The Potential Impact of IFRS on Accounting for Further and Higher Education

Transcription

1 The Potential Impact of IFRS on Accounting for Further and Higher Education BUFDG Innovation Centre Epinal Way Loughborough Leics LE11 3EH Tel: Fax: Web:

2 Government and Public Sector The Potential Impact of International Financial Reporting Standards on Accounting for Further and Higher Education April 2009 A Joint Publication by the British Universities Finance Directors Group and PricewaterhouseCoopers LLP

3 Contents Section Page Introduction and Summary Analysis... 3 Impact of First Time Adoption Presentation of the Financial Statements Cash Flow Statements Accounting Policies and Estimation Techniques Revenue Recognition Accounting for Government Grants Segmental Reporting Taxation Reporting of the Substance of Transactions Fixed Assets Leases Investment Properties Intangible Assets including Research and Development Impairment Charitable Donations and Endowment Accounting Stocks and Inventories Financial Instruments Provisions, Contingent Liabilities and Contingent Assets Contracts Employee/Retirement Benefits Non Current Assets Held for Sale and Discontinued Operations Group Accounts Consolidated Financial Statements Associates and Joint Ventures Business Combinations Related Party Disclosures Events after the Balance Sheet Date Insurance Contracts Glossary Contacts

4 Introduction and Summary Analysis Introduction 1 Much of the commentary in the UK on the impact of International Financial Reporting Standards ( IFRS ) on public benefit entities has dealt with issues in relation to central government, the National Health Service NHS ) and local government. Convergence with IFRS is likely to be an issue for higher and further education ( HEFE ) institutions in the near future; early preparation and an understanding of the impact will be integral to a successful and effective transition. This document is aimed at raising awareness about the likely impact of IFRS in order to assist institutions with their preparations. 2 This publication considers the potential impact of the Accounting Standards Board s ( ASB s ) proposals for converging UK Generally Accepted Accounting Practice ( UK GAAP ) with IFRS and in doing so highlights the current key differences between IFRS and current GAAP as interpreted by the 2007 Statement of Recommended Practice: Accounting for Further and Higher Education ( 2007 SORP ). It also considers individual standards under UK GAAP on a themed basis following the order of the standards as they are presented in the SORP. 3 IFRS as with all accounting requirements and guidance will continue to evolve. The International Accounting Standards Board ( IASB ) is continuously reviewing its standards and guidance. The IASB has, for example, its improvements agenda. IFRS will therefore continue to evolve to the date that UK GAAP converges with IFRS (and it is anticipated beyond this date) and therefore the exact form of convergence with UK GAAP for higher and further education may remain uncertain. 4 This publication is written from the perspective of higher education institutions that currently adopt the SORP (the accounting differences raised are likely to be equally applicable to Further Education ( FE ) Colleges, there may, however, be some differences in the typical accounting transactions faced by FE Colleges). It is intended to be a part of an ongoing process of keeping the sector informed as the developments and process for convergence become clearer. Background 5 To have an understanding of the forces behind the convergence of UK GAAP with IFRS it is necessary to consider briefly the public benefit sector impetus for convergence. As part of the 2007 budget, Her Majesty s Treasury ( the Treasury ) announced that in order to bring benefits in consistency and comparability between financial reports in the global economy and to follow private sector best practice, that from the first year of the Comprehensive Spending Review i.e. 2008/09 the annual financial statements of government departments and other entities in the public sector were to be prepared using IFRS adapted as necessary for the public sector. Central Government and the National Health Service will apply IFRS based Financial Reporting Manuals ( FReM ) from 2009/10 accounts and local government will apply an IFRS based Code of Practice from 2010/11. The government has not mandated that higher education institutions and further education colleges will be covered by these reporting arrangements. The Future of UK Generally Accepted Accounting Practice 6 The ASB is finalising its plans for converging UK GAAP with IFRS. It envisages issuing a discussion paper during the second quarter of 2009 with implementation after a transition period likely to be from 2010 to The ASB has in mind a three tier reporting structure for UK GAAP: 3

5 Tier 1 full IFRS for entities deemed to have public accountability; Tier 2 IFRS for Private Entities (for the middle tier); and Tier 3 the Board s Financial Reporting Standard for Smaller Entities. 7 The proposed ASB consultation will also consider the future role of SORPs. Albeit it should be noted that there is no equivalent to Statements of Recommended Practice (SORPs) under IFRS. 8 The current 2007 SORP Accounting for Further and Higher Education requires compliance with UK GAAP. Consequently, IFRS will only become effective for the sector when UK GAAP converges with IFRS. Latest indications, set out above, are that UK GAAP convergence with IFRS is likely to occur in Whatever the outcome of these uncertainties a move to IFRS will mean a fundamental change in financial reporting for further and higher education institutions. Experience in the commercial sector and burgeoning experience in the public sector shows that conversion to IFRS presents numerous, complex challenges and demand on resources which need to be resolved before the issue of the first set of IFRS based financial statements. 10 These challenges include the technical accounting issues set out in more detail in this publication but also include: changing processes and business practice; ensuring that both staff and key decision makers in institutions understand the impact and the significance of the changes (experience of the transition in the private sector found that a significant investment in staff training was required); the impact on the external environment that considers an institution s financial reports e.g. funding councils and the impact of the new statements and disclosures on commercial arrangements with other organisations. 11 The challenges listed above will be important considerations in the preparations an institution will make for convergence but are wider issues not considered in detail in this publication. International Financial Reporting Standards 12 Financial Reporting has been continuously evolving in recent years both domestically and internationally. The most important change for national standard setters is convergence around IFRS. Increasingly, the class of financial reporting requirements called 'national GAAP is becoming rarer and in many countries it is being supplemented or replaced by the use of IFRS. 13 IFRS comprises; International Accounting Standards ( IAS ). (The International Accounting Standards Committee ( IASC ) issued 41 standards before it was reconstituted as the International Accounting Standards Board (IASB)). Eight International Financial Reporting Standards issued by the IASB. 14 IFRS can also be considered to include interpretations issued by the IASB Standing Interpretations Committee (SIC) which has been renamed the International Financial Reporting Issues Committee (IFRIC). The IFRIC continues to work on emerging issues that require attention before an international standard can be amended or issued. 15 The IASB also has a Framework for the Preparation and Presentation of Financial Statements ( the Framework ) which sets out the concepts that underlie the preparation and presentation of financial 4

6 statements for external users. 16 In June 2002, the European Commission approved a Regulation (Regulation EC No. 1606/2002 the 'European Union ( EU ) 2005 Regulation') requiring all listed companies in the EU (including banks and insurance companies) to prepare their consolidated financial statements under EU-adopted International Financial Reporting Standards (IFRS or IAS) for financial years beginning on or after 1 January In addition, the Regulation allowed Member States to extend the requirement to use IFRS to unlisted groups and to individual company financial statements. This regulation passed into UK company law. The UK Government amended the Companies Act 1985, effective for accounting periods starting on or after 1 January 2005 to bring in this Member State option on a permissive basis. The relevant sections of the Companies Act 1985 have been carried forward into the Companies Act 2006 without substantive amendment. It should be noted that the Companies Act as issued does not permit charities to use IFRS. 17 The SORP requires that institutions following the SORP should apply all extant UK accounting and financial reporting standards, Urgent Issues Task Force (UITF) Abstracts, relevant legislation and accounts directions from the Funding Bodies applicable to the reporting institution. It also comments that: This SORP is drafted on the basis of UK accounting standards which the SORP Board believes are appropriate for institutions. In the unlikely event that an institution is required to comply with International Financial Reporting Standards, then it should comply with this SORP as far as possible and disclose the nature of any departure. 18 HEFE institutions should therefore continue to follow the SORP as required by their accounts directions. Subject to the ASB s plans for the future of UK GAAP it is anticipated that the HEFE SORP Board will need to consider the impact of converged UK standards on the HEFE sector. Further guidance will be issued once the ASB finalises its plans. Statement of Recommended Practice: Accounting for Further and Higher Education (2007) 19 In July 2007 the new SORP Accounting for Further and Higher Education was issued. The 2007 SORP is the fourth to combine the requirements of institutions in the further and higher education sectors. It has been fully revised and developed from the previous SORP: Accounting for Further and Higher Education, issued in The Statement of Principles for Financial Reporting, Interpretation for Public Benefit Entities 2 ( SoPPBE ) sets out the principles that should underlie the preparation and presentation of general purpose financial statements for public benefit entities. The SoPPBE indicates that the primary purpose for articulating the application of the principles for public benefit entities is to provide a coherent frame of reference for SORPs. This includes the SORP: Accounting for Further and Higher Education. There is no equivalent statement for public benefit entities under IFRS and therefore the SoPPBE is likely to provide a useful frame of reference for the HEFE SORP Board under IFRS. The impact of the SoPPBE is not dealt with in any detail in this publication. Differences between IFRS and the SORP Accounting for Further and Higher Education 21 The following sections of this publication focus, on a themed basis, on the current differences between IFRS and UK GAAP as interpreted by the SORP and assess the potential implications of these differences for the SORP and for accounts preparers. Under each theme there is a comparison of each IAS/IFRS against the equivalent UK financial reporting and accounting standard. These have been colour-coded as follows: 1 Companies Act 2006, Section 395(2) 2 Statement of Principles for Financial Reporting; Interpretation for Public Benefit Entities, ASB June

7 Similar, but minor differences Some differences Significant differences No equivalent UK Standard and therefore not included in the SORP 22 This publication does not deal with; IAS 26, Accounting and reporting by retirement benefit plans. IAS 30, Disclosures in the financial statements of banks and similar financial institutions. IFRS 2, Share-based payments IFRS 6, Exploration for and evaluation of mineral resources. These standards are not considered to be directly relevant to institutions. 23 Additionally, this publication does not cover in detail: IAS 21 The effects of changes in foreign currency exchange rates IAS 29 Financial Reporting Hyperinflationary Economies IAS 41 Agriculture These standards are also not deemed to have a significant impact on financial reporting of higher education institutions. Summary Analysis of the Impact of IFRS on the Financial Statements of Higher Education Institutions Significant Differences 24 The body of this publication highlights that the following areas could have a significant impact for financial reporting for HE institutions in any move to IFRS: More extensive disclosure requirements in several areas and (as indicated above) as a result of first time adoption of IFRS (paragraphs ) - in the private sector experience has shown that the size of the financial statements and annual reports has increased significantly with many increasing by 50 per cent. Format of the financial statements - under IFRS there are differences to the presentation requirements of all of the principal statements; particularly the income and expenditure account in a move to the Statement of Comprehensive Income and the Cash Flow Statement (paragraphs 37-52). Segmental reporting requires transparency and increased disclosure, and a move to IFRS is likely to mean that there will be significant differences to the segmental reporting requirements for institutions. IFRS requires that segmental reports are provided on the basis of information produced as a result of the management s approach to organising the business as opposed to the current approach in the SORP (which for most institutions does not currently require significant segmental analysis). However, moving to producing segmental reports on the basis of the management s approach to organising the business is likely to mean that segmental information is presented on the same basis as that used internally for evaluating operating segmental performance and therefore should be based on information already regularly produced by institutions (paragraphs 69-71). The lack of a standard which considers substance over form issues particularly for PFI/PPP 6

8 transactions and the impact that this may have on the assets recognised or not currently recognised in institution s balance sheets (paragraphs 76-88). Tangible fixed assets under IFRS there is a move to fair value (for those institutions that revalue their assets), there are also differences in the treatment of impairment recognition and for institutions not adopting fair valuations for their fixed assets the requirement to capitalise borrowing costs (paragraphs ). Leases under IFRS there is a requirement to split leases at inception between the land and buildings elements, this means that institutions will need to examine their leases and similar arrangements to make this change and that for some property leases the buildings element may now become finance leases. Additionally, the quantitative test for leases no longer exists. Furthermore, experience of convergence in the public and private sectors has found that to effect the standard leases will need to be reviewed. Locating the appropriate paperwork has been a challenge at many organisations (paragraphs ). Financial instruments - full adoption of the recognition; measurement and disclosure requirements of the highly complex IFRS standards. It is recognised that whilst these standards are complex for many public benefit entities that have adopted them there has not been a significant impact on the financial instruments reported in the financial statements. However, significant time and effort has had to be employed to ascertain this (paragraphs ). Employee benefits whilst the UK and international standards themselves are relatively similar, the impact for one particular element will be significant, IFRS requires that untaken annual leave is accrued the process for identifying this accrual can be time consuming (paragraph 158). Group accounts - IAS 28 defines significant influence as the power to participate in financial and operating policy decisions. This contrasts with FRS 9 which requires that the entity actually exercises significant influence and therefore there may be a different boundary for the associates an institution has significant influence over. Additionally, for both associates and joint ventures the entities must be equity/gross equity accounted for even where group accounts would not otherwise be prepared. ( ) Some Differences 25 The publication also demonstrates that there a number of other areas where there are some differences between IFRS and the SORP: Accounting Policies (paragraphs 53-60). Taxation: particularly in relation to deferred tax (paragraphs 72-75). Accounting for employee/retirement benefits (with the exception of the treatment of untaken annual leave (paragraphs )). Related party transactions (paragraphs ). 26 In addition, there are deemed to be significant differences in the international standards and the SORP s reporting requirements in relation to the treatment of investment properties (paragraphs ) and intangible assets (paragraphs ). These areas are not considered to be a material issue for many institutions and are therefore not categorised above as a significant difference. However, the differences between the international standards and the SORP might have an impact for some institutions with significant investment properties or research expenditure (potentially including intellectual property) which IAS 38 might now require to be capitalised. IFRS 1 First Time Adoption of IFRS 27 IFRS 1 sets out detailed rules that entities must follow when adopting IFRS for the first time. It also sets 7

9 out a number of exemptions that may (and in some cases must) be applied when adopting IFRS. The standard also requires reconciliations and disclosures as a result of first time adoption of IFRS. Experience in the private sector has indicated that the application of IFRS 1 itself can require significant investment in resources. Summary Comparison of IFRS to the SORP and UK GAAP 28 The following table provides a summary comparison of UK Accounting and Financial Reporting Standards and International Accounting and Financial Reporting Standards on a standard by standard basis. These are also analysed on the basis set out earlier which has been repeated here for completeness: Similar, but minor differences Some differences Significant differences No equivalent UK Standard and therefore not included in the SORP Comparison of IFRS to the SORP and UK GAAP IFRS Framework for the preparation and presentation of financial statements. IAS 1, Presentation of financial statements. SORP and UK GAAP Statement of principles for financial reporting. FRS 3, Reporting financial performance (part). FRS 18, Accounting policies. FRS 28, Corresponding amounts. IAS 2, Inventories. IAS 7, Cash flow statements. IAS 8, Accounting policies, changes in accounting estimates and errors. IAS 10, Events after the balance sheet date. IAS 11, Construction contracts. IAS 12, Income taxes. SSAP 9, Stocks and long-term contracts (part). FRS 1, Cash flow statements. FRS 3, Reporting financial performance (part). FRS 18, Accounting policies. FRS 21 (IAS 10), Events after the balance sheet date. SSAP 9, Stocks and long-term contracts (part). FRS 16, Current tax. FRS 19, Deferred taxation. IAS 16, Property, plant and equipment. IAS 17, Leases. IAS 18, Revenue. FRS 15, Tangible fixed assets. SSAP 21, Accounting for leases and hire purchase contracts. FRS 5, Reporting the Substance of Transactions. FRS 5, Application Note G Revenue recognition. SSAP 9, (for long term contracts). IAS 19, Employee benefits. FRS 17, Retirement benefits. 8

10 IFRS IAS 20, Accounting for government grants and disclosure of government assistance. IAS 21, The effects of changes in foreign exchange rates. SORP and UK GAAP SSAP 4, Accounting for government grants. FRS 23 (IAS 21), The effects of changes in foreign exchange rates. SSAP 20, Foreign currency translation (superseded for entities applying FRS 23). IAS 23 (2007), Borrowing costs. IAS 24, Related party disclosures. IAS 27, Consolidated and separate financial statements. FRS 15, Tangible fixed assets (part). FRS 8, Related party disclosures. FRS 2, Accounting for subsidiary undertakings. SIC 12, Consolidation special purpose entities. FRS 5, Reporting the substance of transactions (part). IAS 28, Investments in associates. IAS 29, Financial reporting in hyperinflationary economies. FRS 9, Associates and joint ventures (part). UITF 9 (Accounting for operations in hyperinflationary economies FRS 24 (IAS 29), Financial reporting in hyperinflationary economies. IAS 31, Financial reporting of interests in joint ventures. IAS 32, Financial instruments: Disclosure and presentation (changed to 'IAS 32, Financial instruments: Presentation' by IFRS 7). FRS 9, Associates and joint ventures (part). FRS 25 (IAS 32), Financial instruments: Disclosure and presentation (changed to 'FRS 25 (IAS 32), Financial instruments: Presentation' by FRS 29 (IFRS 7)). FRS 4, Capital instruments (part superseded by FRS 25). FRS 13, Derivatives and other financial instruments: Disclosures (superseded for entities applying FRS 25 or FRS 29). IAS 36, Impairment of assets. IAS 37, Provisions, contingent liabilities and contingent assets. IAS 38, Intangible assets. FRS 11, Impairment of fixed assets and goodwill. FRS 12, Provisions, contingent liabilities and contingent assets. FRS 10, Goodwill and intangible assets. SSAP 13, Accounting for research and development. IAS 39, Financial instruments: Recognition and measurement. FRS 26 (IAS 39), Financial instruments: Measurement (changed to FRS 26 (IAS 39), Financial instruments: Recognition and measurement by amendment to FRS 26). 9

11 IFRS SORP and UK GAAP FRS 4, Capital instruments FRS 5, Reporting the substance of transactions (derecognition) IAS 40, Investment property. IAS 41, Agriculture. IFRS 1, First time adoption of International Financial Reporting Standards. IFRS 3, Business combinations. SSAP 19, Accounting for investment properties. No equivalent UK Standard and therefore not included in the SORP No equivalent UK Standard and therefore not included in the SORP FRS 6, Acquisitions and mergers. FRS 7, Fair values in acquisition accounting. FRS 10, Goodwill and intangible assets. IFRS 4, Insurance Contracts IFRS 5, Non current assets held for sale and discontinued operations. IFRS 7, Financial instruments: Disclosures. IFRS 8, Operating segments. IFRIC 12, Service concession arrangements. No equivalent UK Standard and therefore not included in the SORP FRS 3, Reporting financial performance (part). FRS 29 (IFRS 7), Financial instruments: Disclosures. SSAP 25, Segmental reporting. FRS 5, Application Note F Private finance initiative and similar contracts. 10

12 Impact of First Time Adoption IFRS 1 First Time Adoption of IFRS No equivalent UK Standard and therefore not included in the SORP 29 The following sections of this publication include an individual assessment on a standard by standard basis of the impact of international financial reporting standards on the SORP. The SORP does not cover IFRS 1 First Time Adoption of IFRS. IFRS 1 must be applied to any entity applying IFRS for the first time. 30 IFRS 1 deals with how entities that are applying the IFRS for the first time should do this. It covers the general approach to conversion to IFRS and the areas where the rules for first time adoption are different to ongoing IFRS. Experience has shown that significant resources are required to interpret and apply the requirements of this standard effectively. 31 Since it was issued in 2003, IFRS 1 has been amended many times to accommodate first-time adoption requirements resulting from new or amended IFRSs. In November 2008 the IASB issued a revised standard which changed the Standard s structure without amending its substance. At the time of writing this publication the revisions to the IFRS 1 (revised) have still to be adopted by EU. 32 IFRS 1 requires where IFRS is adopted an explicit and unreserved statement of compliance with IFRS is necessary. It requires entities to select accounting policies that comply with IFRSs in force at the closing balance sheet date for the first IFRS financial statements. IFRS 1 also requires that entities prepare an opening IFRS balance sheet which should include all assets and liabilities required by IFRS and classified, recognised and measured in accordance with IFRS and the preparation of full IFRS financial statements (with appropriate and extensive disclosures). 33 IFRS 1 requires full retrospective adoption of most IFRSs but there are optional exemptions from full retrospective application. The exemptions which are most likely to apply to higher educations include: business combinations; fair value as deemed cost; employee benefits; assets and liabilities of subsidiaries, associates and joint ventures; designation of previously recognised financial instruments; insurance contracts; leases; and fair value measurement of financial assets or financial liabilities at initial recognition. 34 Whilst not all of these optional exceptions will apply to all institutions, consideration needs to be given to each and its impact on longer term financial reporting must also be assessed. 35 There are also mandatory exceptions from retrospective application in IFRS 1. These are in the areas of derecognition of financial assets and liabilities, hedge accounting, non controlling interests. The 11

13 standard also sets out requirements in relation to the use of estimates on first time adoption. For example it sets out that hindsight should not be used when moving to IFRS. It states that: An entity's estimates in accordance with IFRSs at the date of transition to IFRSs shall be consistent with estimates made for the same date in accordance with previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error. 36 Furthermore IFRS 1 also includes extensive disclosure requirements including reconciliations of: equity from previous GAAP (UK) (in the case of institutions as interpreted by the SORP) to IFRS and at the end of the last period presented in the entity s most recent annual financial statements under previous GAAP (UK); profit (surpluses) from previous GAAP to IFRS for the last period in the entity s most recent annual financial statements. 12

14 Presentation of the Financial Statements IAS 1 (Revised) Presentation of financial statements FRS 3 Reporting financial performance (part) FRS 18 Accounting policies FRS 28 Corresponding amounts 37 Guidance on the overall structure of financial statements is provided by IAS 1 revised Presentation of Financial Statements. This includes minimum requirements for each primary statement (under IFRS Statement of Financial Position; Statement of Comprehensive Income; Statement of Changes in Equity and Statement of Cashflows) and notes to the financial statements. Under the SORP the presentation of the financial statements is set out in Section 2 with the prescribed format for the primary financial statements set out in Appendix The main elements of a set of IFRS financial statements are largely similar to those required by the SORP. However, there are some differences in the terminology, format and reporting requirements for each element. The main elements are summarised in the table below: Table 1: Comparison Main Elements of the Financial Statements IFRS The SORP A Statement of Financial Position for the period (IAS 1 (revised) uses different terminology from the previous version). However an entity can continue to present a balance sheet rather than a statement of financial position provided that the description is not misleading. A Statement of Comprehensive Income A Statement of changes in equity for the period A Statement of Cashflows for the period Notes, comprising a summary of significant accounting policies and other explanatory information A Statement of Financial Position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or where it reclassifies items in its financial statements. The Balance Sheet The Income and Expenditure Account The Statement of Total Recognised Gains and Losses which accords with the requirements of FRS 3 A note of the historical cost profit or loss for the period A Cash Flow Statement (more detail on the differences between the SORP and IFRS in relation to the cash flow statement is provided in the following section) Notes to the Balance Sheet and Income and Expenditure Account Notes detailing significant accounting policies and estimation techniques 39 IAS 1 (revised) specifies the minimum line requirements to be disclosed on the face of the Statement of Financial Position (Balance Sheet). IAS 1 (revised) also requires that entities should insert additional line items when required to do so by other IFRS or when the size, nature or function of an item or aggregation 13

15 of similar items is such that separate presentation is relevant to an understanding of an entity s financial position. IAS 1 (revised) also specifies as a minimum the line items that should be disclosed on the face of the Statement of Comprehensive Income. The presentation of the format of the financial statements is primarily defined in Appendix 2 of the SORP. The SORP does not provide an explicit statement on the use of additional lines, it does, however, define certain circumstances where additions may be required. For example, in relation to endowment income, it requires that if the accumulated income is so material that its disclosure is fundamental to the understanding of the institution s financial position then it should be shown on the face of the balance sheet. Performance Statements Statement of Comprehensive Income 40 IAS 1 (revised) requires entities to present a Statement of Comprehensive Income, setting out all items of income and expense (that is, all non-owner changes in equity) which would include those entries currently included in the Statement of Recognised Gains and Losses (STRGL). The Standard gives entities a choice as to whether they present comprehensive income within a single statement or in two statements 3. Statement of Changes in Equity 41 Under IAS 1 (revised), entities are not permitted to exclude certain income and expenses ( other comprehensive income ) from any performance statement by including them directly in the Statement of Changes in Equity, an option that was available under IAS 1 (2005). As indicated above these entries are typically those included in the STRGL by institutions. The Statement of Changes in Equity presents owner changes in equity, that is, transactions and events that increase equity but are not part of performance. For institutions this is most likely to include movements in reserves. This is a significant change from the UK concept that that performance should be measured more broadly than the profit shown in the income and expenditure account and will see a move away from the current reporting of performance in the STRGL. 42 The Income and Expenditure Account format included in the SORP Appendix 2 requires disclosure of surplus/(deficit) after depreciation of tangible fixed assets at valuation and before tax (roughly equivalent to operating profit per the requirements of FRS 3). IAS 1 does not require disclosure of operating profit or surplus. However, under IAS 1, entities are not prohibited from disclosing operating profit or other relevant level. 43 Following FRS 3, the SORP requires the Income and Expenditure Account to split newly acquired, continuing and discontinued operations. Where all operations are continuing, the customary practice in the education sector has been to include a note on the face of the Account to this effect. IAS 1 (revised) requires as a minimum disclosure on the face of the Statement of Comprehensive Income of a line aggregating: the post-tax profit/loss of any discontinued operations; and the post-tax gain/loss recognised on measurement to fair value less costs to sell or on disposal of the assets or disposal group(s) constituting the discontinued operation. The disclosure should be presented in a separate section of the Statement so that it is separate from the results of continuing operations and not presented as revenue. IFRS 5 requires further detailed analysis of the single amount, either on the face of the Statement or within the notes. 3 A single statement would contain all items of income and expense. Under the two statement approach, items of comprehensive income would be divided between a separate Income Statement and a separate Statement of Comprehensive Income. Where a two statement approach is adopted, the income statement shall be displayed immediately before the Statement of Comprehensive Income. 14

16 44 The SORP requires that the recognition of the gains or losses on disposals of fixed assets and the sale and termination of operations should be disclosed on the face of the Income and Expenditure account after minority interest and taxation and following the exceptional treatment set out for these items in FRS 3. Other exceptional items, exceptional due to their size or nature should be reported in accordance with the requirements of FRS 3 and disclosed separately by way of note or on the face of the income and expenditure account if that degree of prominence is necessary in order to give a true and fair view. Under IFRS those entities that choose to disclose a category 'exceptional items' in their IFRS financial statements would need to ensure that the notes to the financial statements include a definition of this term; this is particularly important because the term 'exceptional item' is not defined within IFRS. IAS 1 (revised) sets out a list of the circumstances that may give rise to separate disclosure of items. Balance Sheet (Statement of Financial Position) 45 As indicated earlier IAS 1 (revised) specifies the minimum line items to be included in the balance sheet but it contains no requirements or recommendations on sub-totalling or balance sheet totals. It also requires entities to present current and non-current assets and current and non-current liabilities as separate classifications on the face of the Statement of Financial Position (balance sheet) except when a liquidity presentation provides reliable and more relevant information. The order and format of the balance sheet, classification of assets and liabilities and the use of sub totals is prescribed by Appendix 2 of the SORP. Disclosure Issues 46 IAS 1 (revised) requires that the notes must disclose the nature and purpose of each reserve within equity. This is similar but not expressly required by Appendix 3 of the SORP which sets out a list of notes which may be reasonably expected to be included in the notes to the accounts. This includes a note on the revaluation reserve, the income and expenditure reserve, notes on endowment funds and deferred capital grants. 47 IAS 1 (revised) requires that information is provided that enables users of an entity's financial statements to evaluate the entity s objectives, policies and processes for managing capital. The SORP requires institutions to provide an Operating and Financial Review (OFR) based on best practice and the recommendations of the ASB s Reporting Statement (RS), The Operating and Financial Review. This RS recommends an OFR includes disclosures on capital structure. 15

17 Cash Flow Statements IAS 7 Cash flow statements FRS 1 Cash flow statements 48 The SORP requires that institutions produce a cash flow statement. Similarly IAS 7 does not include any exemptions from the requirement to prepare one, hence all financial statements now include a cash flow statement. 49 There are a number of significant differences between a cash flow statement prepared under IAS 7 and one prepared under FRS 1. The cash flows reported under IAS 7 relate to movements in cash and cash equivalents (defined as short-term highly liquid investments that are readily convertible into known amounts of cash and subject to insignificant risk of changes in value). FRS 1 requires the movement of cash (defined as cash in hand and deposits repayable on demand, less overdrafts) to be reported in the cash flow statement. Under FRS 1 and the SORP, there is no concept of cash equivalents, albeit cash flows relating to IAS 7 cash equivalents would be included in 'management of liquid resources'. 50 One of the significant differences is that IAS 7 requires cash flows to be reported under three sections: operating, investing and financing, whereas the SORP follows the requirement of FRS 1 requiring cash flows to be reported in far greater detail under standard headings set out below. The SORP also requires sub classification of some of the headings below. Table 2: Comparison of the Formats of the Cash Flow Statements as Required Under IFRS and the SORP IAS 7 Operating Activities (Includes principal revenue producing activities and other activities that are not investing or financing). Investing Activities (Includes acquisition and disposal of long-term assets and other investments not included in cash equivalents) Financing Activities (Includes activities that result in changes in the size and composition of the contributed equity and borrowings The SORP Net Cash Flow from Operating Activities Returns on investments and servicing of finance Taxation Capital expenditure (including: Endowment assets acquired and received Receipts from the sale of endowment assets Payments to acquire tangible assets Deferred capital grants received) Management of Liquid Resources Financing 51 The SORP Appendix 2 requires reconciliation of the movement in cash to net funds (debt). It indicates that this is not a primary statement and can be shown in the notes to the accounts. IAS 7 does not require any such reconciliation of movements in cash flows to the movement in net debt. However, this reconciliation is often performed by companies as this is regarded as good practice. 52 Under FRS 1, foreign currency exchange differences on cash balances are not reported on the face of the cash flow statement as they are non-cash items. However, IAS 7 requires foreign currency exchange 16

18 differences on cash and cash equivalents to be reported on the face of the cash flow statement in order to reconcile the opening and closing cash and cash equivalent balances. 17

19 Accounting Policies and Estimation Techniques IAS 8 Accounting policies, changes in accounting estimates and errors FRS 3 Reporting financial performance (part) FRS 18 Accounting policies (part) 53 The scope of FRS 3 and FRS 18 is wider than that of IAS 8 and only the equivalent parts are dealt with in this section. 54 IAS 8 does not include any distinction between fundamental errors and other material 4 errors and all such errors are required to be corrected by retrospective restatement (i.e. prior period adjustment). This is significantly different to the SORP s adoption of FRS 3, which is more restrictive in respect of errors and only restates prior period figures for the correction of fundamental errors (and/or the effects of the changes in accounting policies). 55 IAS 8 requires that changes in accounting policies should be applied retrospectively (unless a standard or interpretation includes transitional provisions). As highlighted above the standard also requires retrospective restatement to correct all material prior period errors and gives guidance on how this should be applied. IAS 8 does not permit the use of hindsight 5 when applying a new accounting policy or when correcting prior period errors. The SORP requires full adoption of FRS 3 in relation to the retrospective restatement of fundamental errors and changes in accounting policy and does not include guidance on the use of hindsight. However, it is unlikely that current accounting practice would permit the use of hindsight. 56 IAS 8 presents a hierarchy of guidance to which management refers and whose applicability it considers when selecting accounting policies. Management is required to use its judgement in applying accounting policies that result in information that is relevant, reliable, reflects economic reality and is neutral, prudent and complete. The SORP requires that institutions should ensure that, for all material items, they adopt the accounting policies most appropriate to their particular circumstances for the purpose of giving a true and fair view. It does not provide a hierarchy of guidance. The appropriateness of the accounting policies to particular circumstances should be judged against the objectives of relevance, reliability, comparability and understandability. The SORP requires that accounting policies selected should be consistent with the requirements of accounting standards, UITF Abstracts and relevant legislation. Specific reference should be made as to whether the accounts have been prepared in accordance with the SORP. It is unlikely that the slight difference of approaches will have a significant impact on the selection of accounting policies for institutions albeit the selection of accounting polices would need to be 4 IAS 8 defines material omissions and misstatements as Material omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. 5 IAS 8 includes a definition of impracticable' and guidance on its interpretation. This clarifies that retrospectively applying a new accounting policy requires distinguishing information that provides evidence of circumstances that existed on the date as at which the transaction, other event or condition occurred and that would have been available when the financial statements for that prior period were authorised for issue. In other words, IAS 8 does not permit the use of hindsight when applying a new accounting policy. 18

20 in accordance with the appropriate International Financial Reporting or Accounting Standard. 57 IAS 8 and FRS 18 use different terminology for when accounting policies can be changed voluntarily. IAS 8 only allows a change in policy if it results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity s financial position, financial performance or cash flows. The SORP requires that accounting policies followed should be reviewed regularly to ensure they continue to be the most appropriate and new policies should be implemented if they are judged to be more appropriate to the institution s particular circumstances. In judging whether a new policy is more appropriate than the existing policy, the institution will give due weight to the impact on comparability. This difference in terminology is unlikely to have a significant impact on the approach of accounts preparers. 58 IFRS requires more detailed disclosure requirements for changes in accounting policy and correction of errors. A particular example being under IAS 8, the nature of a future change in an accounting policy when an entity has yet to implement a new standard that has been issued, but not yet come into effect is required to be disclosed, together with details of its impact (where known or reasonably estimable). The SORP does not include such a requirement. 59 Changes to accounting estimates are accounted for prospectively (i.e. from the date of change of estimate) under both IFRS and the SORP. IAS 8 requires disclosure of the nature and amount of a change in an estimate that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect. The SORP following the requirements of FRS 18 would require disclosure where the effect of a change to an estimation technique is material, a description of the change and, where practicable, the effect on the results for the current period. Disclosures Relating to a Change in Accounting Policy 60 IAS 8 sets out disclosure requirements for situations where a change in policy has an effect on the current period or any prior period, or would have such an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods. These requirements together will the contrasting requirements of the SORP (following the requirements of FRS 3 and FRS 18) are set out in the table below. Table 3: Comparison of the Disclosure Requirements Relating to a Change of Accounting Policy under IAS 8 and the SORP IAS 8 The SORP (FRS 3 and FRS 18) This disclosure Includes: the nature of the change in accounting policy; the title of the standard or interpretation and, when applicable, that the change is made in accordance with its transitional provisions (with a description, including those that might have an effect on future periods) (for non-voluntary changes); the reasons the new policy provides reliable and more relevant information (for voluntary changes); for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each line item affected and if IAS 33 applies, for basic and diluted earnings per share; the amount of the adjustment relating to Disclosure Includes: details of any changes to accounting policies; an explanation of why each new accounting policy is more appropriate; where practicable, the effect of a prior period adjustment on the results for the preceding period; and where practicable, an indication of the effect of a change in accounting policy on the results for the current period. Where it is not practicable to make the disclosures on the effect of the prior period, that fact, together with the reasons, should be stated. 19

21 IAS 8 The SORP (FRS 3 and FRS 18) the periods before those presented, to the extent practicable; and if retrospective application is impracticable for any period, the circumstances that led to this and a description of how and from when the change in accounting policy has been applied. 20

22 Revenue Recognition IAS 18 Revenue FRS 5 Application Note G Revenue recognition SSAP 9 (for long-term contracts) 61 The ASB issued Application Note G Amendment to FRS 5, Reporting the Substance of Transactions: Revenue Recognition in November The amendment to FRS 5 was issued as an interim position to provide guidance in the UK until a new standard is developed internationally. The Application Note covers the basic principles of revenue recognition that should be consistently applied regarding the recognition and measurement of revenue and specifically addresses five key areas (long-term contracts, separation and linking of contracts, bill and hold arrangements, sales with right of return and presentation of turnover by principals and agents). The SORP has fully adopted FRS 5 and Application Note G. IAS 18 is generally consistent with the principles set out in the ASB's Statement of Principles for Financial Reporting. Application Note G is considered to have moved UK accounting closer to IAS The 2007 SORP included a number of areas where Application Note G had particular relevance to institutions i.e. agency arrangements, tuition fees and bursaries and scholarships. It is unlikely that the accounting arrangements under IFRS will change significantly for these transactions. 63 In addition to Application Note G, FRS 5 itself deals with some specific types of transaction, including consignment stocks and sale and repurchase agreements and Statement of Standard Accounting Practice (SSAP) 9 deals with income from long-term contracts. 64 Accounting for research grants is governed by the requirements of SSAP 9. It is unlikely that there will be a significant impact on the recognition of income in relation to research contracts where income should be recognised on the basis of the evidence of an institution s performance of the contract. 65 The following Urgent Issues Task Force (UITF) Abstracts also deal with issues relating to revenue recognition and the related matter of cost recognition are fully adopted in the SORP: UITF 24, Accounting for start-up costs, UITF 28, Operating lease incentives, UITF 34, Pre-contract costs, and UITF 36, Contracts for sales of capacity (this is likely to have limited application to further and higher education institutions). 21

23 Accounting for Government Grants IAS 20 Accounting for government grants and disclosure of government assistance SSAP 4 Accounting for government grants 66 The requirements of IAS 20 are similar to those of the SORP in relation to government grants. IAS 20 also includes the options provided by SSAP 4 i.e. that grants that relate to recognised assets are presented in the balance sheet either as deferred income, or by deducting the grant from the cost of the asset. This contrasts with the SORP which sets out: Where an institution receives a grant to finance, or partly finance, the purchase, construction or development of an asset, and the asset is capitalised, the grant should be credited to deferred capital grants and an annual transfer made to the income and expenditure account over the useful economic life of the asset at the same rate as the depreciation charge on the asset for which the grant was awarded. This is achieved by crediting the grant to deferred capital grants, disclosed on the funds side of the balance sheet separately from endowments and reserves, and released to income over the estimated useful life of the related asset. 67 The SORP does not permit the deduction from cost method. 68 It is possible that the requirements of IAS 20 would permit the sector to continue to account for government grants in a manner similar to that currently provided by the SORP. 22