Closing the GAAP on international standards

CHANGES TO ACCOUNTING STANDARDS have started flowing in thick and fast with the UK regulator issuing changes to UK GAAP and the IASB and FASB each individually updating the way loans and losses are calculated.

In the UK, accounting standards have moved a step closer to international financial reporting standards (IFRS) with the introduction of FRS102 to succeed the historical UK GAAP.

The Financial Reporting Council’s (FRC) FRS 102, which includes a reduced disclosure framework, has been hailed as a simplification of accounting requirements. It encompasses some significant accounting differences to EU-IFRS such as amortisation of goodwill and development of the way costs are calculated.

The standards will modernise accounting calculations and make them fit for purpose, according to an FRC impact assessment.

“The standards have not kept pace with evolving business transactions and in some areas are out of date. As business practices change, so too must accounting requirements to ensure that financial statements continue to show a true and fair view,” the assessment said.

The move was welcomed by the ICAEW with its head of the financial reporting faculty, Neigel Sleigh-Johnson, claiming the latest change was a major improvement to the UK regime. “The new UK GAAP is much shorter, clearer and simpler than the old regime, which was outdated and rather lacking in coherence, and is thus a great improvement overall. It also aligns UK accounting more with international thinking.”

In the FRC’s view current standards are “untenable” in the longer term because: there is no consistent framework; they allow certain transactions which are relevant to understanding the financial position of a company to remain “unrecognised”; they have not kept pace with evolving business transactions and in some areas are out-of-date.

The FRC also analysed the cost benefit of FRS 102’s implementation. Although the FRC argued it is impossible to quantify this in a realistic way, the main quantifiable costs it calculated are the transition costs – such as changing accounting and reporting requirements. However, it is suggested there will be cost savings for those that will now have a reduced disclosure which will outweigh any transition costs. It is also claims that any company which uses FRS 102 will also have benchmarking comparisons which could lead to a reduction in the cost of borrowing.

Additionally the FRC claims there are several problems which are to be tackled by the changes. These include: inadequate guidance on accounting for financial instruments; inconsistencies in standards between IFRS and older standards; many accountants that prepare the statements need to keep pace with both IFRS and UK GAAP (and their differences) however trainee accountants are being examined on IFRS leading to questions about the future capabilities of the next generation to produce accounts in UK GAAP; and currently using UK GAAP means it is difficult to compare the financial position and performance of foreign companies with large UK ones.

All change

FRS 102 wasn’t the only change to reporting in March, with other updates being met with a more steely reception. The IASB proposed changes to the way loans and losses are accounted under IFRS, something which had been urgently called for by the G20. Unfortunately it’s introduction was overshadowed by its earlier attempts and failure to produce a unified proposal on the issue with the US accountancy standard setter, the Financial Accounting Standards Board (FASB).

The US’s FASB issued an update on how loans should be calculated at the end of last year after negotiations with the IASB broke down, with the ICAEW’s Sleigh-Johnson claiming that discussions for one impairment standard had “proved impossible” between the two standard setters.

The IASB said in its highlights that the two boards found it difficult to achieve a “converged solution because of jurisdictional differences in regulatory and systems environments”. Chairman of the IASB Hans Hoogervorst said: “Our proposals are a simplified version of the expected credit loss approach that we originally jointly developed with the FASB. We believe the model leads to a more timely recognition of credit losses. At the same time, it avoids excessive front-loading of losses, which we think would not properly reflect economic reality.

The consultation of the IASB draft proposals, published in March: Financial Instruments; Expected Credit Losses, is due to end in July. Meanwhile the consultation on FASB draft proposal: Improvements to Accounting for Credit Losses on Financial Assets will close on 30 April.

Box: Future considerations

A number of additional topics were identified through the development of FRS 102 which may be considered in the future as possible updates which the FRC lists as:
Narrative reporting
To consider narrative reporting requirements for public benefit entities
Social benefit obligations
To consider if and how social benefit obligations should be recognised and measured in financial statements
To consider how fund accounting would be applied in accordance with the requirements of FRS 102 for segmental reporting