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Future for UK GAAP

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Future of UK GAAP

On 29 October 2010, the Accounting Standards Board (ASB) published its proposals for the future of UK GAAP. The proposal includes a three-tier financial reporting framework which is planned to be in introduced for accounting periods beginning on or after 1 July 2013 as follows:

Tier 1

This tier includes all companies who are publicly accountable ie quoted on a recognised stock exchange. There are reduced disclosures available for subsidiaries.

Tier 2

This tier includes all non-publicly accountable entities and would report under the Financial Reporting Standard for Mid-Tier Entities (FRSME), which is based on the principles in the IASB’s IFRS for SMEs. Again, there are reduced disclosures available for subsidiaries.

Tier 3

This tier would include all small entities who will continue to use the FRSSE.
The ASB noted that FRSME is considerably shorter and less complicated than current UK standards and would also be modified to comply with UK and EU law with the intention to ease tax reporting. In addition, the board described the current 2,000-page volume of UK GAAP as “an unwidely and incoherent mixture of old UK standards and ones that have been partly converged with IFRS”.
However, the ASB acknowledged the costs of transition from current GAAP to the FRSME are likely to amount to an estimated £78.9m. Clearly, practitioners will be concerned about the costs they incur and the amount that they will be able to pass on to their clients - in the light of today’s economic climate, probably not very much.
According to the ASB have, some entities will be affected more than others and that these costs should be recouped by less onerous financial reporting requirements. Time will inevitably tell.
The ASB’s other reasons for withdrawing current GAAP and replacing it with FRSME are:
  • current GAAP permits certain transactions to remain unrecognised that are relevant to an assessment of the financial position of the entity; and
  • current GAAP has not kept pace with evolving business transactions and in some areas are out of date. As business transactions change, accounting requirements must also change with them to ensure the financial statements present a true and fair view.


It goes without saying that many practitioners out there will be completely against the transition to an international-based framework. However, the reality is that we will be moving over to an international-based framework.
The FRSME will be simpler to apply and understand than current UK GAAP which has become overly-complicated. In fairness, if we were to keep UK GAAP in its current form, the ASB would have to update current UK GAAP in any event, so it might as well bite the bullet and start afresh.


IFRS for SMEs was developed by the International Accounting Standards Board (IASB) and published in July 2009. It is based purely on the principles involved in full IFRS but is considerably shorter than full IFRS (at some 230 pages as opposed to full IFRS at 3,000+ pages).
FRSME is the UK equivalent of IFRS for SMEs and is based on the IASBs “IFRS for SMEs”. In developing FRSME, the ASB had to tweak the IFRS for SMEs so the international standard would comply with our Companies Act.
The FRSSE will still continue to be used for the much smaller (tier 3) companies.
A notable feature in the FRSME is that it allows reduced disclosures for subsidiaries. Paragraph 1.8 of FRSME states:
In response to concerns expressed by respondents to the ASB Consultation Paper ‘Policy Proposal: The Future of UK GAAP’ (Policy Proposal), the draft applicable FRS also sets out a reduced disclosure framework for qualifying subsidiary undertakings. The framework gives exemptions from certain disclosure requirements to qualifying subsidiaries that prepare financial statements either in accordance with EU-adopted IFRS or the FRSME.
When the IFRS for SMEs was issued for publication by the IASB in July 2009, the ASB had to make changes to it so that it would comply with UK legislation. These changes included:
  • (a) adjusting the requirement for the preparation of consolidated financial statements, so that it is only required when stipulated under our Companies Act 2006;
  • (b) removing certain options permitted by IFRS for SMEs but which are not permitted under UK legislation; and
  • (c) inserting disclosure requirements for certain financial liabilities held at fair value.

The ASB has also made the following changes:

  • (a) it has replaced the chapter on tax with IAS 12 Income Taxes;
  • (b) it has provided transitional relief for dormant companies; and
  • (c) introduced an exemption from preparing a cash flow statement (statement of cash flows) for a parent who presents such a statement in its individual financial statements.

Cash flow statement

A key concern of most practitioners is whether the cash flow statement (known internationally as the statement of cash flows) would have to be prepared.
Paragraph 3.17 of FRSME does make the statement of cash flows mandatory, which will be a disappointment to many practitioners, though it was expected given that IFRS requires the statement of cash flows as a mandatory primary statement. However, a parent entity that prepares separate financial statements does not have to produce a statement of cash flows in its separate financial statements.


To help prepare AccountingWEB members for the changes ahead, further articles in the forthcoming weeks will highlight key provisions of the FRSME, together with the differences between what we currently do and the way in which we will be reporting under the new regime.