The Accounting Standards Board’s Urgent Issues Task Force (UITF) has been addressing the issue of what is the legal definition of an off-balance sheet arrangement.

The UITF received an enquiry expressing concern that the new requirement regarding off-balance sheet disclosures set out in section 410A of the Companies Act 2006ⁱ, does not define off-balance sheet arrangements. Without such a definition, companies would not have clarity as to the adequacy of disclosures made to comply with the Act.

Section 410A of the Act applies to companies (other than small companies ) that prepare their accounts in accordance with either the Companies Act and UK Financial Reporting Standards or International Financial Reporting Standards as adopted by the EU. The requirements for disclosures of off-balance sheet arrangements are derived from an EU Directive (2006/46/EC). This Directive arose from an Action Plan announced in May 2003, after the Enron and Parmalat scandals, which gave short-term priority to increasing inter-alia the transparency of off-balance sheet arrangementsⁱⁱ.

The UITF points out that the Department for Business, Enterprise and Regulatory Reform (BERR) has recently issued guidance on accounting and reporting provisions of the Companies Act 2006ⁱⁱⁱ. The guidance includes a non-exhaustive list, extracted from the EU Directive, of the types of transaction that the EC envisaged for disclosure when the legislation was enacted. Recital 9 of the Directive states:

Such off-balance-sheet arrangements could be any transactions or agreements which companies may have with entities, even unincorporated ones, that are not included in the balance sheet. Such off-balance-sheet arrangements may be associated with the creation or use of one or more Special Purpose Entities (SPEs) and offshore activities designed to address, inter alia, economic, legal, tax or accounting objectives. Examples of such off-balance-sheet arrangements include risk and benefit-sharing arrangements or obligations arising from a contract such as debt factoring, combined sale and repurchase agreements, consignment stock arrangements, take or pay arrangements, securitisation arranged through separate companies and unincorporated entities, pledged assets, operating leasing arrangements, outsourcing and the like. Appropriate disclosure of the material risks and benefits of such arrangements that are not included in the balance sheet should be set out in the notes to the accounts or the consolidated accounts.

Neither the Directive nor, as a consequence, the Companies Act has provided a definition of an ‘off-balance sheet arrangement’. The UITF agrees with the concern regarding the clarity of the requirements but concluded that it could not issue an Abstract without such a definition being in place. The UITF does, however, make the following points by way of guidance:

• when a company provides disclosures in accordance with s410A it should consider the types of transactions envisaged by the EC (as quoted above) and the aim of the legislation;
• s410A applies only where, at the balance sheet date, the risks or benefits arising from arrangements are material;
• disclosure need only be given to the extent necessary for enabling the financial position of the company to be assessed; and
• some Financial Reporting Standards, for example FRS 5 ‘Reporting the substance of transaction^vi’ and SSAP 21 ‘Accounting for leases and hire purchase contracts^v’, require disclosures that address items not necessarily included in the balance sheet. Consequently companies are already required to provide some disclosures regarding off-balance sheet arrangements. Companies will, in addition, need to consider whether arrangements outside of the scope of these standards require disclosure in accordance with s410A.
  

1. The ASB is an operating body of the Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board) and by the FRC Board. The Committee on Corporate Governance assists the Board in its work on corporate governance.
2. The main role of the ASB is to issue accounting standards. The ASB collaborates with accounting standard-setters from other countries and the International Accounting Standards Board (IASB) both in order to influence the development of international standards and in order to ensure that its standards are developed with due regard to international developments.
3. The ASB has eleven Board members, of whom two (the Chairman and the Technical Director) are full-time, and the remainder, who represent a variety of interests, are part-time.
4. The Urgent Issues Task Force (UITF) is a committee whose main role is to assist the ASB with important or significant accounting issues and where unsatisfactory or conflicting interpretations have developed (or seem likely to develop) about a requirement of an accounting standard or the Companies Act. The UITF has fifteen members who have experience in the technicalities of financial reporting. Further details about the UITF can be obtained at www.frc.org.uk/asb/uitf.
5. Press enquiries should be addressed to Ian Mackintosh (Chairman) on 020 7492 2434, David Loweth (Technical Director) on 020 7492 2420 or Michelle Crisp (UITF Director) 020 7492 2432.

End notes:

ⁱ s410A was inserted by The Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008 (SI 2008-393) which became effective 6 April 2008 and applies in relation to financial years beginning on or after 6th April 2008.

ⁱⁱ Large and medium-sized companies have to disclose in the notes to their accounts the nature and business purpose of the off-balance sheet arrangements, and large companies also have to disclose the financial impact of the arrangements on the company.

ⁱⁱⁱ Guidance for UK Companies on Accounting and Reporting: Requirements under the Companies Act 2006 and the application of the IAS regulation, issued June 2008.

^iv FRS 5 requires:

Disclosure of a transaction in the financial statements, whether or not it has resulted in assets or liabilities being recognised or ceasing to be recognised should be sufficient to enable the user of the financial statements to understand its commercial effect. (Paragraph 30)

Where a transaction has resulted in the recognition of assets or liabilities whose nature differs from that of items usually included under the relevant balance sheet heading, the differences should be explained. (Paragraph 31)

^v SSAP 21 states:

Disclosure should be made of the amounts of any commitments existing at the balance sheet date in respect of finance leases which have been entered into but whose inception occurs after the year end. (Paragraph 54)

The total of operating lease rentals charged as an expense in the profit and loss account should be disclosed analysed between amounts payable in respect of hire of plant and machinery and in respect of other operating leases. (Paragraph 55)

In respect of operating leases, the lessee should disclose the payments which he is committed to make during the next year, analysed between those in which the commitment expires within that year, in the second to fifth years inclusive and over five years from the balance sheet date, showing separately the commitments in respect of leases of land and buildings and other operating leases. (Paragraph 56)