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Plan
to apply FRED30 hedging and financial instrument rules to all listed companies
ICAEW gives guidance on application of
FRS5 to insurance intermediaries
IASB drafts guidance on leasing
transactions and funding decommissioning costs
Size
criteria for small and medium-sized companies increased
Revenue
recognition rules issued as amendment to FRS5
Cost
of buying in own shares to be deducted from shareholders’ funds.
Interest
rate hedging to focus on currency amount rather than individual assets
All
own share purchases to be deducted from shareholders’ funds
ASB
in conflict with proposed international standard on assets held for sale
Plan
to record emission allocation rights as assets and emission obligations as
liabilities
Shares
held by ESOP trusts to be deducted from shareholders’ funds instead of shown as
asset
Treasury shares should be deducted from
shareholders’ funds, proposes UITF
Regulations
permit quoted and listed shares to be bought back and held as “treasury shares”.
ICAEW
guidance says foreign currency gains on long-term monetary items are realised.
Immediate
recognition of capacity sales contracts heavily restricted.
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16 April 2004: The
Accounting Standards Board plans to extend the proposed accounting treatment of
hedges and financial instruments to all listed companies in addition to companies
that apply the fair value accounting rules contained in the Companies Act as originally
envisaged. Consequently the ASB has suspended any further work on FRED23.
See under Financial Instruments and Hedge Accounting.
27 January 2004: Revenues earned by insurance intermediaries from placing insurance policies should normally be recognised at the inception of the policy, as this will coincide with the right to consideration being established, unless certain obligations remain to be fulfilled in which case recognition of the revenue or an appropriate proportion of it should be deferred. This is the essence of detailed guidance issued by The Institute of Chartered Accountants in England and Wales in elaboration of accounting standard FRS5.
See under Insurance Brokers’ Accounts.
15 January 2004: The International Financial Reporting and Interpretations Committee (IFRIC) of the International Accounting Standards Board has issued a draft interpretations D3 and D4 dealing respectively with transactions that have the substance of a lease and with funds established to reimburse decommissioning, restoration or rehabilitation obligations as incurred. In both cases, the Accounting Standards Board has concluded that sufficient guidance is already contained in UK accounting standards and/or statute law and therefore does not intend to publish an equivalent document.
See under Leasing and Hire Purchase Transactions and Decommissioning Costs.
9 January 2004: The Government has increased the size criteria affecting the preparation, audit and filing of accounts of small and medium-sized companies (and groups of companies) for financial periods ending on or after 30 January 2004. In effect the size threshold has virtually doubled for each category.
See under Smaller Companies and Entities.
November 2003: The Accounting Standards Board has issued an amendment to FRS5 containing application notes on revenue recognition. Among the requirements included in the application notes are the following:
(a) Where a seller receives payment from a customer in advance of performance, it should initially recognise a liability equal to the amount received, representing its obligation under the contract, and when the seller obtains the right to consideration through its performance, that liability will be reduced by the amount recognised as revenue.
(b) In applying SSAP9 to long-term contracts, recognition of turnover should normally reflect the extent to which the contractor has obtained the right to consideration arising by virtue of performance, rather than the pattern of costs incurred, and as a consequence different stages of a contract may vary in profitability (for the requirements of SSAP9, see Long-Term Contracts).
(c) Where the effect of the time value of money is material to reported turnover, the amount recognised should be the present value of the cash inflows expected from the customer. The unwinding of such a discount should be credited to finance income in the profit and loss account.
(d) Where several contractual components are linked, but operate independently of each other, turnover should be recognised by reference to the right to be paid for each individual component.
(e) Where goods are sold on terms that require the seller to hold those goods in stock on behalf the customer, but the principal benefits and risks have been transferred to the customer, the revenue should be recognised as turnover subject to making any appropriate allowance for future returns and the related time value of money.
(f) The fair value of goods sold subject to a right of return should be recognised net of the estimated fair value of future returns.
(g) Where a seller acts as agent, rather than principal, only the commission or other revenue earned on a sale should be recognised as turnover.
The new rules apply to accounts for financial periods ended on or after 23 December 2003.
See under Turnover.
28 October 2003: The Urgent Issues Task Force of the Accounting Standards Board has confirmed in Abstract 37 that the consideration payable for the purchase by an entity of its own shares – including “treasury” shares – must in future be deducted from shareholders’ funds, that the consideration paid or net proceeds received for the purchase or sale of own shares should be shown as a separate amount in the reconciliation of movements in shareholders’ funds, and that no gain or loss should be recognised in the profit and loss account or the statement of total recognised gains and losses on the purchase, sale or cancellation of such shares.
See under Purchase by Company of its Own Shares.
8 May 2003 (as amended on 3 October 2003): Proposals have been made to amend Abstract UITF13 to make it consistent with the proposed new rules applicable to the treatment of treasury shares by requiring any of a company’s own shares held in an ESOP trust to be deducted from shareholders’ funds instead of being shown as an asset under the heading “Own Shares”. Consideration paid or net proceeds received for the purchase or sale of own shares in an ESOP trust would be shown as separate amounts in the reconciliation of shareholders’ funds, and neither gain nor loss would be recognised in the profit and loss account or statement of total recognised gains and losses on the purchase, sale or cancellation of the company’s own shares. The treatment of other assets and liabilities, finance costs, administration expenses and dividends would remain unchanged from UITF13. Coinciding with the proposed amendment of UITF13, UITF17 would also be amended to accommodate the revised treatment of such shares pending introduction of a new accounting standard based on exposure draft FRED31. Under this proposal, entities would be permitted to calculate the cost of an employee share award by reference to the difference between the amount (if any) of any consideration payable for the shares by the employee and either:
(a) the fair value of the shares at the date when the award was made (namely when the initial conditional commitment was entered into); or
(b) in the case of shares purchased by an ESOP trust, their book value on the date when the revised version of UITF13 comes into effect (being original cost or subsequent revalued amount), and in all other cases the cost of the shares purchased at fair value and available for the award.
However, alternative (b) was subsequently removed from the proposal.
See under Employee Share Ownership Schemes.
21 August 2003: The Accounting Standards Board has modified its proposals in exposure draft FRED30 to permit fair value hedging of the interest rate risk applicable to a portfolio of financial assets and liabilities to be determined by reference to an amount of currency rather than to individual financial assets and/or liabilities.
See under Hedge Accounting.
30 July 2003: The Urgent Issues Task Force has extended its proposed accounting treatment for “treasury shares” – see below – to embrace all purchases of an entity’s own shares. The effect will be that the cost of any such purchases will be deducted from shareholders’ funds. The treatment will also apply in the consolidated accounts of a holding company in which a subsidiary has acquired shares.
See under Purchase by Company of its Own Shares,
24 July 2003: The UK’s Accounting Standards Board has revealed a conflict with the International Accounting Standards Board in exposing new proposals for accounting for assets held for sale and the disclosure of discontinued activities. Exposure draft FRED32 proposes to amend FRS3 and FRS15 to conform to new international proposals which include permitting depreciation charges to be suspended as soon as an asset is reclassified as held for sale even if remaining in use. The ASB believes the cessation of depreciation in such circumstances is “inappropriate”. Other requirements in FRED 32 relating to certain categories of non-current asset – other than goodwill, deferred tax assets, certain financial assets, and assets arising from employee benefits - and “disposal groups” held for sale include:
(a) Separate disclosure of such non-current assets, and the assets and liabilities of disposal groups, under the appropriate statutory headings in the balance sheet (assets and liabilities of disposal groups not being offset).
(b) The reduction of balance sheet amount of such assets and liabilities to net realisable value (fair value less costs to sell) if lower than the book value.
Where an entity applies a policy of revaluation to the relevant class of tangible fixed asset, it would be possible to revise the carrying amount upwards to reflect net realisable value if this exceeds the existing book value. In defining “discontinued operations” FRED 32 removes the need for the sale or termination to have a material effect on the nature and focus of the reporting entity’s operations, with the consequence that the financial effect of small disposals and terminations which hitherto have been recognised within continuing operations will in future be included with material discontinuations. Comments are invited by 24 October 2003.
See under Discontinued Operations.
19 May 2003: Allowances granted by governments wishing to control the emission of greenhouse gases will soon have to be recorded as a current asset (or, if held for use on a continuing basis, as an intangible fixed asset) at fair value, according to a proposed Abstract issued in draft by the Urgent Issues Task Force of the Accounting Standards Board. To the extent that the fair value of such allowances exceeds their cost (for example, where they are issued free of charge or for a lesser consideration than market forces have determined), the excess will have to be treated as a government grant, being recognised initially as deferred income and subsequently recognised as income over the compliance period to which the allowances relate. A liability would be recognised for the obligation to deliver allowances to government for emissions actually made in a financial period.
See under Emission Rights.
8 May 2003: The Urgent Issues Task Force of the Accounting Standards Board is proposing that the amount attributable to treasury shares – shortly to be permitted under statutory regulations made in April 2003 - should be deducted from shareholders’ funds, that the consideration paid or net proceeds received for the purchase or sale of treasury shares should be shown as separate amounts in the reconciliation of movements in shareholders’ funds, and that no gain or loss should be recognised in the profit and loss account or the statement of total recognised gains and losses on the purchase, sale or cancellation of such shares.
See under Treasury Shares.
14 April 2003: With effect from 1 December 2003 a public company with “qualifying shares” (namely shares listed on the stock exchange, traded on the alternative investment market, or listed or traded on a regulated market in a European Economic Area state) may purchase such shares out of distributable profits and hold them as “treasury shares” provided they do not account for more than 10% of the nominal value of shares in issue. Treasury shares may be sold for cash (in this context including cheques, the release of a liability, and an undertaking to pay cash within 90 days of the sale), or transferred under an employees’ share scheme, or cancelled. On cancellation the amount of issued share capital must be reduced by the nominal value of the shares so cancelled. If treasury shares cease to be “qualifying shares” they must be cancelled forthwith. On the sale of treasury shares, not more than the purchase price (calculated on a weighted average basis) may be treated as a realised profit and any surplus above purchase price must be transferred to a share premium account. In the case of fully paid bonus shares, the purchase price should be treated as nil.
See under Purchase by Company of its Own Shares.
March 2003: The Institute of Chartered Accountants in England and Wales has overturned the previous view - based on accounting standard SSAP20 - that foreign currency gains on unsettled long-term monetary items would normally be regarded as unrealised and therefore not available for distribution. In a new guidance statement Tech7/03, the Institute says that such items are now to be regarded as realised unless there are doubts as to the convertibility or marketability of the currency in question. The guidance statement also introduces a new concept of “qualifying consideration” for determining whether or not profit is realised.
See under Distributable Profits and Assets.
27 March 2003: Abstract UITF36 published by The Urgent Issues Task Force of the Accounting Standards Board will prohibit contracts for the sale of “capacity” – such as telecommunications networks and supplies of energy resources – from being reported as an immediate outright sale of an asset or component of a larger asset unless five specific criteria can all be satisfied. Where all the criteria are met the effect should be reported as a disposal of a fixed asset unless the asset has been designated as held for resale (and therefore included as stock) from the time it was acquired or constructed, in which case the proceeds should be reported as turnover. UITF 36 becomes mandatory for accounting periods ending on or after 22 June 2003, but will not apply to entities that adopt the current Financial Reporting Standard for Smaller Entities (FRSSE).
See under Capacity Sales Contracts.
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