Financial Reporting Brief
Our featured article for May is 'Financial Reporting in Ireland – Is It All New?' with Brendan Sheridan commenting on the major changes coming the way of Irish companies in 2015 and going forward with new Accounting Standards, a new EU Accounting Directive and a new Companies Act. Much work to do!
Financial Reporting in Ireland – Is It All New?
A time of significant and pervasive change!
Accounting Standards, New EU Accounting Directive, Company Law – the vast majority of Irish entities will not escape having to deal with transition and implementation of changed requirements, perhaps some more than others. In this article we focus on the new accounting standards and the EU Accounting Directive. The Companies Act 2014, to be commenced from 1st June 2015, will bring about many changes including administrative and structural changes and we comment on the new Act here.
If you are an Irish GAAP user and particularly at the smaller end of the market, the general trend of change is to simplify. However, for many entities there will be different and new accounting challenges and questions to be addressed.
New Irish GAAP
For the past number of years we have been heralding the arrival of ‘New GAAP’ comprising mainly of FRS102, the standard which replaces all that went before it in terms of Irish GAAP – standards and interpretations, and FRS 101 ‘The Reduced Disclosure Regime’ based on IFRS. They are now here with FRS 102 mandatory for accounting periods beginning on or after 1 January 2015.
FRS 103, primarily for insurers, has also come on board and other developments include Statements of Recommended Practice (SORPs) in such areas as pensions and charities which have been updated to be consistent with FRS 102.
The landscape has changed for financial reporting under Irish GAAP with 2,500 pages of standards, interpretations and accompanying documents of which it has been comprised up until now replaced by one standard of approximately 350 pages. FRS 102 is in many respects consistent with, and based on, the IASB’S standard IFRS for Small and Medium-sized Entities albeit that the Financial Reporting Council has in effect taken the best of both regimes in also retaining some of the more useful features of ‘old GAAP’ including the accounting options in such areas as property revaluations and capitalisation of costs such as borrowing costs and development costs.
There are many aspects of FRS 102 which entities may have to consider, including:
- Financial instruments, including accounting for derivatives e.g. forward contracts, interest rate swaps
- Fair values, a first time experience for many with potentially greater volatility of earnings
- Borrowings, including the impact of loans repayable on demand and zero rate inter-company, or other, loans
- Pensions, including the normally negative earnings impact of ‘net interest cost’
- Deferred tax, with a broader base for recognition
- Disclosures, with major changes such as the need to disclose critical judgements and estimates, and determining who are ‘key management’ for the purposes of a more detailed remuneration disclosure.
Entities will also have to work through the transition process including consideration of the various options available.
There is a wealth of information available to guide on implementation, including many Deloitte publications and one should also be aware of the Staff Education Notes on 15 different areas on the FRC website.
Those entities who have already adopted IFRS will, except for the group accounts of listed entities, have the option of staying with IFRS or moving to Irish GAAP. For ‘qualifying entities’, mainly subsidiaries of groups which are preparing accounts in accordance with IFRS or another reporting framework compatible with EU Accounting Directives there is an option available subject to certain conditions to adopt a reduced disclosure framework which will exclude such disclosure as financial instruments, fair value, capital management, share-based payments and others. Financial institutions, the wide scope of which is defined in the Standard, will not be able to avail of some exemptions. A reduced disclosure regime is also available for ‘qualifying entities’ adopting FRS 102.
The EU Accounting Directive
In June 2013 the European Council and Parliament published the New Accounting Directive, replacing both the EU 4th and 7th Directives which have been the bedrock of most of Irish company law in the accounting area for up to thirty years. The new Directive must be transposed into Irish company law by July 2015, and will be effective for accounting periods beginning on or after 1 January 2016.
The new Directive takes the small company or group as the starting point in what is described as a ‘think small first’ approach, with additional requirements being imposed on medium-sized and large entities and also public interest entities. The provisions of the Directive prohibit Member States from imposing a legal requirement on small companies to disclose information in their financial statements beyond that prescribed by the Directive, though there is a very limited discretion in a small number of areas. What is prescribed by the Directive is not very extensive.
The Department of Jobs, Enterprise and Innovation (DJEI) published a Consultation Paper on the range of 104 options set out in the Directive in which Member States are required to decide in enacting the enabling legislation to implement the provisions of the Directive. The responses are now under consideration by DJEI.
The new Directive introduces an obligation on large undertakings and ‘public interest entities’ active in the extractive industries or engaged in logging of primary forests to produce and publish a report on all material payments to governments, analysed by country, and where payments are attributable to a specific project, by project.
Micro – Entity Regime
A Directive adopted by the EU in 2012 amending the then existing Accounting Directive introduced a new category of company, the ‘micro-entity’. The application of the 2012 Directive was at the option of the Member States. Ireland did not apply it, the UK did. However, it is now back on the agenda as part of the Accounting Directive and decisions must be made on the options to adopt. A micro-entity is a company with a balance sheet total of up to €350,000, turnover of up to €700,000 and an average of up to ten employees.
The primary statements of a micro-entity would not require inclusion of a cash flow statement or a statement of recognised gains and losses with significantly reduced disclosure note requirements and exemption from preparing a directors report. The balance sheet and profit and loss account are in abridged form. Filing with the Companies Office may be confined to the balance sheet only, with very limited note disclosures. Micro-entities financial statements that comply with the new regime are presumed to give a true and fair view. There is no requirement for directors to consider what additional information may be needed in order for the accounts to give a true and fair view.
The Financial Reporting Council (FRC) has responded to UK legislative changes on foot of the Directives by publishing three Financial Reporting Exposure Drafts:
FRED 58 (FRS 105) – The Financial Reporting Standard applicable to the Micro-Entities Regime.
FRED 59 – Draft amendments to FRS 102: Small entities and other amendments.
FRED 60: Draft amendments to FRS 100 and FRS 101
Under the new reporting framework, the FRSSE (Financial Reporting Standard for Smaller Entities) will be withdrawn and smaller entities will now have to choose between three core regimes subject to meeting relevant criteria:
- The micro-entities regime (FRS 105)
- The small entities regime (FRS 102 – Section 1A)
- FRS 102
The financial reporting requirements of each standard get progressively more complex and comprehensive the further up the suite of standards you go. Where a choice of regime exists, entities should consider which of the regimes is the most appropriate with such considerations as the characteristics or restrictions of a particular regime, the resources available and the information needs of the users. The micro-entity regime applies to companies only and excludes public companies, financial institutions, charities and all companies where consolidated accounts are being prepared.
The proposals in relation to FRS 102 section 1A are that small entities will apply the recognition and measurement requirements of FRS 102, but different presentation and disclosure requirements, thus ensuring that all entities apply a consistent framework.
In addition, other more minor amendments are required to FRS 102 to ensure continued compliance with changes to company law, on foot of the implementation of EU Directives. FRED 59 sets out these proposed amendments.
Ireland must catch up on the new Accounting Directive and all that it brings in the very near future with the requirements required to be implemented in 2016. This will give rise to potentially two sets of adjustments and two transition processes over the next year or so. Thinking it through, proper planning and getting the appropriate support in place where needed will ease the way and help to avoid any pitfalls and surprises.
All this at a time when the Companies Act 2014 also has to be dealt with.
Busy times ahead!!
Whats new - Monthly reporting pack
Irish/UK GAAP/GAAS and related developments
IFRS & Related Developments
- South African study into how integrated reporting fosters integrated thinking and better decision-making
Regulatory & Related Developments
- Central Bank publishes a Consultation Paper on the Domestic Actuarial Regime and Related Governance Requirements under Solvency II
- IFRS in Focus — First meeting of IFRS Transition Resource Group for Impairment of Financial Instruments
Financial Reporting Brief
- Quarterly Financial Reporting Brief: April 2015
- April 2015: Corporate Reporting – A Broader Horizon
- March 2015: Impairment losses – Improved recognition?
- February 2015: The Challenge of Transition
- Quarterly Financial Reporting Brief: January 2015
- January 2015: Integrated Reporting – crossing the chasm
- December 2014: Clear and concise reporting – achievable?
- November 2014: Supervisory authorities - fundamental to consistent reporting
- Quarterly Financial Reporting Brief: October 2014
- October 2014: Group reporting – A way forward
- September 2014: The Financial Reporting Lab – An experiment that works?
- August 2014: Financial Instruments – Accounting we can all understand?
- July 2014: Standards – the current state of play
- Quarterly Financial Reporting Brief: July 2014
- June 2014: Revenue – getting the top line right
- May 2014: The quest for improved disclosure
- Quarterly Financial Reporting Brief: April 2014
- April 2014: Sustainable investment – accounting a concern?
- Financial Reporting Brief special edition (March 2014): FRS 103 Insurance Contracts