Reduced Disclosure Framework - A Step Forward
Published January 2013
Is there really a need for major unwieldy disclosures to be included in all financial statements throughout a group? Up until now, the true and fair view requirement supported by company law and accounting standards has meant only one answer to the question. The question as to whether such repetition added anything to group reporting could only be answered in that context without any further regard to the relevance and proportionality of reporting.
At last the availability of relief has arrived. Standards published by the Financial Reporting Council (FRC) in November provide for a reduced disclosure framework (RDF) for 'qualifying entities' and in December changes were made to Irish company law which ease the way for companies to avail of RDF. In the next few months a third standard is expected to be published by the FRC which in due course will replace all of the existing Irish and UK accounting standards. This too will have RDF for 'qualifying entities'.
How does a company qualify?
An entity qualifies if it is a member of a group where the parent prepares publicly available consolidated financial statements which are intended to give a true and fair view and it is included in the consolidation - a 'qualifying entity'. A charity may not be a 'qualifying entity'.
A qualifying entity may avail of a reduced disclosure framework provided that:
- Shareholders have been notified in writing about, and do not object to, the use of the disclosure exemptions.
- It otherwise applies as its financial reporting framework the recognition, measurement and disclosure requirements of EU adopted IFRS, but makes amendments to EU adopted IFRS requirements to comply with the Companies Acts.
- It discloses in the notes to its financial statements a brief narrative summary of the disclosure exemptions adopted and the name of the parent of the group and details of where the group financial statements may be obtained.
Where a qualifying entity adopts the reduced disclosure framework, it shall state in the notes to its financial statements - 'These financial statements were prepared in accordance with Financial Reporting Standards 101 Reduced Disclosure Framework'.
Must the group prepare IFRS accounts?
For a qualifying entity to avail of FRS 101, the group consolidated financial statements must be prepared in a manner equivalent to consolidated financial statements that are prepared in accordance with the EU 7th Directive. Guidance in FRS 100 explains that for equivalence to be achieved it is necessary to consider whether the consolidated financial statements of a non-EEA parent meet the basic requirements of the EU Directives. Primarily, this requires that they give a true and fair view without implying strict conformity with each and every provision of the Directive. The European Commission has adopted decisions which provide that generally accepted accounting principles of the following countries are equivalent - USA, Japan, China, Canada, Republic of Korea, with India also on course.
Disclosures in the consolidated financial statements must meet the basic disclosure requirements of the relevant standard or interpretation, without requiring strict conformity with each and every disclosure. Assessment should be based on the relevant facts, including similarities and differences. Disclosures may be made in aggregate or in abbreviated form at group level, but if no group disclosure is made, the qualifying entity will not be able to avail of the exemption from disclosure.
What Disclosure Exemptions are available?
Key areas of the RDF relate to:
- Cash flow statements
- Share based payments
- Financial instruments
- Fair Value
- Business combinations
- Discontinued operations
- Capital management
- Related parties
- IFRS issued but not yet effective
Are there any limitations?
Entities which fall within the definition of a 'financial institution', as in FRS 100, are not able to avail of exemption from disclosures related to financial instruments (IFRS 7 and IFRS 13) and capital management.
Potential difficulties have arisen in relation to what is within the definition of a 'financial institution'. However, arising from complexity with defining the scope the FRC has included a catch-all to include 'any other entity whose principle activity is to generate wealth or manage risk through financial instruments'.
While this may be seen to apply, to some extent, to many entities which would not be thought of as financial institutions in the ordinary sense, this would not seem to be what is intended. The unifying feature seems to be accepting deposits or holding assets in a fiduciary capacity, rather than the generation of wealth through financial instruments.
Practical difficulties with interpretation are likely to arise and further guidance may become necessary.
What about Transition?
Qualifying entities adopting the reduced disclosure framework are preparing accounts in accordance with 'Companies Act' requirements. Companies will need to consider the format of their financial statements carefully to ensure that all specific disclosures required by the Companies Acts 1963 to 2012 are included. Where qualifying entities are currently preparing accounts in accordance with IFRS, recent changes to company law enables them to change to FRS 101 which before that would not have been permitted.
An appendix to FRS 101 provides an overview of how the requirements in FRS 101 address company law requirements. Matters specifically dealt with include consistency of financial reporting within groups, financial instruments measured at fair value, non-amortisation of goodwill, presentation/formats and realised profits.
The FRS 101 Reduced Disclosure Framework may be adopted for 2012 financial reporting. The benefit of not having to repeat disclosures throughout a network of 'qualifying entities' and improved efficiency of the consolidation process are worthy of consideration.
A more complete summary of FRS 101 is available on the Deloitte Audit website
First published in Finance Dublin Online.