FRS102 – a great reference guide
As you may know, non-listed UK and Irish companies are not subject to International Financial Reporting Standards (IFRS). Instead, local standards are applied to financial reporting in such entities. Recently, the FRC in the UK has issues FRS102, which is applicable to all non-listed UK/Irish companies from January 1st 2015. This standard replaces all previous local accounting standards.
Financial reporting is not my speciality, so if you want to read more about FRS 102, Prof Robert Kirk has authored an excellent reference guide for CPA Ireland. You can find the guide at this link: A new era for Irish & UK GAAP – A quick reference guide to FRS102 – CPA Ireland and a hard copy of the book is also available to purchase here.
New code for Irish charities
In March 2011, the Irish Times reported on a new voluntary code for charities in Ireland. Yes, it’s a while ago and has been on my “to do” list for quite a while. Following the enacting of the Charities Act 2009, all Irish charities must submit an annual activity report to the Charities Regulatory Authority. Larger charities also have to complete and file audited accounts. The new proposed code aims to make charities more transparent financially, going beyond the requirements of the Act. The five key elements of the code are:
- charities commit to good practice and ensure fundraising activities are open and legal
- a donor charter will be introduced
- a complaints and feedback procedure
- a monitoring group will monitor code compliance
- an annual report and a statement of annual accounts will be publicly available
An example of a prior year adjustment – IAS10
International Accounting Standard 10 (IAS10) requires companies to make what is termed a prior year adjustment to its financial statements on a number of grounds. One reason is the discovery of an error of a material nature. Here’s a recent example from TUI Travel, one of Europe’s biggest travel operators. The (London) Independent reported on Oct 22, 2010 how TUI has to write off £117m (above 20% of its current year profits) as a result of errors in pricing systems.
TUI’s website reports the following adjustments:
- A reduction of underlying operating profit for the year ended 30 September 2009 of £42m from £443m to £401m, all of which relates to TUI UK.
- A reduction in opening reserves at 1 October 2008 of £70m, from £2,286m to £2,216m.
- As a result of the two adjustments above the separately disclosed items of £29m announced in the Q3 results will no longer be required.
- A reduction in the underlying earnings per share for the year ended 30 September 2009 of 2.8p from 23.8p to 21.0p.
This is a good example of IAS10 at work.
Proposals to improve the financial reporting of leases
The IASB and the FASB (respective International and US accounting standard setters) have recently published proposals
(see here) to change the way leases are reporting in financial statements, i.e. the income statement and balance sheet. A lease is a contract for the use of an asset, and in accounting terms a lease can be either an operating lease or a finance lease. Without going into detail, a finance lease is capitalised in the balance sheet, meaning the asset subject to the lease is included as a business asset, with a corresponding liability for the amount owed to the lease company or bank. An operating lease on the other hand does not appear on the balance sheet, with any lease payments going through the income statement as an expense. The new proposals are suggesting that all leases must be accounted for as assets of a business, with a liability shown for the amounts owed on the lease. The argument from the standard setters is that a balance would show the true future liabilities of the business. How would this affect a business? Well, it might not affect the business at all if it had no operating leases, but some firms use operating leases quite a lot. If these leases suddenly were capitalised to the balance sheet, an immediate increase in long-term debt occurs. This might put businesses beyond the capacity to raise more debt. Airlines typically lease aircraft, which are normally treated as an operating lease. For example, Aer Lingus (an Irish airline) has about a €50m operating lease charge on their balance sheet annually. Let’s assume this is a 10 year lease, so if this were to be capitalised to the balance sheet, an increase in debt of €500m happens overnight. On a smaller scale, many retailers in capital cities might have expensive 21 year leases on prime retailer sites. Putting these leases on the balance sheet might cripple the borrowing capacity of smaller companies. It looks like a debate on this proposal will be quite heated.
Accounting for long term contracts
Construction type companies are subject to a special accounting standard called IAS 11 (see http://www.ifrs.org). This standard specifies how construction companies deal with revenues and costs associated with contracts in their published accounts. What’s the problem you might ask? Why a special standard? The problem is that construction or similar contracts often span multiple accounting periods. If too much revenue is recorded early, profits might be inflated incorrectly. And, if costs are recorded too early, profits might look much lower than they should be. So, IAS 11 says what is allowed and not allowed. In a nutshell, losses must be included in accounts immediately; profits should be reported only when certain and in proportion to the completion of a contract. A recent news article in the Telegraph highlights one UK company (Connaught Group) that may be incorrectly applying the standard – you can read it here – to long term social housing maintenance contracts.
In fact, IAS 11 applies two basic accounting concepts. First is applies the prudence concept, as losses are to be recognised straight away and profits only when reliable estimates are possible. It also applies the accruals concept, which means that revenues and costs should be matched against each other as evenly as possible over time.
Global IFRS adoption
While the minute detail of the many accounting standards is not one of the topics I like to write about, it occured to me recently ” how international are the International Financial Reporting Standards (IFRS)?”. A key advantage of one set of reporting standards is ease of comparison and understanding of financial statements. Since 2005, all EU listed companies are required to use IFRS and some member states allow smaller companies to use it. On a global scale, approximately 120 countries have adopted IFRS, with about 90 of these making adoption mandatory for all listed companies. Most of the G20 countries have either adopted IFRS or set dates for adoption (see http://is.gd/jMVJw). The US Federal Accounting Standards Board and the International Accounting Standards Board (the body who issue IFRS) have agreed a date of June 2011 for convergence of US and International standards. Also, some countries are planning to adopt the IFRS for SME, which is a cut down version of the full IFRS set. This will not only extent IFRS principles to SME but possibly to developing economies also. So the spread of IFRS is pretty wide, and by about the middle of this decade, the standards will be quite international in nature and name.
Accounting rules in smaller companies
Limited companies must prepare financial statement in accordance with accounting standards and Company Law. As you can imagine, complicated rules and laws are often way too much for a small company to deal with. Most to the time, directors of small companies leave the work of preparing financial statement up to practicing accountants. In fact, in the UK and Ireland, small companies are also exempt from the requirement to have their financial statements audited provided they meet certain conditions.
In June 2008, the UK’s Accounting Standards Board (ASB) issue an accounting standard specifically designed to cater for and simplify the accounting rule for small companies. What constitutes a small company is specified by Company Law. In the UK, any company with turnover of not more than £5.6m, a balance sheet total of not more than £2.8m and has less than 50 employees is a small company. If a business meets these criteria, it can then adopt the ASB’s Financial Reporting Standard for Small Entities (FRRSE). This standard is very useful in that it incorporates all requirements relating to financial statements as set out in Company Law. Thus, by following this standard in the preparation of its accounts, a company is also fully compliant with the law. The FRRSE covers many areas of financial statements- for example: the profit and loss account, fixed assets, current assets, the Directors Report and much more. It also exempts smaller companies from some more complex requirements of other accounting standards. If your business is a small company, it might be worth while asking your accountant if the FRRSE is suitable for you. It might simplify their work, and as a result save you some fees.
Here is a link to the ASB’s website, where you can download the FRRSE for free;
http://www.frc.org.uk/documents/pagemanager/asb/FRSSE/FRSSE%20Web%20optimized%20FINAL.pdf
Martin's accounting blog 