The UK Accounting Standards Board (ASB) just finished its second consultation on ditching the UK GAAP for a new financial reporting framework based on IFRS.
Under the proposed changes, all publicly accountable entities will have to use EU-adopted International Financial Reporting Standard (IFRS). Entities without public accountability will use a new standard based on IFRS for SMEs adapted for the UK – Financial Reporting for Medium-Sized Entities (FRSME) – and small entities without public accountability will be able to use the existing Financial Reporting Standard for Smaller Entities (FRSSE). The proposed changes have been set to apply from 1 July 2013. I have a few concerns.
While the government is professing to end UK gold-plating of regulations, the ASB is proposing to gold-plate EU rules on which companies have to adopt full EU-IFRS. The definition of publicly accountable in the proposals would include to Alternative Investment Market (AIM) companies and PLUS-quoted companies, thus requiring them to use full IFRS. While AIM companies do have to use IFRS now, this is only because the London Stock Exchange has made that decision.
And indeed, PLUS-quoted companies can choose to use either IFRS or UK GAAP. Under the new proposed framework, any of these companies would have to use full IFRS, which is not what the EU accounting regulations require. This would substantially increase the burden on some companies at a time when government is looking to reduce regulation and gold-plating to foster growth.
We have also yet to be shown why the new FRSME could not be used by AIM or PLUS-quoted companies. The current IFRS for SMEs standard developed by the International Accounting Standards Board (IASB) makes a blanket statement that it is not appropriate for ‘publicly accountable entities’ without explaining why not. It seems that the UK has dumped this into their framework too. The ASB consulted on this, so we’ll see what comes of it.
Timing of these changes is an issue too. We don’t see the need to rush this. Given the current economic situation, companies should be focusing on running their businesses and growing, rather than on a significant and time-consuming change in how they prepare their accounts. And given that the ASB has decided to amend IFRS for SMEs and create a UK FRSME, it should take the time to create a quality standard that meets the needs of users.
Ultimately, we are wary about the impact analysis of these changes. Numbers are given without much explanation – for example, total costs of transition are said to be £78.9m. How did they get to that? The costs of transition and benefits will also be different for larger and smaller companies, and we have urged the ASB to take this into account. For example, many of the costs have most likely been calculated assuming that the least senior qualified person in a company would prepare accounts – of course, this isn’t reality in a smaller company where it’s normally the FD.
Needless to say, this revamp is vast and will result in FDs needing to become familiar with the new framework and potentially with a whole new set of standards. We are actively involved in the debate to ensure smaller companies are taken into account, and we encourage you to do the same and make your opinion heard. Change is coming.
Tim Ward is chief executive of the Quoted Companies Alliance (QCA), the membership organisation of the small and mid-cap quoted sector. His past roles have included head of issuer services and head of marketing at the London Stock Exchange and finance director at FTSE, the index company.