Study Zone

The Future of UK GAAP

ASB’s top man Ian Mackintosh talks to PQ magazine.

The UK Accounting Standards Board (ASB) has just completed an extensive consultation exercise on the future of UK GAAP, taking in views from preparers and users of accounts, and advisers. This included inviting comments on a paper, published last July, which set out proposals for a three-tier system under the international framework.
At present companies that are listed and produce consolidated financial statements are required to use IFRS as adopted in Europe. Any other company can choose to use IFRS if it wishes. The rest of the companies use UK GAAP as published or, if they are small enough, the Financial Reporting Standard for Smaller Entities (FRSSE).
The consultation paper suggested that a new three-tier system be adopted whereby publicly accountable entities (roughly, those that are listed or look after other people’s money, such as banks or insurance companies) should use IFRS, companies that presently use the FRSSE should continue to do so, and the rest (the ones in the middle) should use the IFRS for SMEs. It was proposed that over a period of time the FRRSE should either be phased out or made compatible with international standards.
The aim was to bring financial reporting standards in the UK under one framework (the international framework) as it had been agreed that it was not efficient or cost effective to work under two frameworks in the longer term. Opinions on other matters such as the reporting of subsidiaries and public benefit entities were also canvassed.
The consultation period closed in February and more than 150 responses have been received. There are quite diverse opinions on some of the major questions. The ASB will now consider all the responses before making a final decision later his year.
One of the biggest debates is whether the FRSSE should be retained, giving a three-tier system, or not, giving a two-tier system. Either way, though, we will eventually end up with a financial reporting system that is based on the international framework. This then begs the question, what is the role of the ASB going forward?
The overall aim of the ASB is to contribute to the establishment and improvement of standards for financial reporting. In my view, there are a number of activities the ASB should undertake to achieve this.
Firstly, whatever the future shape of UK GAAP, the ASB retains the responsibility for overseeing and setting standards for all UK entities other than the listed consolidators (which are covered by European law). It therefore has a watching brief to ensure that the financial reporting standards in place best serve the UK and Irish constituency going forward.
Secondly, I see a major role in attempting to influence the IASB in its setting of international standards. The ASB will continue to conduct a two-way communication with its constituents to achieve this. It needs to inform them of the progress of international standards, and it needs to hear their concerns and ideas on how proposed measures might be improved. It must also continue to liaise closely with the IASB to understand its agenda and to feed in views.This process of influencing the future of international standards will sometimes need to be done by the ASB itself, particularly in representing UK and Irish points of view, and at other times with and through the European Union. The ASB works closely with EFRAG in its endorsement and advisory role in the EU and with other European national standard setters. Similarly, it must be aware of thinking in other parts of the world. This will probably be best achieved by working closely with the national standard setters of many countries.
The political side of standard setting cannot be ignored either. The ASB informs and collaborates with the UK government agencies and those of the EU. Major international influencers, such as the G20, will also play a part in the formation of future international standards and the ASB will need to keep abreast of their deliberations and decisions.
The third vitally important role for the ASB will be in research and innovative thinking. A major nation like the UK should be a leader in tackling the difficult and interesting long-term issues, and be available to lead thought and communicate it to the international community.
There are many challenges for the ASB on the road ahead. In the shorter term it must consider the feedback it has had on the future of UK GAAP and, with further consultation, finalise and implement sensible and broadly agreed steps to put in place a rational and harmonised framework of financial reporting standards for the UK and Ireland.
In the longer term it needs to position itself, in a cost-efficient manner, to influence the future of international GAAP and its adoption in Europe. To do this it needs dynamic communication with its constituents and an outreach to European and international leaders in financial reporting. It also needs to maintain its place on the international stage in terms of research and thought leadership.
Another matter that needs to be addressed is the position of the ASB vis-à-vis public benefit entities, which includes charities, not-for-profit companies and the public sector. The consultation paper did raise the question of whether not-for-profit entities were adequately covered by the present standards, and if they needed their own standard. It will be interesting to consider our constituents’ views on this and to work out how best to respond.
The public sector has, in the UK, decided to operate under IFRS and amend the standards as necessary to meet their specific needs. At present the UK government does not involve the ASB in its decisions, which include, in the near future, how to treat the substantial holdings it has in banks. Perhaps there might be a role for the ASB here, but this is a matter for the government to decide. With or without additional responsibilities, the ASB has a challenging period ahead in the near term, and a vital role to fulfil domestically and internationally over many years to come.

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