In October 2010, the Accounting Standards Board (ASB) published an exposure draft "The future of financial reporting in the UK and the Republic of Ireland" which proposes to replace UK financial reporting standards (UK GAAP) with a new standard based on the international standard for small and medium-sized entities. The consultation period ends on 30 April 2011.


Under the current financial reporting system, companies fall into one of three categories:-

  • quoted companies must use international financial reporting standards (IFRS), as adopted by the EU, when preparing financial statements;
  • unquoted (large, medium-sized and certain small) companies use UK GAAP; and
  • certain small companies may be eligible to use a simplified version of UK financial reporting standards (financial reporting standards for smaller entities (FRSSE)).

What is the Accounting Standards Board proposing to change?

The ASB is proposing to keep a three-tier framework:-

There will be no change for quoted companies with public accountability (see below) or small companies that are eligible to use FRSSE.

The main change proposed in the ASB's exposure draft affects unquoted companies and others that currently report using UK GAAP. In order to simplify UK GAAP into a concise, coherent and updated form, the ASB is proposing that such companies use a new financial reporting standard for medium-sized entities (FRSME).[1] FRSME are based on IFRS for small and medium-sized entities but adapted to comply with UK and European legal requirements. The new standard is considerably shorter and less complicated than current UK GAAP. It also provides for disclosure exemptions for qualifying group subsidiaries which would cut the reporting burden and allow them to make significant cost savings.

The proposed change will affect charities and other "public benefit entities" that currently use UK GAAP. The ASB is developing a tailored standard for such entities which is due to be published in the course of the year.

The proposed tier system

The proposed three-tier framework builds on the existing system and uses 'public accountability' as the differentiator:-

  • Tier 1 entities are entities that have public accountability, i.e., quoted companies and certain entities in the financial services sector such as banks, credit unions, insurance companies, securities brokers/dealers, mutual funds or investment banks. Tier 1 entities report using EU-adopted IFRS.
  • Tier 2 entities are entities without public accountability; and certain small publicly accountable entities that are prudentially regulated (for instance, small credit unions). Tier 2 entities may report using FRSME or EU-adopted IFRS.
  • Tier 3 entities are small companies without public accountability. Tier 3 entities may report using FRSSE or, alternatively, FRSME or EU-adopted IFRS.

When are the changes proposed to come into effect?

The ASB is proposing that the changes apply to accounting periods beginning on or after 1 July 2013, with early adoption permitted.

The consultation period ends on 30 April 2011. We will report on the results of the consultation and the ASB's response in due course.