statements in the future. The following points are identified as being especially important to address:

• clarification of the objective of separate financial statements,
• development of guidance on how to account for transaction costs and contingent consideration in separate financial statements,
• initiation of a comprehensive debate on common control transactions as the method of accounting for such transactions may impair the usefulness of separate financial statements,
• consideration of the accounting for business combinations under common control in the acquirer's separate financial statements, and
• strengthening of the disclosures on distributions to equity holders.

Comments on the discussion paper are requested by 31 December 2014. Please click for the following additional information:

• press release on the EFRAG website
• discussion paper on the EFRAG website
• European Commission (EC) document summarising the use of options of the IAS Regulation by European Union Member States (link to EC website)

The European Union published the EU Accounting Directive 2013/34/EU (‘the Directive’) on 26 June 2013, which amended Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. The Directive aimed to simplify the accounting requirements for small companies and improves the clarity and comparability of companies' financial statements within the Union. The UK government is now seeking views on the proposed implementation of the accounting and auditing provisions of the Directive into UK law.

The consultation:

• proposes to increase the thresholds for small and medium-sized companies. The thresholds for determining what is a small company will be raised to the top end of the range permitted by the Directive. A company will be small if it meets at least two of: total assets <£5.1m (up from £3.26m), turnover <£10.2m (up from £6.5m), <50 employees (unchanged). A company will be medium-sized if it meets at least two of: total assets<£18m (up from £12.9m), turnover <£36m (up from £25.9m), <250 employees (unchanged). BIS consider that this would allow approximately 11,000 additional companies to access the small company accounting regime;
• implements changes to comply with the new largely harmonised small company regime whereby the Directive prevents member states from requiring more than a minimal set of mandatory notes to the financial statements unless additional disclosure is necessary for a true and fair view. In practice, this means that many small companies will present fewer notes in future;
• asks whether small companies should be allowed to only prepare abbreviated accounts for shareholders; currently they must prepare full accounts for shareholders and may file abbreviated accounts. The government believes the question of the level of detail should be one for shareholders;
• asks whether the existing restrictions - whereby the small and medium-sized company regimes cannot be adopted by ineligible companies and members of ineligible groups - should be amended. The Directive will continue to require that public companies (in the UK a PLC) with securities admitted to trading, credit institutions and insurance companies are ineligible. BIS are asking whether they should maintain the other classes of ineligibility including being an unlisted public company (in the UK a PLC), MiFID investment firm, UCITS management company, or e-money issuer and, in the case of the medium-sized limits, the majority of other regulated UK financial services companies;
• explores the opportunities offered by the option to provide greater flexibility in the layout of the profit and loss account and balance sheet. In particular, BIS is seeking views as to whether it would be possible to adopt International Financial Reporting Standards (IFRS) formats, removing a further complexity for companies adopting Financial Reporting Standard (FRS) 101;
• amends the approach in relation to the writing off of goodwill and development costs. In the rare situations where the useful economic life cannot be reliably estimated, the government is proposing that they should be amortised over a maximum of ten years (the top end of the range permitted by the Directive) – assuming this change is made, the FRC will consider amending Financial Reporting Standard (FRS)102 which currently includes a limit of five years;
• proposes removing the option whereby a company preparing consolidated financial statements has a choice to only list the principal subsidiaries in the notes to the financial statements and provide a full list with the annual return. Problems with compliance for companies taking this option have been identified by BIS as part of the Red Tape Challenge (link to UK government website); and
• proposes that micro-entity companies should no longer have to prepare a Directors’ Report; they are already exempt from filing this.

The consultation paper also:

• asks whether the small company audit exemption thresholds should be changed at the same time as the small company accounting regime thresholds. The government’s current view is that they should not, and are likely to be consulted on as part of implementing the EU Audit Reform regime;
• proposes making a change to the statutory contents of the audit report from the amended EU Statutory Audit Directive at the same time as these accounting changes. Auditors must state whether, based on the knowledge obtained during their audit, the directors’ report and any strategic report (a) comply with applicable law and (b) contain any material misstatements; and
• asks questions about the application of the small companies regime to charitable companies. The government is proposing that, as such companies are outside the scope of the Directive, they will not be subject to the restriction on which notes to the financial statements may be required by law. This would allow the law to continue to require companies with the Charities Statement Of Recommended Practice (SORP).

The Accounting Directive must be incorporated into UK law no later than 20 July 2015, but permits that the changes may first apply for financial years beginning on or after 1 January 2016.

The Financial Reporting Council is expected to consult in due course on the changes to UK financial reporting standards that will be required as a result of the implementation of the EU Accounting Directive in the UK.

Comments are invited by 24 October 2014.

Please click for:

• Press release (link to BIS website).
• The consultation issued by BIS (link to BIS website)
• The EU Accounting Directive 2013/34/EU (link to European Commission website)
• Our news story on the publication of the EU Accounting Directive 2013/34/EU
• Our Need to Know newsletter on the consultation

The Government Financial Reporting Manual (FReM) Exposure Draft (14)01 (link to HM Treasury site) proposes amendments to the FReM to reflect the application of IFRS 13 ‘Fair Value Measurement’ in the public sector. This exposure draft follows two previous exposure drafts on the application of IFRS 13 for the public sector (exposure drafts (13)01 and (12)03). Each of these consultations has informed the development of financial reporting policy and HM Treasury’s final proposals as set out in this exposure draft.

The Exposure Draft includes a new “principles based approach” to determining the use of IFRS 13 in the public sector.  It considers how IFRS 13 may be applied in the public sector context by distinguishing between those assets which are held for their service potential (i.e. operational assets) and those that not held for their service potential or that are surplus assets that can be disposed of. HM Treasury proposes that only assets in this second group are valued at fair value in accordance with IFRS 13, and then only if the entity holding those assets is not restricted from accessing the market. IAS 16 will continue to be adapted to ensure that assets in use that are held for their service potential are held at current value.

The Government Financial Reporting Manual (FReM) Exposure Draft (14)02 (link to HM Treasury site) proposes amendments to the FReM with the aim of simplifying and streamlining the presentation of the statutory annual reports and accounts produced by central government entities so as to better meet the needs of users. HM Treasury launched the simplifying and streamlining accounts project in April 2013 (link to HM Treasury website) and issued a consultation (part of that project) setting out proposals to restructure the format of the Annual Report and Accounts (ARA) produced by central government entities in July 2014.  This exposure draft details the proposed changes to the 2015 to 2016 FReM as a result of the project.

The Exposure Draft proposes to restructure the traditional ‘front-half’ annual report and ‘back-half’ financial statements into three integrated sections: performance, accountability and the financial statements. The purpose of the performance section is to “tell the story” of the reporting entity, providing information on the entity, its main objectives and strategies and the principal risks it faces. The accountability section contains the Governance Statement, remuneration report and information on parliamentary accountability including the Statement of Parliamentary Supply. The final integrated section will comprise the audited financial statements.  HM Treasury proposes that notes to the accounts will only be required in respect of material balances.

The comment deadline for both exposure drafts is 13 October 2014.

Please click for:

• Government Financial Reporting Manual (FReM) Exposure Draft (14)01 (link to HM Treasury website).
• Government Financial Reporting Manual (FReM) Exposure Draft (14)02 (link to HM Treasury website).
• Our previous news story on HM Treasury’s simplifying and streamlining accounts project

Currently, the scope of each IPSAS specifically excludes GBEs and references the Preface to International Public Sector Accounting Standards, which states that GBEs apply International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB).

IPSAS 1, Presentation of Financial Statements, defines a government business enterprise as an entity with all the following characteristics:

• Is an entity with the power to contract in its own name
• Has been assigned the financial and operational authority to carry on a business
• Sells goods and services, in the normal course of its business, to other entities at a profit or full cost recovery
• Is not reliant on continuing government funding to be a going concern (other than purchases of outputs at arm’s length), and
• Is controlled by a public sector entity.

The consultation paper, The Applicability of IPSASs to Government Business Enterprises and Other Public Sector Entities, seeks to address concerns that a wide range of entities are being identified as GBEs, through diversity of practice in the application of the definition, and some entities being described as GBEs even though they may not meet all the requirements of the definition.

The paper identifies two possible approaches as to defining the IPSAS reporting mandate:

1. Describe the characteristics of public sector entities for which IPSASs are intended, without defining GBEs. The high-level characteristics would be based on either:
   1. current and developing IPSASB literature (including the Conceptual Framework), or
   2. terms and explanations from the Government Finance Statistics (GFS)
2. Modifying the current definition of a GBE in IPSAS 1 to either:
   1. clarify the current GBE definition to make it easier to be consistently applied, without modifying the definition significantly, or
   2. narrowing the definition of a GBE to profit-oriented entities, so excluding entities that have a financial objective of full cost recovery.

The IPSASB has expressed a unanimous preliminary view that the first approach is the best way forward, with the majority of board members supporting the development of high-level characteristics of a public sector entity based on existing IPSASB materials. This view is supported on the basis it is high-level and principles based, and acknowledges the role of regulators and other relevant authorities in determining which entities should apply IPSASs. The consultation paper also notes that this approach is consistent with the approach the IASB takes in respect of profit-oriented entities in the Preface to International Financial Reporting Standards and individual IFRSs.

The consultation paper is open for comment until 31 December 2014. Click for IPSASB press release (link to IFAC website).

Earlier this month, the Department for Business, Innovation and Skills (BIS) published its feedback on implementation of the country-by-country reporting provisions of the EU Accounting Directive (Directive 2013/34/EU (link to European Commission website))  for extractives companies - those in the mining, oil and gas sectors, as well as those who log primary forests.

In its response, BIS indicated that the FCA would consult on the equivalent requirements of the revised Transparency Directive (Directive 2004/109/EC) (TD) as amended by the Transparency Directive Amending Directive (Directive 2013/50/EU (link to the European Commission website)).

The FCA has published CP 14/17 which proposes new rules and guidance in Chapter 4 of the Disclosure and Transparency Rules (DTRs). The proposed requirements are contained in a new DTR 4.3A:

• Extractives companies with transferrable securities admitted to trading on an EEA regulated market should prepare a report on payments to governments for financial years commencing on or after 1 January 2015. This is consistent with the timing of the forthcoming company law requirement under the EU Accounting Directive, but a year earlier than required by EU law. In the case of a parent undertaking, the report must be on a consolidated basis.
• Reports under DTR 4.3A must be disseminated via a Regulated Information Service ('sent down the wire'). That announcement must set out which the website on which the report is available. The report must remain available on that website for ten years.
• A UK company reporting under the forthcoming BIS regulations will be treated as having prepared a report as required by DTR 4.3A, although it will be necessary to both disseminate it as required by DTR 6.3 and file it at Companies House.

The new requirements will also apply to companies who are required by the Listing Rules to comply with DTR 4 as if they were an issuer for the purposes of the DTRs.

The sanctions regime that will apply in cases of failure to comply with DTR 4.3A will be that applicable to failures to comply with other parts of DTR 4. The new sanctions regime required by the revised TD will be introduced later with the other changes required by the revised TD.

Please click for:

• The consultation document published by the FCA
• Our previous UK Accounting Plus news item on the response from BIS on the implementation of the country-by-country reporting provisions of the EU Accounting Directive

The Order seeks to implement aspects of the Competition Commission’s package of remedies for audit reform in the UK in light of agreement at European level on audit reform.

We welcome the CMA’s decision to align the timetable and transitional requirements for their requirement for FTSE 350 companies to tender their audits every ten years with the tendering and rotation requirements of the new EU audit reform package. Our main comment concerns the interpretation of those transitional provisions; we urge the CMA to discuss these with the Department for Business, Innovation and Skills (BIS), and the European Commission. This would help avoid confusing interaction between three different sets of rules – those of the CMA, those of EU law, and the requirements of the UK Corporate Governance Code which will remain until at least October 2016.

Our other comments are

• in order to avoid an immediate and unplanned tender if a company unexpectedly enters the FTSE 350 during a year, the status of the company in the preceding financial year should be used to determine whether the Order applies to a company;
• a statutory requirement to disclose compliance with the Order would be uninformative to stakeholders. More useful quantitative and qualitative information is already required by the UK Corporate Governance Code and other parts of the draft Order – if a disclosure obligation is retained, it should be made more informative; and
• the CMA should be clear that they intend to use the information gathering powers in the Order only if sufficient information is not already available. We believe that compliance with the Order should be monitored by the FRC, who will already be monitoring compliance with the rotation and tendering requirements of the EU audit reform package.

The full comment letter can be downloaded from our publications pages.

On 25 March 2014, the IASB published an exposure draft (ED/2014/01 ‘Disclosure Initiative (Amendments to IAS 1)’) containing a number of amendments to IAS 1.

In response to the exposure draft, the EFRAG issued a draft comment letter that noted its support for the project and provided several suggestions to improve the proposed amendments.

The EFRAG’s feedback statement provides an analysis of the EFRAG tentative position expressed in the draft comment letter, describes the comments received from constituents and then highlight how these comments were considered by the EFRAG Technical Group (EFRAG TEG) in reaching their final position on the IASB ED set out in their final comment letter to the International Accounting Standards Board (IASB). 

The general consensus from constituents was "almost all respondents welcomed the IASB’s proposals in the ED and the overall message of the EFRAG draft comment letter. However, the majority of respondents that answered our questions did not agree with EFRAG’s suggestion to prohibit disclosure of immaterial information. Constituents also raised a number of minor concerns on the other topics covered by the amendments."

For more details on the feedback statement, please see (links to EFRAG website):

Also click for:

• Our previous story on the Exposure Draft ED/2014/01 ‘Disclosure Initiative (Amendments to IAS 1)'.
• Our UK Accounting Plus project page: Disclosure initiative — IAS 1 amendments.