The exposure draft FRED 22 Revision of FRS 3: Reporting Financial Performance was one of the last pieces of work to emerge from Sir David Tweedie’s ASB. It harks back to the first uncertain days of the board in the early 1990s. FRS 3 was the first major standard the ASB produced and it kicked off the process which saw radical improvement in the quality of UK financial reporting.
So why has the ASB returned to the topic nearly a decade later? The technical explanation is that accounting reforms are making reported figures for performance more volatile. In particular, reported profits are becoming more volatile as a result of a number of accounting changes, including stricter rules for provisions, the need to provide for National Insurance on share options, and the need to write off start-up costs. Changes in accounting for retirement benefits, share-based payment and financial instruments will increase volatility still further.
The ASB is claiming that the FRED 22 proposals will take the UK further ahead in ensuring good reporting of financial performance. International accounting standards and US accounting rules are behind the UK in that items such as revaluations and foreign currency gains and losses are usually lost somewhere in shareholders’ funds. As a result these items are often not presented as being part of a company’s performance at all. So when proposals for a single performance statement appear from the IASC or US standard-setters the UK influence should be obvious.
But there is another aspect to the UK case that we should not forget.
In the UK, many of the additional figures are handled through the second performance statement – the statement of total recognised gains and losses (STRGL). But international accounting standards and the accounting rules of many countries – notably the US – haven’t invented the STRGL, and so their companies have more difficulty in handling the volatility.
Issued in 1992, the STRGL made radical changes in the way that companies report their performance in their annual accounts. This new statement aimed to supplement the profit and loss account, giving users of accounts a more complete picture of the results for the year. However, since FRS 3 was issued, questions have been raised about the rationale for allocating transactions to the various financial statements – hence the need for the revision. The ASB has been working with its international colleagues on these revisions.
FRED 22 proposes that the present p&l and STRGL are merged into a single statement of financial performance divided – for most companies – into three sections: operating; financing and treasury; and other gains and losses. Classification of gains and losses under the proposed standard would depend on their nature, rather than, for example, on whether they were realised as cash. So gains and losses on the disposal of fixed assets would be reported in the same section as revaluation gains and losses, because both represent holding gains and losses. The standard setters also say the format of the performance statement would be adapted for special industries, such as banking and insurance.
FRED 22 proposes changes to FRS 3 including:
– a relaxation in the time constraints on reporting discontinuing operations;
– information on dividends and prior period adjustments would join earnings per share as a note at the foot of the new performance statement;
– a new note would detail the exceptional items reported over a five-year period.
The ASB, while maintaining that FRS 3 was a “landmark standard for its time” is now saying that it represents a job only half done. The job that FRS 3 did was to raise the notion of continuing/discontinued income, abolish extraordinary items and throw a searchlight on the murky world of gains and losses, which had previously avoided any public scrutiny by creeping through the reserves. But the ASB is saying that reporting financial performance can be improved still further. It now claims that combining the p&l and the STRGL will simplify the presentation of the components of income.
If the proposal becomes a standard, readers of accounts will see on one page the results of all of a company’s operations, its treasury and financing activities and all other gains and losses, such as revaluation of fixed assets and gains, and losses on the pension scheme.
All of this may be true technically. Reporting financial performance may well be – in the words of the ASB – “a hot issue”, but perhaps there is another reason for its reappearance. Maybe Sir David reckons that if he can score with a standard made largely in the UK, then he is well on his way to repeating his successful stint at the ASB on the global stage.
Peter Williams is a chartered accountant and freelance journalist.
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