Corporate Financial Reporting I

1
Corporate Financial Reporting I

• Lecture 3
• International Influences on the UK Regulatory
  Framework

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Aims and Outcomes

• Aims
• This lecture aims to outline international
  developments that have affected and will affect
  the regulatory framework for financial reporting
  in the UK
• Learning outcomes
• After the lecture and recommended reading
  students should be able to
• Outline the role of the European Union in the
  development of accounting harmonisation
• Outline the history and changing role of the
  International Accounting Standards
  Committee/Board in the development of accounting
  harmonisation
• Explain the implications of current developments
  on the regulation of UK financial reporting
• Discuss why accounting and financial reporting
  systems developed differently indifferent
  countries

3
European influences

• EU Directives
• - 4th (1978)
• - 7th (1983)
• Directives have to be implemented into national
  legislation in order to become operational e.g.
  UK Companies Acts of 1981 and 1989

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International influences early developments 1

• 1973
• IASC founded by accountancy bodies from 9
  countries
• Issued IASs (International Accounting Standards).
  Activity up until late 1980s was codifying of
  best practice, including many national options
• 1989
• Publication of a conceptual framework and initial
  discussions with IOSCO (International
  Organisation of Securities Commissions) regarding
  their acceptance as applicable for the financial
  statements of multinationals making cross-border
  security offerings
• Development of comparability project
  eliminating certain options and/or expressing a
  preference for one treatment

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International influences early developments 2

• 1993
• Adoption of IASs by a number of continental
  companies for consolidated statements
• 1995
• Agreement by IOSCO and IASC to develop a core
  set of IASs
• 1998
• Certain countries legally allowed the use of IASs
  for consolidated statements (Belgium, France,
  Germany Italy)
• 1999
• G7 Finance Ministers and IMF urge support for
  IASs to 'strengthen the international financial
  architecture
• 2000
• IOSCO endorses the use of IASs
• 2001
• Reformed IASC starts

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International influences the current reformed
IASC

• IASC Foundation of 19 Trustees.
• Appoints members of IASB, IFRIC SAC and raises
  money
• IASB of 14 Board Members. Initially adopted 12
  extant IASs but issues its own IFRS
  (International Financial Reporting Standards).
• Objectives
• To develop a single set of high quality,
  understandable and enforceable global accounting
  standards
• To promote the use and rigorous application of
  those standards, and
• To work actively with national standard-setters
  to bring about convergence of national accounting
  standards and IFRS to high quality solutions
• IFRC (International Financial Reporting
  Interpretations Committee) - issues
  interpretations of standards for comment and then
  makes proposals to the IASB for approval.
• SAC (Standards Advisory Council) gives advice
  to IASB on agenda decisions and priorities in the
  Boards work

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IASB Overview of Requirements

• The IASB reporting framework comprises an
  (overriding) requirement for fair presentation, a
  number of accounting principles and detailed
  rules
• Fair presentation
• Financial statements shall present fairly the
  financial position, financial performance and
  cash flows of an entityThe application of IFRS,
  with additional disclosure when necessary, is
  presumed to result in financial statements that
  achieve a fair presentation (IAS 1, para. 13)
• In the extremely rare circumstances in which
  management concludes that compliance with a
  requirement in a Standard or an Interpretation
  would be so misleading that it would conflict
  with the objective of financial statements set
  out in the Framework, the entity shall depart
  from that requirementif the relevant regulatory
  framework requires, or otherwise does not
  prohibit such a departure (IAS 1, para. 17)

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The Spirit of Mary Arden

• The FRRP has published a legal opinion on the
  effect of the IFRS requirement for fair
  presentation in the light of UK Companies Act
  requirements for a true and fair view. The key
  points of the opinion are
• Unlike the financial reporting standards of the
  ASB, IFRS are explicitly part of the law rather
  than being implicit in the true and fair
  requirement.
• Accounts must be fairly presented. Although the
  application of IFRS is presumed to result in a
  fair presentation, it may be necessary, in
  extremely rare circumstances, for a company to
  depart from strict compliance with IFRS in the
  interests of fair presentation.
• Companies that continue to prepare accounts in
  accordance with UK national standards remain
  subject to the overriding requirement of the Act
  that accounts give a true and fair view, which,
  in all but highly exceptional cases, requires
  compliance with UK accounting standards.

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Principles (IAS 1, 20 ff.)

• Going concern (IAS 1, para. 23)
• Accruals (IAS 1 para. 25)
• Consistency (IAS 1 para 27)
• Materiality and Aggregation (IAS 1 para 29)
• Each material class of similar items must be
  presented separately in the financial statements.
  Dissimilar items may be aggregated only if the
  are individually immaterial
• Offsetting (IAS 1 para. 32)
• Assets and liabilities, and income and expenses,
  may not be offset unless required or permitted by
  a Standard or an Interpretation
• How does this differ from the UK Companies Act
  requirements?

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The differences

• IAS 1 requires disclosure of management's
  judgement in applying the most significant
  accounting policies and other key assumptions
  about future risks and uncertainties.
• IAS 1 requires assets and liabilities to be
  presented on the basis of a current/non-current
  distinction (except where presentation in the
  order of liquidity provides more relevant and
  reliable information).
• In other ways, IAS 1 is less prescriptive than
  the Companies Act in relation to the format of
  the balance sheet and income statement.
• Under IAS 1, the statement of total recognised
  gains and losses ('STRGL') may be presented
  either as a statement of performance (similar to
  the STRGL) or as a subset within the statement of
  all changes in equity (including capital
  transactions with owners and distributions to
  owners that under FRS 3 are shown in the
  reconciliation of movements in shareholders'
  funds).

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International influences - Recent events

• 2002
• 6th June EU Regulation approved that would
  require all EU companies listed on a regulated
  market to prepare consolidated accounts in
  accordance with endorsed IASs/IFRSs for
  accounting periods beginning on or after 1
  January 2005
• ARC and EFRAG established
• ARC - Accounting Regulatory Committee is the
  legal body for the endorsement mechanism
• EFRAG (European Financial Reporting Advisory
  Group) gives private sector, technical advice to
  the ARC.
• What happens if IAS/IFRS are not endorsed, e.g.
  IAS 39? Amended July 2005.
• Is this a process initiated by default?

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Accounting Harmonisation a new Strategy
vis-à-vis International Harmonisation

• EUs 1995 response to the problem
• large listed companies exclude them from the
  scope of application of the Directives and thus
  free them to follow other rules.
• obtain an agreement with the United States on the
  mutual recognition of accounts.
• The Commission has attempted to initiate such
  discussions, but has found little interest on the
  American side. Accounts prepared by US companies
  under US GAAP are in fact already recognised in
  all Member States.
• of the various international bodies working on
  accounting standards, for the time being only the
  IASC (now IASB) is producing results which have
  a clear prospect of recognition in the
  international capital markets within a timescale
  which corresponds to the urgency of the problem.
• the creation of a European Accounting Standard
  Setting Body

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Application of EU Regulation in UK

• Compulsory use of IFRS for consolidated
  statements of listed companies
• Optional for unlisted and unconsolidated
  statements
• Enforcement of IFRS is at national level in the
  UK via FRRP
• Unclear as yet the final picture for the UK. In
  the short term there will be two regulatory
  systems operating in the UK.
• What will the accounting be for company accounts,
  listed and unlisted? Unlisted groups?
• What will the role of company law be?
• Will there be a role for UK accounting standards?

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ASB response

• March 2004 discussion paper UK Accounting
  Standards A Strategy for Convergence with IFRS
• In the medium term there is no case for using two
  sets of different accounting standards in the UK,
  so UK accounting should be brought into line with
  IFRS
• ASB should not seek to issue new standards that
  are more demanding or restrictive than IFRS
• Proposes
• new ASB standards effective 2005 and 2006 will be
  implemented
• thereafter a series of step changes will occur,
  replacing one or more existing ASB standards with
  standards based on IFRS as prospective IASB
  projects are completed

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ASB response

• March 2005 Exposure Draft Accounting
  Standard-setting in a Changing Environment
  setting out the ASBs views on its future role
• To contribute to the establishment and
  improvement of standards of financial accounting
  and reporting for the benefit of users, prepares
  and auditors of financial information, by
• Contributing to the development and
  implementation of IFRS
• Influencing EU policy on accounting standards
  including the endorsement of IFRS
• Achieving convergence of UK accounting standards
  with IFRS
• Improving other aspects of UK accounting
  standards
• Improving communication between companies and
  investors

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A set of global standards?

• Currently IASB and US are working on convergence
• All new projects are done jointly
• FASB has agreed to work more actively with IASB
  to converge IFRs with US GAAP and remove
  virtually all differences before 2007.

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But why?

• The above international influences are all
  designed to harmonise national financial
  reporting frameworks particularly as a response
  to the globalisation of business.
• There are, of course a number of arguments both
  for and against harmonization
• The IASB has decided to harmonise accounting
  based on a particular view of the users of this
  information and their information needs. This
  view is not necessarily that which has been the
  base for all national systems..