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The Future of Financial Reporting – ABCUL response

Executive Summary

1.1 We continue to be deeply concerned about the impact that the current proposals are likely to have on the credit union sector in Britain. We call on the ASB to consider four measures which we feel will mitigate the impact of the proposals significantly and provide the basis for an enhanced reporting framework which is consistent with International Financial Reporting Standards but which is proportionate to the reality of credit unions in Britain:

1.1.1 Reconsider credit unions' classification as publicly accountable

1.1.2 Change the application of the Companies Act size criteria to meeting 2 of the 3 medium company criteria

1.1.3 Create a credit union SORP to supplement the application of the FRSME in the credit union context

1.1.4 Move back the effective date to 1 July 2015

1.2 Credit unions in Britain are a small, volunteer-led sector which – whilst growing very healthily with strong support from Government – is still in an early stage of its development relative to the credit union sectors in many parts of the world. In many countries credit unions are a much more widely-used financial service – in the US and Canada, for example, more than 40% of the population belong to their credit union, whilst in Britain it is between 1.5 and 2%. Were credit unions in Britain to be of comparable size and operate on the same principles as those in North America we would be much less concerned with the proposed move to IFRS.

1.3 Despite being small, credit unions are providing a vital service to almost a million people in England, Scotland and Wales – many of whom have little or no access to financial services on equitable terms to the mainstream. Without a credit union, many people have no choice but to pay astronomical rates of interest for small-sum, short-term loans or place their savings with unregulated, unprotected savings schemes. Furthermore, a lack of access to fair financial services can hinder an individual‟s ability to make use of savings and flexibility that the majority take for granted (direct debit payments or internet shopping, for example) which result in the poorest paying the most for vital services – this has been called the „Poverty Premium‟.

1.4 In addition to their role in financial inclusion, British credit unions have been increasingly recognised for the role they can play in a reformed financial services sector. In some parts of the world – such as the United States of America – credit unions are the primary source of banking services for those looking for an alternative to the main, high street banks. Their member-focused ethos and not-for-profit business model – both of which arise from their co-operative ownership

1.5 The combination of these important roles has placed the expansion of credit unions at the heart of the Coalition Government‟s plans – both in terms of welfare reform and reform of the financial services sector. Recently, following the successful delivery over the last 5 years of the DWP‟s £100m Financial Inclusion Growth Fund,

1.6 And in addition to credit union specific moves, the Government has recently announced a drive to minimise the burden of red tape and regulation upon (especially small) businesses with a view to boosting economic growth. Furthermore, moves have been proposed to reduce the financial reporting requirements imposed upon micro-firms with very small staffing and turnover.1.9 As we set out in our response to the ASB‟s Policy Proposal and short Impact Assessment last year, we have reason to believe that credit unions will be burdened by ballooning accountancy and audit costs in applying IFRS. We estimate that the total cost to the sector will be somewhere between £6 and £7.5 million annually. This is whilst we foresee no material benefit to their primary users, the credit union sector‟s membership. In fact, it is likely that the accounts produced under IFRS will be more difficult for lay-members to understand and, therefore, less transparent than at present. Furthermore, we have been informed by the Financial Services Authority that they see no benefit in the extra disclosures under IFRS as they obtain their information primarily from a standardised return designed to provide information relating specifically to their prudential regulatory rules. not feel that the ASB have properly understood just quite how small many credit unions are and therefore we provide a full analysis of this below.that a Statement of Recommended Practice for the credit union sector applying FRSME would be an appropriate way of assisting the audit profession in applying the rules to the sector and, therefore, mitigating much of the disruption and cost increase which otherwise will arise. This would be an ideal way of drawing a clear distinction between the requirements of full-IFRS and the FRSME.The full response can be downloaded here

1.7 The Government, therefore, is taking active and purposeful steps to support the credit union movement in line with the measures taken by the previous Labour administration and in keeping with the cross-party appeal that the sector has. Politicians‟ and policy-makers of all hues are keen to see credit unions expand because of, in the words of Financial Secretary to the Treasury Mark Hoban MP, their potential to „greatly enrich British society‟.

1.8 It is in this context of a small but growing credit union sector and comprehensive support from Government that the Accounting Standards Board‟s proposal to require credit unions to apply International Financial Reporting Standards finds itself. We have serious concerns that these technical standards are onerous, disproportionate and potentially damaging to the development of the British credit union sector.

1.10 We appreciate the concession which the ASB made following the Policy Proposal consultation last year whereby credit unions meeting all three of the small company criteria as set out in the Companies Act 2006 will be able to apply the FRSME. This is certainly preferable to the original position which would have seen every credit union having to apply full-IFRS. We are, however, concerned that even this will have serious ramifications for all credit unions. It could be argued that it is anti-competitive to require small firms to apply burdensome standards that can only be sustained by larger firms. This will ensure more consolidation in financial services supply not greater diversity. This is a very poor result for consumers.

1.11 Firstly, those credit unions which, having £3.26m or more in total assets, will be required to apply full IFRS are likely to be seriously damaged by the costs associated with doing so. In our response to last year‟s short Impact Assessment we calculated – on advice taken from a range of accountancy and audit professionals – that there will be at least a 100% increase in audit costs and a 5-10% increase in general costs to the credit union. On 2008 numbers, cost increases of this magnitude would have pushed at least 8 of around 30 credit unions into a loss-making position or one of very marginal profitability. This will result in depreciating capital at a time when the FSA are tightening capital adequacy requirements and would push credit unions into cost-cutting with the effect of reducing their capacity to grow. Furthermore, those credit unions which would remain in profit under the proposals would face considerable challenges in applying full-IFRS which would inevitably act as a brake on their growth whilst providing little or no benefit to anyone associated with the credit union. These are standards designed for much larger organisations who represent a systemic risk due to their size and are actively accountable to hundreds of thousands or even millions of individuals through deposit-taking and / or shareholding. To obstruct the natural growth of a burgeoning sector by applying completely inappropriate reporting standards to it cannot be the intention of the ASB‟s proposals.

1.12 Similarly, we have continued concerns for the credit unions that will be able to apply the lesser, FRSME standards. On analysing the proposed FRSME we have found that, whilst being a positive simplification of full IFRS, it does share some of those critical areas which we believe will be particularly onerous for credit unions. Examples here include the requirement to apply acquisition accounting – as opposed to merger accounting permitted under the proposed FRSBE – or the rather vague requirement at 12.1 (f) to "provide information that enables users of the entity‟s financial statements to evaluate the nature and extent of relevant risks arising from financial instruments to which the entity is exposed at the end of the reporting period." Therefore we feel that without supplementary information, even the FRSME is likely to be onerous to apply. We do

1.13 Our third key concern is that of timing. The effective date of 1 July 2013 may be more than two years away but, given that in transition three years‟ accounts are required to be restated and that credit unions‟ financial year end is generally 30 September, this will mean work must begin restating accounts in anticipation of possibly having to apply one or other form of IFRS for the accounts of the present financial year, when they are prepared and audited following 30 September 2011. It cannot be reasonable, especially where the sector in question is so small, that firms are required to begin restating their accounts in a new format prior to their knowing which format they are going to ultimately have to apply. This will only exacerbate cost increases and we feel that it would only be sensible to set the effective date in such a way as to ensure that all firms know exactly how they will have to present their accounts and under which tier well in advance of having to begin the process of doing so.

1.14 We therefore urge consideration of the following 4 areas:

1.14.1 Reconsider credit unions' classification as publicly accountable: Credit unions are not publicly accountable but are accountable only to their membership which is drawn from a tightly defined group under the „common bond‟. The common bond is a tightly defined concept which is a matter determined by a combination of legislation and the Financial Services Authority and its existence has defined the treatment of credit unions by the EU as different from other deposit-takers. Indeed, the concept is critical to the distinct definition of a credit union which determines their proportionate treatment by FSA and the OFT also. The ASB should pay heed to this concept which, until now, it has dismissed presumptively without truly looking at its implications or the effect it has had on the interpretation of other regulatory bodies.

1.14.2 Change the application of the Companies Act size criteria to meeting 2 of the 3 medium company criteria: The Accounting Standards Board, whilst professing to derive its distinctions and dividing lines from legislation in order to avoid being accused or arbitrariness, has decided to stray from the legislative application of the size criteria in the Companies Act 2006 without providing any real justification for this. Similarly we feel that sufficient justification has not been provided for setting the bar so low. Even our largest credit unions are quite significantly less complex than the very large deposit-takers or publicly traded companies forming the bulk of those firms required to apply full-IFRS and we do not feel that it is proportionate to expect firms of this size to do so. We feel therefore that – if the concept of the common bond is to be dismissed – a more appropriate size threshold would be to apply the medium company size criteria on a 2 of 3 basis as they are found in the Companies Act. This would mean that those deposit-taking firms required to apply full-IFRS – including credit unions – would be of a sufficient complexity and scale to a). experience sufficient benefits from applying full-IFRS and b). be in a position to absorb the significant costs of doing so.

1.14.3 Create a credit union SORP to supplement the application of the FRSME in the credit union context: Given the vagaries of the FRSME – as highlighted above with 12.1 (f) – we feel

1.14.4 Move back the effective date to 1 July 2015: As outlined above, we feel that there is too much uncertainty surrounding the proposals at present for it to be reasonable to expect small firms such as credit unions to begin preparing accounts in a new standard before the final decisions have been made. At the very least the effective date should be set such that firms are in no doubt as to which standards they are going to be required to apply when they begin restating their accounts. This would mean a new effective date of at least 1 July 2015.