ASB wants less clutter; government proposes a wider audit exemption and changes corporation tax rates

Welcome to Financial Reporting Matters

Welcome to Financial Reporting Matters.  We begin by looking at the ASB's proposals for cutting clutter.  We welcome ideas in this area.  Recent changes, partly driven by IFRS, have lengthened annual reports.  It seems like a good time to stand back and see if their size can be reduced.  It will be interesting to see how the proposals are received; some would require a change in regulation and approach.  We encourage interested parties to respond by the September deadline.

We consider two issues arising from the 2011 Budget.  The government proposes a wider audit exemption, primarily by removing the audit requirement for subsidiaries with parent company guarantees.  The main UK corporation tax rate is reduced.

The IASB has been discussing its leases project.  Several changes have been made to the initial proposals.  A recent suggestion would mean leases shorter than 12 months remain off balance sheet for lessees as well as lessors.  KPMG's International Standards Group, part of KPMG IFRG Limited, has produced a Leases Newsletter, available here, comparing the current proposals to the exposure draft.

The ASB has issued a press release, available here, proposing a new standard for public benefit entities.  These are, broadly, entities with a primary objective other than providing a financial return to shareholders or members.  The proposals give guidance for public benefit entities applying the FRSME, which will replace UK GAAP for accounting periods beginning on or after 1 July 2013.  This is further evidence of the changes required as the ASB moves to replace current UK GAAP. 

If you have any comments on this edition or would like one of your colleagues to receive future editions of Financial Reporting Matters you can contact me at FinancialReportingMatters@kpmg.co.uk.  

Andrew Vials, Senior Technical Partner

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ASB report - 'Cutting Clutter from Annual Reports'

The ASB believes that clutter in annual reports obscures relevant information, making it harder for users to analyse the performance of the business and its prospects for long-term success.

Their report, available here, suggests that reducing clutter is more than 'taking a red pen to a late printer's proof'.

Clutter comes from immaterial disclosures, reducing the ability to identify and understand relevant information, and explanatory information unchanged from year to year.  The ASB believes a significant opportunity exists in the latter area.  It suggests potential ways to reduce clutter, such as detailing changes in accounting policies within the annual report and cross referencing to fuller policy information on the corporate website.

The ASB accepts that moving this type of 'standing data' out of the annual report would require regulatory changes. 

Comments are requested by 30 September 2011.

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Government plans to widen audit exemption

The government has stated its intention to reduce costs for business in its Plan for Growth, available here. 

Two proposals require changes in UK legislation only.  The current small company audit exemption requires two tests.  The company must first qualify as a small company.  This generally requires a company to meet at least two of the three size thresholds in the current and preceding financial year.  It must then comply with the turnover and balance sheet thresholds in the current accounting period.  The government has said it will remove the latter test.  This will reduce of some of the barriers to the small company audit exemption. 

The second proposal would exempt 'non-financial' subsidiaries with parent company guarantees from audit.  The term 'non-financial' is not yet defined, although the government has stated that the exemption will be available to most subsidiaries.  The government intends to bring forward legislation for this during 2012. 

Two further proposals would require changes in EU legislation.  The government will press the EU to exempt companies with fewer than 10 employees - known as 'micro' companies - from preparing statutory accounts.  This is consistent with the EU's proposals.  The government has also indicated it would like to extend the audit exemption to medium-sized companies. 

In addition, the government will consult by the end of July 2011 on how narrative reporting by quoted companies can be simplified.  

Precise details of the proposals are not yet available.

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UK corporation tax changes

The Budget on 23 March 2011 announced new phased reductions in the main UK corporation tax rate.  The rate is now proposed to be 23% (was to be 24%) by 1 April 2014.  The first reduction to 26% (was to be 27%) takes effect from 1 April 2011. 

Tax rate changes (under both UK GAAP and IFRS) are taken into account if they are substantively enacted at the balance sheet date.  In the UK this means inclusion in a Bill passed by the House of Commons awaiting only passage through the House of Lords and Royal Assent or in a resolution passed under the Provisional Collection of Taxes Act (PCTA) 1968.

The first reduction to 27% was enacted in June 2010 within the 2010 Finance Act.  The additional reduction to 26% was included in a resolution passed under the PCTA 1968 on 29 March 2011.

For accounting periods ending after 29 March 2011, deferred tax will be measured based on the new 26% rate.  For periods ending before this date, deferred tax continues to be measured based on 27%.

The reduction to 25%, effective from 1 April 2012, will be included in the 2011 Finance Bill.  This is expected to be substantively enacted in June or July 2011.

As the 25% rate is not yet substantively enacted it is not taken into account when calculating deferred tax balances.  The remaining reductions to 23% are expected in future Finance Bills.

Disclosure should nevertheless be made of the expected effect, if material, of the future reductions to 23%.

If you have any queries, please speak to your KPMG tax contact.

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