United Kingdom case study

United Kingdom case study

Richard Martin Head of Financial Reporting

ACCA Global body for professional accountants 140,000 members and 404,000 students 80,000 members in Europe 170 countries

Implementing the vision How does the UK: use the options for small and medium companies in the Fourth and Seventh Directives? use the options to allow or require the use of IFRS in the IAS Regulation? provide a bridge between financial reporting requirements and tax accounting? What accounting records and financial information do small entities in the UK prepare? What services do UK accounting practitioners provide to small entities?

UK differences with REPARIS economies significantly larger than every REPARIS economy has a different legal system from every REPARIS economy does not have an accounting law does not require the use of a chart of accounts has accounting standards (UK GAAP) has a very large and well-established accountancy profession does not require professional accountants to have a university education

Potentially relevant UK experience The UK has implemented the EU acquis communautaire makes extensive use of the options for small and medium companies in the EC Fourth and Seventh Directives makes extensive use of the options to allow or require the use of IFRS in the IAS Regulation bases taxable profit on accounting profit requires business entities to maintain proper books and recor complete and up to date records of assets, liabilities, income, expenditure and inventories (tax and VAT law) sufficient accounting records to show and explain transactions and disclose financial position (company law)

UK choices on 4 th & 7 th directive options

Directive options for SMEs Abridged balance sheet (article 11), abridged notes (article 44) and annual report (article 46) small companies Abridged profit and loss account (article 27) small and medium companies Exemption from statutory audit (article 51) small companies Abbreviated accounts (article 47) Exemptions for publication of Profit and loss account and some notes No consolidated accounts (7 th article 6) Small and medium-sized groups

UK implementation of SME options Turnover Balance Sheet Total Employees No consolidation, abridged balance sheet, notes and no annual report plus filing exemptions (2 out of 3) < 6.5m < 3.26m < 50 Audit exemption (both) < 6.5m < 3.26m Not applicable Abridged profit and loss account (2 out of 3) < 22.8m < 11.4m < 250

Other 4 th Directive options Many member state options UK choices for all companies All 4 layouts for balance sheets and profit and loss accounts (articles 10 and 22) All of the alternative valuation rules (article 33) Not treating formation expenses as assets (article 34) Allowing research and development costs as assets (article 37)

Micro companies EU Commission proposed to allow member state option to exempt micro companies from the 4 th directive (as part of wider revision) Micros likely to be <10 employees, < 1million turnover, 500k of assets 87% of UK companies Has been passed in the EU Parliament, but currently held up in Council by 6 member states Will probably wait for the full revision of 4 th directive to be completed and proposed

Questions for discussion The UK general approach to options in 4 th directive has been to take up most of them. To what extent would that approach work in REPARIS economies? For SME options the UK approach has been to adopt most of them, maximise the thresholds up to EU limits and thereby minimise the burden on those companies. To what extent would that approach work in REPARIS economies? What would be the basis for decisions on burdens on SMEs? What would be the attitude to micro companies in REPARIS economies if the EU proposal were to be passed?

UK adoption of IFRS under IAS regulation

IAS regulation: major options for member states Require or permit or prohibit use of IFRS adopted in the EU in place of national GAAP/EC Directives consolidated financial statements of non-publicly traded companies legal entity financial statements of all companies About half of the member states have allowed IFRS as an option

UK use of IAS regulation options Legal entity financial statements Consolidated financial statements Listed companies UK or IFRS IFRS Banks UK or IFRS UK or IFRS Insurance companies UK or IFRS UK or IFRS Other unlisted companies UK or IFRS Charities UK UK UK or IFRS

UK proposals for IFRS Legal entity financial statements Consolidated financial statements Listed companies IFRS IFRS Banks IFRS IFRS Insurance companies IFRS IFRS Other large or mediumsized IFRS for SMEs IFRS for SMEs Small companies UK FRSSE UK FRSSE

Current proposals for UK GAAP Tier 1 all companies that have public accountability (perhaps up to 12,000) All companies with traded securities, all banks, credit unions, insurers and pension funds Use EU adopted IFRS (using option under IAS regulation) Tier 2 all other large (6,000) or medium-sized companies (35,000) Use a UK adapted version of IFRS for SMEs which would be amended to comply with 4 th Directive Tier 3 any small companies (about 1,700,000) Can continue for now to use Financial Reporting Standard for Smaller Entities (FRSSE) based on existing UK standards might be replaced by IFRS for SMEs in future

Questions for discussion Do you think the approach to extending the use of IFRS or IFRS for SMEs might be appropriate in REPARIS economies? UK convergence with IFRS - two systems of accounting in one country is inefficient in the longer term, because of complexity issues including user understanding training and education of accountants etc To what extent do you think the same considerations would apply now or in the future in REPARIS economies?

Tax and accounting

UK tax and accounting UK accounting standards (SSAP and FRS) apply to companies and other entities that prepare financial statements that are intended to show a true and fair view do not take tax implications into consideration UK tax law requires all entities to use UK GAAP or IFRS accounting profit as the basis for determination of taxable profit

Revenue Accounting profit (UK GAAP or IFRS) With Adjustments Becomes Taxable profit

Examples: adjust profits for tax Disallowable expenditure entertaining, fines, tax advice fees, share-based payments Depreciation and amortisation fixed rates of capital allowance instead Pension costs on a cash basis Related party transactions may be adjusted to commercial values Some fair value gains and impairments no tax deduction until asset disposed of

Do not adjust profits for The accounting numbers are used for tax for Revenue Costs of sale Most employee costs Leases-operating and finance Interest payable and receivable (mostly) Provisions Foreign currency translation (mostly)

Questions for discussion How comparable is the closeness of accounting and profits for tax purposes in UK with REPARIS economies? Do you see any advantage in having the adjustment approach as opposed to requiring all items to be the same for tax and accounting?

Accounting records and services for SMEs

Accounting records for a typical small UK company Maintains proper books and records complete and up to date records of assets, liabilities, income, expenditure and inventories (tax and VAT law) Wages and salaries records (for tax deduction purposes PAYE) sufficient accounting records to show and explain transactions and disclose financial position (company law) prepares detailed financial statements to support its tax return adjusts UK GAAP accounting profit for perhaps 3 to 4 items to determine taxable profit Prepares abridged financial statements for shareholders Prepares abbreviated accounts for companies register

UK accounting practitioners For small companies, accountants in practice often maintain some accounting records to comply with tax, VAT and company law (subject to ethical constraints) Administer the salary and tax deduction (PAYE) system prepare financial statements to support tax return prepare calculation of taxable profit prepare tax and VAT returns and agree related liabilities prepare abridged financial statements for shareholders and abbreviated ones for companies register Generally do not audit those financial statements provide other business advisory and taxation services (subject to ethical constraints)

Questions for discussion How comparable to the UK are the requirements for books and records and accounts in REPARIS economies? How comparable are the services typically provided to small companies by accounting practitioners?

THANK YOU Richard Martin richard.martin@accaglobal.com