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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Accounting for corporate finance: derivative contracts: the development of standards in the UK

The development of standards in the UK

The role of the Accounting Standards Board (ASB) is to issue accounting standards. It is recognised for that purpose under the Companies Act 1985. It took over the task of setting accounting standards from the Accounting Standards Committee (ASC) in 1990.

To date, the ASB has issued a number of Financial Reporting Standards (FRSs) and adopted a number of the Standard Statements of Accounting Practice (SSAPs) issued by its predecessor, the ASC.

The ASB recognised that it had to respond to the challenge to traditional accounting posed by the growth in the use of financial instruments (see CFM24030). In the mid-1990s it published a discussion paper which proposed to address the issue of derivatives in two stages:

  1. The development of a disclosure standard
  2. The subsequent development of a standard which would address measurement and recognition issues.

The first stage led to an exposure draft, followed in September 1998 by the issue of FRS13 (Derivatives and other Financial Instruments: Disclosures). 

Structure of FRS13

As set out in the discussion paper, FRS13 is a disclosure standard only. It is divided into three parts:

  • Part A applies to non-financial institutions whose capital instruments (i.e. not just equity shares) are listed (nationally and/or internationally, and in primary and/or secondary markets such as the Alternative Investment Market). Subsidiary companies which may have quoted debt instruments are not exempt.
  • Part B applies to banks and similar institutions (e.g. building societies), whether or not these are listed.
  • Part C applies to other financial institutions (eg stockbrokers, moneybrokers, lessors and investment trust companies) whose capital instruments are listed.

Companies not subject to FRS13

This means that the great majority of companies are not subject to the standard. Other types of entity that do not come under the scope of FRS13 include:

  • insurance companies and groups
  • companies that have adopted the Financial Reporting Standard for Smaller Entities (FRSSE).

Note that the term ‘entity’ is used by accountants to mean any business operation that draws up accounts. It includes not only UK and foreign companies, but such things as joint ventures, limited liability partnerships, branches of companies and partnerships and similar associations set up under the laws of overseas countries.