UK Accounting Standards

The Future of Financial Reporting in the UK

The FRSME’s A comparison of UK GAAP and the

FRSME

2

and a simplified UK standard based on the IFRS for SME’s

TIER 1 FULL IFRS AS ADOPTED BY THE EU

TIER 2 UK GAAP

TIER 3 FRSSE

TIER 1 FULL IFRS AS ADOPTED BY THE EU

TIER 2 FRSME (comments on FRED currently under

consideration)

TIER 3 FRSSE

FULL IFRS as adopted by the EUQuoted groups are already reporting their group accounts under IFRS

This would apply if their equity/debt is traded on a regulated securities exchange

UK GAAPA new financial reporting standard based on the IFRS for SMEs has been produced in exposure draft form. It will be called the FRSME.

This new standard FINANCIAL REPORTING STANDARD FOR MEDIUM-SIZED ENTITIES will replace the current 2000 page book that is UK GAAP.

The smallest companies will continue to use the simplified version of UK GAAP known as the FRSSE.

The current 2000-page book, built up over decades is considered unwieldy and incoherent

Current UK GAAP is a mix of old UK standards and ones that have been partially converged with IFRS.

Commitment to harmonisation with IFRS

Without these changes UK GAAP will need ongoing modifications

Reduces training costs Reduces risk of auditor error Improves consistency Makes interpretation simpler for users of

accounts, Companies will find it easier to move between

tiers.

First FRSME a/cs

31 Dec 2014

1 Jan 2014

31 Dec 2012

Comparatives

Reconcileequity

Reconcileequity

Reconcile

profit

UK GAAP v FRSME

Property, Plant and Equipment Borrowing costs Investment Properties Development costs Intangibles Leased assets Financial assets and liabilities Deferred Tax

12

FRSME Section 17IFRS IAS 16

UK GAAP• Terminology- fixed

assets• Allows certain classes

of fixed asset to be revalued to market value.

• Depreciation of buildings is not specific re components

FRSME• Terminology- non-

current assets• FRSME does not allow

revaluation of property, plant and equipment.

• FRSME requires component depreciation.

FRSME Section 25IFRS IAS 23

UK GAAP• If an entity constructs

its own asset such as a warehouse or building the borrowing costs may be capitalised as part of the cost of the asset

FRSME• FRSME does not allow

capitalisation of borrowing costs

• FRSME requires borrowing costs be expensed through profit

FRSME Section 16IFRS IAS 40

UK GAAP• Investment property is carried

in the balance sheet at fair (market) value

• Gains and losses are reported in the statement of total recognised gains and losses (STRGL)

FRSME• Investment property is also

carried in balance sheet (statement of financial position) at fair (market) value (if fair value can be obtained without due cost or effort)

• Gains and losses are recognised directly in profit.

FRSME Section 18IFRS IAS 38

UK GAAP• Allows development costs to be

capitalised if, and only if,certain criteria are met.-Separate project-Expenditure clearly identifiable-Commercially viable-Technically Feasible-Overall profitable-Resources exist to complete the project

FRSME• FRSME requires internal

development costs to be written off as they are incurred, unless they meet the recognition criteria which say an intangible can be recognised if, and only if:-It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity-The cost or value of the asset can be reliably measured-The asset does not result from expenditure incurred internally on an intangible item.

FRSME Section 18IFRS IAS 38

UK GAAP• Only permits the

revaluation of intangible assets in circumstances where readily ascertainable market values can be obtained.

FRSME• Does not allow

intangible assets to be revalued. The entity will continue to measure intangible assets at cost less accumulated amortisation and any accumulated impairment losses.

FRSME Section 20IFRS IAS 17

UK GAAP

• Two types of lease• Finance• Operating

• Contains a 90% ‘rule of thumb’ test to help determine if risks and rewards are transferred.

FRSME• Similar in principle but

does not contain the 90% rule of thumb

FRSME Sections 11 and 12IFRS IAS 32/IAS 39

UK GAAP• Some UK entities report under

IAS 26 (new model)• This is the same as IAS 39• Some UK entities report under

FRS 4/FRS 5 (Derivatives left off balance sheet).

FRSME• Contains two sections

- Simple instruments (section 11)

- Complex instruments (section 12)

- Unusual feature allows a mix of IAS 39 in full for measurement and adoption of FRSME for disclosure.

- Derivatives come on to the statement of financial position

UK GAAP Timing difference approach

based on periods in which gains/losses recognise vs periods in which tax effect arises.

FRSME Temporary difference

(balance sheet approach) based on difference between carrying amounts and tax bases.

Generally more complex.

DEFERRED TAX