1 The Future of UK Financial Reporting Standards Presenter Title UK Accounting Standards Board [date]

2 Coverage  About the ASB  Status of ASB deliberations  Key facts about the proposals  We want to hear from you

3 About the ASB  Independent operating body of the UK Financial Reporting Council (FRC)  Body prescribed in UK company law to set standards for entities not applying EU- adopted IFRS

4 To establish and improve standards for financial accounting and reporting  ASB’s aim Role of the ASB: Standard-setting

5  Standard-setting process balances a number of different factors:  Underlying accounting principles  Legal requirements  Cost and benefit considerations  Industry-specific issues  The desirability of evolutionary change  Implementation issues Role of the ASB: Standard-setting process

6 FRED Responses received FRS Responses received Discussion Paper ASB deliberates

7  Process aims to ensure:  the Board is well informed  comments from interested parties are fully considered  the reasons for the Board’s decisions are clear  Proposals put forward in a Discussion Paper:  the case for change  how important issues might be addressed  public comment invited  The Board:  considers comments on the Discussion Paper  commissions and reviews any further research  A FRED is published … Role of the ASB: Standard-setting process

8  A FRED is published:  as near complete as practicable text of the proposed accounting standard  includes the Board’s reasoning  public comment invited  The Board:  redeliberates, based on comments received  if decisions differ in major respects from the FRED, further consultation will be carried out, possibly as a further FRED  FRS published:  sets out required accounting practice  to include the Board’s reasons for its conclusions  attaches a dissenting view, if there is one Role of the ASB: Standard-setting process

9 The future of UK financial reporting standards: Status of ASB deliberations  ASB has consulted ….extensively, and listened  March 2004 Discussion Paper  March 2005 Policy Statement Exposure Draft  January 2006Public Meeting and Proposals for Comment  May 2006 Tentative Proposals  April 2007IASB’s proposed IFRS for SMEs  August 2009Policy Proposal: The Future of UK GAAP  October 2010FRED: The Future of Financial Reporting  March 2011FRED: Public Benefit Entities  January 2012Revised FRED: The Future of Financial Reporting  Strong and consistent view that we cannot sustain two broadly different accounting frameworks

10  Over 290 responses to FREDs 43 and 44  Over 100 responses to FRED 45 The status of ASB deliberations: Responses to FREDs 43 and 44 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 Apr 2011 May 2011 Jun 2011 FRED 45 issued for public benefit entities FREDs 43/44 issued Extensive outreach programme ends and comment period closes Extensive redeliberation and regular published updates on tentative decisions FREDs 46/47/48 issued Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011 Jan 2012

11 The status of ASB deliberations: Publication of FREDs 46/47/48  The FREDs were published in January 2012  Three-month comment period closes on 30 April 2012  Further outreach planned  We want views from as broad a range of constituents as possible

12 Key facts about the proposals: The proposed reporting framework  A framework based on proportional financial reporting:  In addition, qualifying subsidiaries and ultimate parents may apply FRED 47 ‘Reduced Disclosure Framework’ – EU-adopted IFRS with reduced disclosures. FRSSEFRS 102EU-adopted IFRS Entities eligible for small companies regime Entities eligible for the small companies regime Entities not small and not required to apply EU-adopted IFRS Entities required to apply EU-adopted IFRS.

13 Key facts about the proposals: A targeted approach  Innovative targeted approach:  targeted to meet needs of preparers and users  clear overarching framework  proportionate approach to introducing enhanced financial instruments reporting  No significant change to the FRSSE  No extension of EU-adopted IFRS application  FRED 48 reduces current complexity and introduces additional transparency around obligations and commitments

14 Key facts about the proposals: What about public accountability?  The concept of public accountability has been eliminated:  The costs of applying EU-adopted IFRS, were considered to outweigh the benefits  Concerns continued to be raised about the practical application of the definition of public accountability.  For some of these entities additional requirements have been included in FRED 48, eg financial institutions

15 Key facts about the proposals: What is FRED 47?  FRED 47 sets out reduced disclosures for qualifying entities that otherwise apply the requirements of EU-adopted IFRS.  A qualifying entity is a subsidiary or an ultimate parent.

16 Key facts about the proposals: What is FRED 47?  Qualifying entities need not disclose:  A cash flow statement (IAS 7);  Related party transactions between wholly-owned members of the same group (IAS 24); and  Selected disclosures from IFRS 1, IFRS 2, IFRS 5, IAS 1, IAS 8, IAS 16, IAS 36 and IAS 38.  Also, qualifying entities which are not financial institutions need not provide the disclosures required by IFRS 7 and IFRS 13.

17 Key facts about the proposals: What is FRED 48?  ‘The Financial Reporting Standard Applicable in the UK and Republic of Ireland’ is:  A standard based on the IFRS for SMEs  A single standard addressing all areas of accounting  A relatively short and easy read  To be updated in three year intervals.

18 Key facts about the proposals: Amendments made to IFRS for SMEs in preparing FRED 48  The ASB agreed and updated its guidelines for amending the IFRS for SMEs:  changes for accounting treatments that exist in current FRSs and EU-adopted IFRS  charges should be consistent with EU-adopted IFRS  make use, where possible, of existing exemptions in company law to avoid gold-plating and  provide clarifications, by reference to EU-adopted IFRS,  Changes are also necessary to enable the FRS to comply with company law (as derived from EU Directives).

19 Key facts about the proposals: Amendments made to IFRS for SMEs in preparing FRED 48  Application of the guidelines re-introduced a number of accounting options for example:  Revaluation of property, plant and equipment  Capitalisation of development expenditure  Capitalisation of borrowing costs.

20 Key facts about the proposals: How FRED 48 differs from current accounting  Revenue recognition – similar approach but different words:  service contracts  construction contracts  contracts with contingent fees  Investment properties - recognised at fair value through profit & loss, rather than through reserves:  increased volatility of profit/loss for the year  consider implications for distributable reserves

21 Key facts about the proposals: How FRED 48 differs from current accounting  Intangible assets – could see more recognised as part of future acquisitions  revised definition of intangible assets  Employee benefits – required to accrue for short- term employee benefits (holiday pay)  will need to measure holiday earned, but not taken  might be easier in practice if holiday year coincides with financial year

22 Key facts about the proposals: How FRED 48 differs from current UK accounting  Leases – high level definitions the same, but…  some differences in detailed application  no requirement to split land and buildings  retrospective – may need to restate operating leases as finance leases in opening balance sheet  leases incentives – same principle but period not specified; full IFRS differs from UK accounting standards  no reference to detail of IFRIC 4; presumption that outsourcing arrangements include a lease

23 Key facts about the proposals: How FRED 48 differs from current accounting  Financial instruments:  Changing requirements for recognition & measurement determine whether financial instruments are ‘basic’ straight-forward accounting for ‘basic’ instruments  Derivatives are not ‘basic’ and are fair valued foreign currency forward contracts. interest rate swaps.  Possible use of hedge accounting more complex than SSAP 20.

24 Key facts about the proposals: How FRED 48 differs from current accounting  Foreign exchange:  Not permitted to use contract rate for sales and purchases, must be spot rate no change in cash flows but … if previously used contracted rates, gains and losses from exchange rate movements will now be disclosed separately – for example movement between spot rate and contracted rate may need systems changes  May now choose a presentation currency other than functional currency might be useful for subsidiaries of global groups

25 Key facts about the proposals: How FRED 48 differs from current accounting  Equity investments:  where fair value is reliably measurable, use fair value through profit and loss;  little practical impact? but more volatility where applies  Impairment of financial assets:  includes ‘bad debt’ provision for trade debtors, no change  must be based on objective evidence  can still include ‘collective’ provision, as long as based on objective evidence

26 Key facts about the proposals: How FRED 48 differs from current accounting  Pensions  For defined benefit (final salary) schemes: Group schemes can no longer recognise surplus/deficit in group accounts only Where contractual agreement for charging the cost as a whole for the scheme between members - cost recognised Where no agreement the legal sponsor recognises the full surplus/deficit in its individual accounts Consider implications for distributable reserves

27 Key facts about the proposals: How FRED 48 differs from current accounting  Pensions  For defined benefit schemes presentation requirements are changed: Recognised in the period Profit or loss Other comprehensive income Service cost Net Interest Income Remeasurements

28 Key facts about the proposals: How FRED 48 differs from current accounting  Acquisitions  Goodwill has a finite useful life amortise on a systematic basis over life prospective, but in practice, unlikely to need to ‘re-life’ existing goodwill  12 months to make adjustments eg to fair values

29 Key facts about the proposals: How FRED 48 differs from current accounting  Taxation  Not IFRS for SMEs, nor IAS 12, but UK solution  Less complex than IAS 12, but in many cases will lead to same deferred tax  Differences include no discounting must provide for deferred tax on revaluations

30 Key facts about the proposals: Other considerations for transition and beyond  Tax payable:  Possible change in timing of tax cash flows  Accounting tax charge may be different – due to deferred tax  Distributable reserves  More differences between distributable reserves and profit?  Arising from more use of fair values, different measurement eg deferred tax and pension schemes.

31 Key facts about the proposals: Other considerations for transition and beyond cont.  Profit related pay and bonuses  if staff receive an element of profit related pay or bonuses, this may vary from expectations if profit differs when using the FRSME  Systems changes  may need to record different data on an on-going basis

32 Key facts about the proposals: Sectors and industries with particular financial reporting issues  Public benefit entities (PBEs)  additional PBE requirements worked in to FRED 48  all current SORPs to be retained and updated.  Other SORPs Update or withdraw?SORPs Retain and updatePension funds Oil and gas Limited liability partnerships Investment companies Authorised funds Separate consultationInsurance WithdrawLeasing Banking segments

33 Key facts about the proposals: Effective date  Likely effective date of 1 January 2015  will be at least 18 months after issue of the FRS  Early adoption will be permitted

34 Key facts about the proposals: Consultation stage impact assessment  FRED includes consultation stage impact assessment. Problem definition Objectives and intended effects FRED proposals Option 1: Do nothing Option 2: UK standards not based on IFRS Option 3: UK standards based on IFRS with minimal amendments ASB deliberates Overall analysis of costs and benefits

35 Key facts about the proposals: Consultation stage impact assessment  Important that benefits outweigh costs, but not all benefits are easily quantifiable  ASB believes proposals will have a positive impact  Of course there are costs associated with the transition, but … benefits:  more consistent, transparent information for decision- making;  on-going cost savings for some;  common accounting language for all.

36 Key facts about the proposals: Alternative view  One Board member does not support the proposals in the FRED  The alternative view considers:  The FRED 48 could be simplified further, particularly in the areas of: Financial Instruments Pensions Deferred tax Share-based payments

37 We want to hear from you  The ASB wants to hear from all interested parties.  The FRED includes specific questions, but comments on any aspect of the proposals are welcome.  The ASB considers all responses carefully, and often amends its proposals in the light of comments received.

38 We want to hear from you  Comments due by 30 April 2012