The Future of Financial Reporting

Since 2004 the ASB has been working on a new set of principles aimed at balancing the needs of preparers and users of accounts by simplifying current standards into a concise, coherent and updated form. The overall objective of the ASB is to enable users of accounts receive financial reporting information that is of high quality, readily understandable and proportionate to the size and complexity of the entity and user information needs.

Earlier this year the ASB has published proposals setting out its view of the future of financial reporting in the UK and Ireland. The proposals will apply to entities that are not listed and do not qualify as small companies. The new proposals are contained within the following Exposure Drafts:

FRED 46 – Application of Reporting Requirements (FRS 100)
FRED 47 – Reduced Disclosure Framework (FRS101)
FRED 48 – The Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102)

The following paragraphs outline the key elements of the proposals however readers are urged to visit the ASB website to review the documents in detail and become familiar with the proposed changes in detail.

The key points of FRED 46 are detailed below:

Entities that are required to apply IFRS must do so;
Entities that are not small and not required to apply IFRS will apply FRS UK & Ireland;
Small entities may apply FRSSE;
A reduced disclosure framework will be available to qualifying entities; and
Where conditions exist where a SORP must be applied then the SORP must be followed.

The key points of FRED 47 are detailed below:

Identifies a reduced disclosure framework which permits entities to apply the measurement and recognition criteria of IFRS with reduced disclosures;
Allows subsidiaries and ultimate parents to prepare financial statements using reduced disclosures; and
Developed principles for determining which disclosures should be reduced as new IFRSs are introduced.

The key points of FRED 48 are detailed below:

Single financial reporting framework totalling approximately 250 pages in total;
The proposals follow the IFRS for SMEs while retaining certain core elements of current GAAP;
ASB aims to replace all extant financial reporting and accounting standards; and
Account format is to follow the formats set out in the Companies Acts.

The proposed effective date of the revised proposals is 1 January 2015 but early adoption will be permitted.

Changes to Earlier Proposals

The ASB proposals are a change from its proposals in October 2010 on the proposed implementation of IFRS for SMEs. The proposed three tier system and extension of public accountability has been removed while Companies Acts account formats and a number of accounting treatments have been reinstated under current proposals.

Some of the key changes from earlier proposals are:

Accounts presented in a format consistent with Companies Acts;
Accounting treatments are consistent with EU adopted IFRS in the following areas:
- Revaluation of property, plant and equipment and intangible assets;
- Capitalisation of borrowing costs;
- Recognition of grant income over the lift of the asset;
- Hedge accounting allowed for investments in foreign operations; and
- Merger accounting allowed for group reconstructions.
Revised proposals for accounting for taxations, based largely on current Irish GAAP;
Accounting requirements for retirement benefit plans; and
Consolidation requirements updated and relief permitted for subsidiary investments held as investment.

Comparison with Current Irish GAAP

The table below presents the key changes from current GAAP to FRS 102.

Area	Irish GAAP	FRS 102
Acquired goodwill and intangibles	Amortisation period assumed 20 years	Amortisation period 5 years where useful economic life cannot be estimated
Investment property	Revaluation to open market value	Use cost unless fair value can be measured reliably without undue cost or effort
Income Tax	Deferred tax calculated using timing approach	Deferred tax calculated using timing difference plus approach
Multi-employer pension schemes	Exemption available to group entities as part of multi employer scheme	No exemption available to individual entity accounts of multi employer schemes
Foreign currencies	SSAP 20 applies local currency	Transactions recorded in functional currency

The key advantages to adopting the proposals of FRS 102 will be the similarities to existing GAAP for users, a compact and concise standard and the ability to look at other GAAPs where there is no solution. Users are asked to bear in mind that the new proposals will not be accepted in a listing document.

Micro Entities

The European Commission is currently revising the Accounting Directives applicable in EU member states. In December 2011 the European Commission issued a proposed Directive to simplify the accounting treatments for small companies. A micro entity is an entity that does not exceed two of the following three criteria:

Balance Sheet total €350,000
Net Turnover €700,000
10 Employees

Micro entities will be exempt from preparing full accounts and instead will prepare an abridged balance sheet and profit and loss account starting from gross profit. There will be no need for a director’s report and there will be reduced disclosure in the notes to the accounts.

Public interest entities and entities trading on a regulated market will be not be allowed to apply the guidance for micro entities. The Committee vote is tabled to take place on 10 July 2012 with Parliament voting on 12 September 2012 on the proposals. If passed successfully each member state will be responsible for enacting the revised proposals in local legislation.

Conclusion

The face of financial reporting will change from what we are currently used to over the coming 18 months. The finalisation of FRS 102 will be key for what currently are medium and large entities not applying IFRS. For small entities the decision will be to apply the new proposals or to adopt FRSSE. The new EC Directive will assist in reducing the reporting burden on mico entities.

Should you have any questions in relation to this article or should you have any Company Law or Company Secretarial queries please contact John Murphy on 053 910 0000, [email protected]