The Accounting Standards Board has proposed replacing existing UK GAAP with a new financial reporting regime called The Financial Reporting Standard Applicable in the UK and Republic of Ireland (The FRS). Under the proposals, listed parent companies and subsidiaries will have a choice between applying The FRS, EU-adopted IFRS, or the Reduced Disclosure Framework for their individual accounts, provided certain conditions are met. Qualifying entities taking the Reduced Disclosure Framework will benefit from more extensive disclosure exemptions compared to The FRS. This new framework introduces more options but also more complexities for preparing consolidated and individual financial statements within listed groups.

1. The proposed changes to UK GAAP have important
implications for listed groups, and introduce new options
for parent companies and subsidiaries
What is happening? Highlights
The Accounting Standards Board has proposed replacing The proposed new UK GAAP framework will have a
existing UK GAAP with a new financial reporting regime. number of impacts on listed groups:
Current UK accounting standards would be replaced by a single
standard, 'The Financial Reporting Standard Applicable in the • parent companies and subsidiaries will have a choice
UK and Republic of Ireland' (The FRS). between The FRS and EU-adopted IFRS, and could
benefit from disclosure exemptions
Under the proposals, companies would first look to company • numerous factors will influence the choices to be made.
law and applicable regulations to determine whether they are
required to apply EU-adopted IFRS. If IFRS is not required,
Under the proposals, a listed parent will generally have a choice
then The FRS can be used.
between The FRS, EU-adopted IFRS and, provided that they
meet the conditions to be a 'qualifying entity', the Reduced
An option of EU-adopted IFRS with disclosure exemptions,
Disclosure Framework in its individual accounts.
the Reduced Disclosure Framework, would be introduced for
parent companies and subsidiaries in their individual company
What about my subsidiaries?
accounts, provided that certain conditions are met.
Most subsidiaries of listed parents will have a choice between
applying The FRS or electing to apply either EU-adopted IFRS
This factsheet focuses on the likely impact for listed groups,
or the Reduced Disclosure Framework in their individual
and on the choices which may be available for their parent
accounts.
company and subsidiary individual accounts.
Qualifying subsidiaries will be eligible for exemptions from a
When will these changes happen?
number of disclosure requirements under both The FRS and
The new standards are currently planned to be effective for
the Reduced Disclosure Framework.
accounting periods beginning 1 January 2015 onwards. Early
adoption is likely to be permitted once the final standards are
Conditions for qualifying parent companies
released. The aim is that the standards will be published during
2012. The introduction of the new framework may bring and subsidiaries
advantages for listed groups, and therefore early adoption could To be eligible to take disclosure exemptions, the conditions to
be worth considering. be a 'qualifying entity' must be met. These are:
• the entity is included in consolidated accounts
What would the impact be on the group • the consolidated accounts are publicly available; and
• there is no objection from any shareholder.
accounts?
The proposals will not alter which entities are required to
This definition of a qualifying entity means that the disclosure
prepare IFRS accounts. The group accounts of companies
exemptions would be available to most parent companies and
listed on the London Stock Exchange or AIM are already
subsidiaries of listed groups. There would be no requirement
required to be prepared under EU-adopted IFRS. These
for a particular percentage ownership, as is the case with the
requirements arise from company law and the AIM rules
current cash flow statement exemption which is restricted to
respectively, and there will be no change to these.
90% subsidiaries.
What about parent company individual
Also, although the entity must be included in consolidated
accounts?
accounts which are publicly available, there is no requirement
Currently, many parent company individual accounts continue for these accounts to be prepared under a particular GAAP.
to be prepared under UK GAAP, although those listed on the This would mean that UK subsidiaries of foreign parents could
London Stock Exchange are required to adopt FRS 26 be eligible, even when the group accounts are not prepared
Financial Instruments: Recognition and Measurement and under IFRS or an equivalent GAAP.
the associated IFRS-converged standards.
Factsheet 336 - January 2012

2. What are the disclosure exemptions for IFRS. It also means that when major changes are made to EU-
qualifying parent companies and adopted IFRS, such as the proposed changes to lease
subsidiaries? accounting, there will be a time delay of a number of years
A qualifying entity may take disclosure exemptions under before similar changes are introduced in The FRS. This could
The FRS. These exemptions cover cash flow statements, lead to consolidation adjustments arising during that period.
financial instruments, related party transactions with and
between wholly-owned subsidiaries and group share-based Preparation of individual financial statements
payment schemes. Despite the disclosure exemptions, individual financial
statements prepared under the Reduced Disclosure Framework
Alternatively, a qualifying entity could elect to apply the will be considerably longer than those prepared under The FRS.
Reduced Disclosure Framework. The disclosure exemptions However, the preparation of the numbers themselves is unlikely
are more extensive for subsidiaries taking this option, but this is to involve much additional work as IFRS-compliant figures will
a reflection of the increased number of disclosure requirements be required for group reporting.
in EU-adopted IFRS.
Maintaining financial reporting knowledge
The main areas of disclosure exemptions are: Preparing accounts under two different accounting frameworks
• cash flow statements also has costs associated with maintaining and updating the
• financial instruments required knowledge. Differences between the two GAAPs can
• related party transactions with and between wholly-owned occasionally lead to confusion and errors occurring. If all
subsidiaries financial statements in the group use the recognition and
• group share-based payment schemes measurement requirements of EU-adopted IFRS, those
• impairment of assets involved in the financial reporting process will only need to
• discontinued operations maintain their knowledge of one set of standards.
• comparative reconciliations
Tax
Some of these exemptions are dependent on ‘equivalent’ The differences between treatments under EU-adopted IFRS
disclosures being made in the group financial statements. and The FRS may lead to differences in the tax treatment of
These equivalent disclosures only have to meet the basic some transactions. Until HMRC have developed appropriate
disclosure requirements of IFRS, not necessarily each and every tax legislation, it is not possible to determine specific issues.
one, and can be on an aggregate basis. However, differences such as the treatment of development
costs may lead to a better tax outcome under one framework
What are the factors to consider? than the other.
For many subsidiaries of listed groups, the option of the
Reduced Disclosure Framework should be given serious Distributable profits
consideration as an alternative to The FRS. However, there are As for tax, differences in accounting requirements could lead to
a number of important factors to consider. differences in the distributable profits, and therefore the
amount available to be paid as dividends, recognised under
Consolidation process either The FRS or EU-adopted IFRS. These will be very
Currently, where the group accounts are prepared under EU- specific to each company, and will need to be investigated
adopted IFRS and the individual accounts under UK GAAP, carefully when making a decision on which framework to
the consolidation process is likely to involve calculating a adopt.
number of adjustments to reconcile the two GAAPs.
Any questions?
If the subsidiary accounts are prepared under The FRS and the This factsheet can serve only as an introduction to the main
group accounts under EU-adopted IFRS, there are still likely to issues raised by the Future of UK GAAP project. The impact
be adjustments as some of the accounting treatments differ. of these changes will vary from business to business. If you
The use of the Reduced Disclosure Framework would remove wish to discuss this further, then please contact your usual
almost all such adjustments, and streamline the process. Grant Thornton representative to discuss how we can help you
assess the implications of these proposals. Alternatively, please
Difference in timetable for changes contact our office location nearest to you for assistance, which
The proposal is that The FRS will only be updated every three can be found on our website at www.grant-thornton.co.uk.
years. This will provide stability, in contrast to the constant
amendments and introduction of new standards in EU-adopted
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