Future of Irish GAAP and IFRS for SME


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Future of Irish GAAP and IFRS for SME

  1. 1. title goes here Future of UK / Irish GAAP - ASB proposals Comparison of current Irish GAAP to ‘ IFRS for SMEs’ KERRY BUSINESS NETWORK GROUP Mark Kenny – Representation and Technical Policy 16 th March 2010
  2. 2. THE FUTURE OF UK / IRISH GAAP Background to ASB Proposals <ul><li>ASB in dialogue with stakeholders since 2004 </li></ul><ul><ul><li>Council Regulation 1606/2002 – ‘IFRS Regulation’ </li></ul></ul><ul><ul><li>Overarching strategy to converge with IFRS </li></ul></ul><ul><ul><li>Widespread support from constituents </li></ul></ul><ul><ul><li>BUT..... </li></ul></ul><ul><li>Full IFRS perhaps not appropriate for all entities </li></ul><ul><li>Irish and UK law – ‘permissive’ re use of IFRS </li></ul><ul><li>Vast majority of entities continue to use UK/Irish GAAP </li></ul>
  3. 3. THE FUTURE OF UK / IRISH GAAP Current ASB Proposals <ul><li>ASB proposals follow on from publication in July 2009 of the IASB’s ‘IFRS for SMEs’ Available for registered users (registration is free) at: http://www.iasb.org/IFRS+for+SMEs/IFRS+for+SMEs+and+related+material/IFRS+for+SMEs+and+related+material.htm#english </li></ul><ul><li>ASB policy document available at: http://www.frc.org.uk/asb/press/pub2054.html </li></ul><ul><li>Irish GAAP, as we know it, would disappear </li></ul><ul><li>3 tiers: </li></ul><ul><ul><li>EU endorsed IFRS - “Publicly accountable” entities; wholly owned subsidiaries </li></ul></ul><ul><ul><li>IFRS for SMEs - Non-publicly accountable entities </li></ul></ul><ul><ul><li>FRSSE - Small companies </li></ul></ul><ul><li>Considerations re the continued use of SORPs and the need for guidance for Public Benefit Entities (PBEs) </li></ul>
  4. 4. THE FUTURE OF UK/IRISH GAAP Current ASB Proposals IFRS UK/Irish GAAP Accounting framework Type/nature of entities Potential implications for Tier 1 IFRS as adopted by EU EU listed – consolidated accounts IEX No change Tier 1 IFRS as adopted by EU Publicly accountable Publicly accountable subs. Irish Debt Listed/Funds Credit Unions Tier 2 IFRS for SMEs Large and Medium NPAs NPA groups NPA entities NPA subsidiaries Tier 3 Financial Reporting Standard for Smaller Entities (FRSSE) Small companies
  5. 5. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs <ul><li>230 pages (current UK/Irish GAAP c2,800 pages) </li></ul><ul><li>Decisions on scope and timing of application rest with legislative, regulatory, and standard-setters in individual jurisdictions </li></ul><ul><li>Principles–based </li></ul><ul><li>Stand alone document </li></ul><ul><ul><ul><li>Genesis in IFRS, but… </li></ul></ul></ul><ul><ul><ul><li>Recognition and measurement simplifications </li></ul></ul></ul><ul><ul><ul><li>Simpler accounting policy options </li></ul></ul></ul><ul><ul><ul><li>Exclusion of certain topics </li></ul></ul></ul><ul><ul><ul><li>Significantly reduced disclosure requirements </li></ul></ul></ul>
  6. 6. THE FUTURE OF UK / IRISH GAAP Definition of SMEs – IASB/ASB <ul><li>Entities that: </li></ul><ul><ul><li>Do not have public accountability and </li></ul></ul><ul><ul><li>Prepare general purpose financial statements (Section 1.2) </li></ul></ul><ul><li>Definition of ‘publicly accountable’ </li></ul><ul><ul><li>Debt or equity traded in a public market or it is in the process of issuing such instruments for trading in a public market; or </li></ul></ul><ul><ul><li>Deposit taking/holding assets in a fiduciary company for a broad group of outsiders as one of its primary businesses – banks, credit unions, insurers, funds, securities brokers/dealers, investment banks (Section 1.3) </li></ul></ul>
  7. 7. THE FUTURE OF UK / IRISH GAAP FRSSE <ul><li>Unless currently using ‘full’ IFRS or the FRSSE, entities’ financial reporting framework will change </li></ul><ul><li>FRSSE </li></ul><ul><ul><li>No firm evidence on level of usage in RoI; quite common in UK </li></ul></ul><ul><ul><li>Thresholds </li></ul></ul><ul><ul><ul><li>In RoI: turnover <€3.81m; balance sheet total < €1.9m; employees < 50 </li></ul></ul></ul><ul><ul><ul><li>In UK, turnover < £6.5m; balance sheet total < £3.26m; employees < 50 </li></ul></ul></ul>
  8. 8. THE FUTURE OF UK / IRISH GAAP EC Simplification Proposals for Micro entities <ul><li>In the EC proposals, micro entities have to meet two of the three following criteria: </li></ul><ul><ul><li>A balance sheet total of not more than €500,000 </li></ul></ul><ul><ul><li>A net turnover of not more than €1,000,000 </li></ul></ul><ul><ul><li>Not more than ten as average number of employees during the financial year </li></ul></ul><ul><li>Member States decide whether to: </li></ul><ul><ul><li>Require micro entities to continue to follow the current requirements of the Accounting Directives (in Ireland: primarily the 1986 Act), or </li></ul></ul><ul><ul><li>Exempt micro entities </li></ul></ul><ul><li>Member States may: </li></ul><ul><ul><li>Introduce other suitable reporting requirements at the national level </li></ul></ul><ul><ul><li>For example, integrating various reporting requirements (e.g. tax, statistics) into one </li></ul></ul>Source: Commission Staff Working Document accompanying Proposal http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0083:FIN:EN:PDF
  9. 9. THE FUTURE OF UK / IRISH GAAP ASB Policy Proposals – Chartered Accountants Ireland approach <ul><li>Chartered Accountants Ireland/CCAB-I public events – </li></ul><ul><ul><li>23 rd November 2009, Belfast </li></ul></ul><ul><ul><li>9 th December 2009, CA House, Dublin </li></ul></ul><ul><li>Speakers in Dublin included: </li></ul><ul><ul><li>Ian Mackintosh, Chairman ASB </li></ul></ul><ul><ul><li>Paul Pacter, IASB Director of Standards for SMEs </li></ul></ul><ul><ul><li>Michael Kavanagh, Head of Financial Reporting Supervision, IAASA </li></ul></ul><ul><ul><li>Terry O’Rourke, Chairman of AC </li></ul></ul><ul><li>Awareness raising activity by Chartered Accountants Ireland with other stakeholders – government, regulators, representative bodies </li></ul>
  10. 10. THE FUTURE OF UK / IRISH GAAP ASB Policy Proposals – Responses <ul><li>ASB website: http://www.frc.org.uk/asb/technical/projects/resposes_policy.cfm </li></ul><ul><ul><li>155 responses from various sectors, professions, interested parties </li></ul></ul><ul><li>Chartered Accountants Ireland response: </li></ul><ul><ul><li>Supportive of proposals in general </li></ul></ul><ul><ul><li>Definition of ‘public accountability’ vital to successful implementation </li></ul></ul><ul><ul><ul><li>Implementation guidance </li></ul></ul></ul><ul><ul><li>Issues for certain types of entities where size not considered </li></ul></ul><ul><ul><li>Non-PA subsidiaries of ‘full-IFRS’ groups </li></ul></ul>
  11. 11. THE FUTURE OF UK / IRISH GAAP ASB Policy Proposals – Responses <ul><li>Chartered Accountants Ireland response: </li></ul><ul><ul><li>IFRS for SMEs </li></ul></ul><ul><ul><ul><li>Exemption from consolidated accounts for intermediate parent </li></ul></ul></ul><ul><ul><ul><li>Exemption from presenting P&L of parent </li></ul></ul></ul><ul><ul><li>Non-PA groups regardless of size – IFRS for SMEs </li></ul></ul><ul><ul><li>However, def n should allow for authorities to designate certain entities as PA regardless of other elements of the def n </li></ul></ul><ul><ul><li>FRSSE should remain; internationalise it in due course </li></ul></ul><ul><ul><li>SORPs where “clear and demonstrable need arising from sector specific issues not covered by guidance in accounting standards” </li></ul></ul><ul><ul><li>Consider staggering implementation dates </li></ul></ul>
  12. 12. THE FUTURE OF UK / IRISH GAAP ASB Policy Proposals – Responses <ul><li>Chartered Accountants Ireland – PBE issues: </li></ul><ul><ul><li>Supports ASB approach of development of PBE standard </li></ul></ul><ul><ul><li>Preference for ‘3 book approach’; dissenting view of a ‘one stop shop’ approach </li></ul></ul><ul><ul><ul><li>Core standards </li></ul></ul></ul><ul><ul><ul><li>PBE standard </li></ul></ul></ul><ul><ul><ul><li>SORPs for sub-sectors (application guidance) </li></ul></ul></ul><ul><ul><li>Core standards to be EU adopted IFRS or IFRS for SMEs? </li></ul></ul><ul><ul><ul><li>Response suggests that a tiered approach might be considered </li></ul></ul></ul>
  13. 13. THE FUTURE OF UK / IRISH GAAP ASB Policy Proposals – next steps <ul><li>ASB acknowledged that a number of key issues will have to be re-deliberated by the Board </li></ul><ul><li>ASB to produce a response analysis for publication </li></ul><ul><li>ASB intends to hold meetings/workshops, perhaps in May, to provide feedback and discuss the Board’s tentative decisions on the basis of the responses </li></ul><ul><li>Looking at a mid-summer Exposure Draft with the aim of a final standard by the end of 2010 </li></ul><ul><li>‘ Changeover date’ still proposed for 1 January 2012, but very tight timeline </li></ul>
  14. 14. THE FUTURE OF UK / IRISH GAAP Key areas contrasting IFRS for SMEs and UK/Irish GAAP (appendix B of ASB doc) <ul><li>Cash flow statements </li></ul><ul><li>Format of financial statements – see illustrative financial statements </li></ul><ul><li>Business combinations – no merger accounting; different disclosures required for acquisitions </li></ul><ul><li>Related party disclosures – disclosure of key management personnel compensation in total </li></ul><ul><li>Associates and joint ventures: cost model; equity method; at fair value through profit or loss </li></ul><ul><li>Goodwill/intangibles: “separability” - more intangibles recognised; default to 10 year finite life. Impairment test required if indicator present </li></ul>
  15. 15. THE FUTURE OF UK / IRISH GAAP Key areas contrasting IFRS for SMEs and UK/Irish GAAP (appendix B of ASB doc) <ul><li>Research and development – follow rules for intangibles; expensed </li></ul><ul><li>Investment properties – only meet definition if fair value at each balance sheet date can be measured reliably without undue cost or effort. Changes in fair value to profit or loss </li></ul><ul><li>Foreign currency – SSAP 20: local currency; IFRS for SMEs: functional currency </li></ul><ul><li>Lease accounting – no change but some differences in disclosures </li></ul><ul><li>PPE – no revaluation option </li></ul>
  16. 16. THE FUTURE OF UK / IRISH GAAP Key areas contrasting IFRS for SMEs and UK/Irish GAAP (appendix B of ASB doc) <ul><li>Deferred tax: temporary differences </li></ul><ul><ul><li>DT booked on revaluations </li></ul></ul><ul><ul><li>Discounting prohibited </li></ul></ul><ul><ul><li>Guidance on uncertain tax positions </li></ul></ul><ul><ul><li>Disclosure of unused tax losses and credits </li></ul></ul><ul><li>Financial instruments: apply either IAS 39 or IFRS for SME – basic financial instruments at cost; other financial instruments at fair value. Hedge accounting restricted to the following four (4) risks: </li></ul><ul><ul><li>interest rate risk of a debt instrument measured at amortised cost. </li></ul></ul><ul><ul><li>foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction. </li></ul></ul><ul><ul><li>price risk of a commodity that it holds or in a firm commitment or highly probable forecast transaction to purchase or sell a commodity </li></ul></ul><ul><ul><li>foreign exchange risk in a net investment in a foreign operation. </li></ul></ul>
  17. 17. THE FUTURE OF UK / IRISH GAAP Key areas contrasting IFRS for SMEs and UK/Irish GAAP (appendix B of ASB doc) <ul><li>No changes in many areas: </li></ul><ul><ul><li>Impairment – FRS 11 </li></ul></ul><ul><ul><li>Provisions – FRS 12 </li></ul></ul><ul><ul><li>Current tax – FRS 16 </li></ul></ul><ul><ul><li>Pensions – FRS 17 </li></ul></ul><ul><ul><li>Accounting policies – FRS 18 </li></ul></ul><ul><ul><li>Share based payments – FRS 20 </li></ul></ul><ul><ul><li>Events after the balance sheet date – FRS 21 </li></ul></ul><ul><ul><li>The effects of changes in foreign exchange rates </li></ul></ul><ul><ul><li>Corresponding amounts – FRS 28 </li></ul></ul><ul><ul><li>Government Grants – SSAP 4 </li></ul></ul><ul><ul><li>Stocks & long term contracts work in progress – SSAP 9 </li></ul></ul><ul><ul><li>Accounting for leases – SSAP 21 </li></ul></ul>
  18. 18. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – Goodwill and Intangibles <ul><li>Goodwill </li></ul><ul><li>All business combinations accounted for using purchase method </li></ul><ul><ul><li>Business combinations between entities under common control not in scope </li></ul></ul><ul><li>Goodwill recognised as intangible at acquisition date </li></ul><ul><ul><li>Cost less accumulated amortisation and impairment </li></ul></ul><ul><ul><li>Useful life cannot be indefinite; if entity is unable to make a reliable estimate – 10 years </li></ul></ul><ul><ul><li>Test for impairment using ‘indicator’ approach </li></ul></ul><ul><li>Negative goodwill </li></ul><ul><ul><li>Reassess the identification and measurement of identifiable items arising on acquisition and cost of business combination </li></ul></ul><ul><ul><li>Recognise immediately in profit or loss </li></ul></ul>
  19. 19. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – Goodwill and Intangibles <ul><li>Intangibles other than goodwill </li></ul><ul><li>Recognition </li></ul><ul><ul><li>“ Separability” – sold, transferred, licensed, rented or exchanged </li></ul></ul><ul><ul><li>Arises from contractual or other legal rights </li></ul></ul><ul><li>Measurement </li></ul><ul><ul><li>Cost less accumulated amortisation </li></ul></ul><ul><ul><li>Useful life presumed to be 10 years if entity cannot make reliable estimate; cannot be indefinite </li></ul></ul><ul><ul><li>Test for impairment using ‘indicator’ approach </li></ul></ul><ul><li>Internally generated </li></ul><ul><ul><li>Expense unless it forms part of cost of another asset meeting recognition criteria </li></ul></ul>
  20. 20. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – Property, plant and equipment and investment properties <ul><li>Property, plant and equipment (PPE) </li></ul><ul><li>No revaluation or ‘fair value’ option </li></ul><ul><li>Investment properties (IPs) </li></ul><ul><li>Distinguishes between IPs for which a fair value can be reliably estimated and those for which it is not possible to reliably estimate fair value </li></ul><ul><li>If fair value is reliably measurable without undue cost or effort – carried at fair value through profit or loss </li></ul><ul><li>If FV cannot be measured reliably or without undue cost/effort – cost less accumulated depreciation as an item of PPE </li></ul><ul><li>Use most recent FV as ‘deemed cost’ until a reliable measure of FV becomes available again </li></ul><ul><li>IP interest held under a lease – only the interest is recognised, not the underlying property </li></ul>
  21. 21. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – Impairment of fixed assets and goodwill <ul><li>Assets, including goodwill, are tested for impairment where there is an indication that the asset may be impaired </li></ul><ul><li>Assessment at each reporting date </li></ul><ul><li>Internal and internal indicators </li></ul><ul><li>Recoverable amount = higher of ‘fair value less costs to sell’ and ‘value in use’ </li></ul><ul><li>Reversal of impairment permitted except for goodwill </li></ul><ul><li>Fair value of goodwill must be derived from measurement of the fair value of the CGUs of which goodwill is a part </li></ul><ul><ul><li>Goodwill on acquisition is allocated from the acquisition date to each of the acquirer’s CGUs that is expected to benefit </li></ul></ul><ul><ul><li>If allocation to CGUs would be arbitrary, then test for impairment at entity level </li></ul></ul>
  22. 22. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – Inventories and construction contracts <ul><li>Inventories </li></ul><ul><li>Recognised at lower of ‘cost’ and ‘selling price less costs to complete and sell’ </li></ul><ul><li>Costs of purchase, conversion and others incurred …’to present location and conditions’ </li></ul><ul><li>Purchase price, import duties, non-refundable taxes, transport and handling costs and any other directly attributable costs less trade discounts, rebates and similar items </li></ul><ul><li>FIFO or weighted average; LIFO not permitted </li></ul><ul><li>Most recent purchase price permitted if it approximates cost (as well as retail method or standard costs) </li></ul><ul><li>Construction contracts </li></ul><ul><li>Reliable estimate of outcome – revenue and expenses recognised by reference to stage of completion </li></ul><ul><li>No reliable estimate – revenue = contract costs incurred that it is probable will be recovered </li></ul><ul><li>Asset - ‘gross amounts due from customers for contract work’ </li></ul><ul><li>Liability - ‘gross amount due to customers for contract work’ </li></ul>
  23. 23. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – Leases and provisions, contingent liabilities and assets <ul><li>Leases </li></ul><ul><li>No GAAP differences </li></ul><ul><li>Some disclosure differences – see paragraphs 20.23 (finance leases) and 20.30 (operating leases) of the IFRS for SME </li></ul><ul><li>Provisions, contingent liabilities and contingent assets </li></ul><ul><li>No GAAP differences nor differences in disclosure </li></ul>
  24. 24. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – pensions <ul><li>Pensions </li></ul><ul><li>More extensive scope </li></ul><ul><ul><li>Short term employee benefits due within 12 months </li></ul></ul><ul><ul><ul><ul><li>Recognise when there is a legal or constructive obligation and it can be reliably measured </li></ul></ul></ul></ul><ul><ul><li>Post employment benefits </li></ul></ul><ul><ul><ul><ul><li>DC and DB plans, multi-employer and state plans </li></ul></ul></ul></ul><ul><ul><li>Other long term employee benefits not due within 12 months </li></ul></ul><ul><ul><ul><ul><li>Liability measured at the net of the PV of the benefit obligation less the FV of the plan assets at the reporting date </li></ul></ul></ul></ul><ul><ul><li>Termination benefits due to early retirement or voluntary redundancy </li></ul></ul><ul><ul><ul><ul><li>Expensed immediately in P/L – not linked to future service </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Best estimate to settle obligation; discount if > 12 months </li></ul></ul></ul></ul>
  25. 25. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – DC plans <ul><li>DC plans </li></ul><ul><li>Contribution payable for a period recognised: </li></ul><ul><ul><li>As a liability after deducting amount already paid. Excess of contributions over contributions due – asset </li></ul></ul><ul><ul><li>As an expense unless capitalised in inventories or property </li></ul></ul>
  26. 26. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – DB plans <ul><li>DB plans </li></ul><ul><li>Recognise a liability for an entity’s obligations (PV) less plan assets (FV) </li></ul><ul><li>Net change in liability = cost for the period </li></ul><ul><li>Should use projected unit credit method (if able without undue cost/effort) </li></ul><ul><li>Simplifications permitted for current employees </li></ul><ul><ul><li>Assume current salaries </li></ul></ul><ul><ul><li>Ignore future service of employees </li></ul></ul><ul><ul><li>Assume all current employees will receive post-employment benefits </li></ul></ul><ul><li>No requirement for independent actuary or annual valuation </li></ul><ul><li>Accounting policy election – recognise all actuarial gains and losses incurred in the period </li></ul><ul><ul><li>In profit or loss, or </li></ul></ul><ul><ul><li>In other comprehensive income </li></ul></ul>
  27. 27. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – DB plans <ul><li>DB plans </li></ul><ul><li>Discounting by reference market yields at the reporting date on high quality corporate bonds </li></ul><ul><ul><li>Current environment – yields on bank bonds as ‘outliers’ </li></ul></ul>
  28. 28. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – other points <ul><li>Borrowing costs must be expensed </li></ul><ul><li>SSAP 20 uses “local currency” whereas IFRS for SMEs uses “functional currency” (no difference if FRS 23 has been adopted) </li></ul><ul><ul><li>Functional currency is the currency of the primary economic environment in which the entity operates </li></ul></ul><ul><ul><li>Factors: currency that mainly influences sales prices for goods and services; country whose competitive forces and regulations mainly determine the sales prices </li></ul></ul>
  29. 29. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – training modules currently available 1 Small and medium sized entities 3 Financial statement presentation 4 Statement of financial position 5 Statement of Comprehensive Income and Income Statement 6 Statement of Changes in Equity and Statement of Income and Retained Earnings 8 Notes to the Financial Statements 10 Accounting Policies, Estimates and Errors 13 Inventories 14 Investments in Associates 15 Investments in Joint Ventures
  30. 30. THE FUTURE OF UK / IRISH GAAP IFRS for SMEs – training modules currently available 16 Investment Property 17 Property, Plant and Equipment 21 Provisions and Contingencies 23 Revenue 24 Government Grants 25 Borrowing Costs 32 Events after the End of the Reporting Period
  31. 31. THE FUTURE OF UK / IRISH GAAP Useful websites <ul><li>ASB proposals and responses: </li></ul><ul><li>http://www.frc.org.uk/asb/technical/projects/project0072.html </li></ul><ul><li>IFRS for SMEs – standard and training modules </li></ul><ul><li>http://www.iasb.org/IFRS+for+SMEs/IFRS+for+SMEs+and+related+material/IFRS+for+SMEs+and+related+material.htm </li></ul><ul><li>IASPLUS (Deloitte) “Choosing your GAAP: Planning for the proposed removal of Irish GAAP” </li></ul><ul><li>http://www.iasplus.com/dttpubs/0911choosinggaapireland.pdf </li></ul><ul><li>PwC “IFRS for small and medium-sized entities: Pocket guide 2009” </li></ul><ul><li>http://www.pwc.com/gx/en/ifrs-reporting/ifrs-for-sme-pwc-pocket-guide.jhtml </li></ul><ul><li>KPMG “IFRS Briefing Sheet: IFRS for small and medium-sized entities </li></ul><ul><li>http://www.kpmg.com/SiteCollectionDocuments/IFRG_briefing_sheets/IFRS-Briefing-Sheet-Issue-144.pdf </li></ul>