1. 1 Corporate Financial Reporting I Lecture 3 International Influences on the UK Regulatory Framework

2. 2 Aims and Outcomes Aims: Aims: This lecture aims to outline international developments that have affected and will affect the regulatory framework for financial reporting in the UK This lecture aims to outline international developments that have affected and will affect the regulatory framework for financial reporting in the UK Learning outcomes: Learning outcomes: After the lecture and recommended reading students should be able to: 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 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 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 Explain the implications of current developments on the regulation of UK financial reporting Discuss why accounting and financial reporting systems developed differently indifferent countries Discuss why accounting and financial reporting systems developed differently indifferent countries

3. 3 European influences EU Directives: EU Directives: - 4th (1978) - 4th (1978) - 7th (1983) - 7th (1983) Directives have to be implemented into national legislation in order to become operational e.g. UK Companies Acts of 1981 and 1989 Directives have to be implemented into national legislation in order to become operational e.g. UK Companies Acts of 1981 and 1989

4. 4 International influences – early developments 1 1973: 1973: IASC founded by accountancy bodies from 9 countries 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 Issued IASs (International Accounting Standards). Activity up until late 1980s was codifying of best practice, including many national options 1989: 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 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 Development of comparability project eliminating certain options and/or expressing a preference for one treatment

5. 5 International influences – early developments 2 1993+: 1993+: Adoption of IASs by a number of continental companies for consolidated statements Adoption of IASs by a number of continental companies for consolidated statements 1995: 1995: Agreement by IOSCO and IASC to develop a core set of IASs Agreement by IOSCO and IASC to develop a core set of IASs 1998: 1998: Certain countries legally allowed the use of IASs for consolidated statements (Belgium, France, Germany & Italy) Certain countries legally allowed the use of IASs for consolidated statements (Belgium, France, Germany & Italy) 1999: 1999: G7 Finance Ministers and IMF urge support for IASs to 'strengthen the international financial architecture G7 Finance Ministers and IMF urge support for IASs to 'strengthen the international financial architecture 2000: 2000: IOSCO endorses the use of IASs IOSCO endorses the use of IASs 2001: 2001: Reformed IASC starts Reformed IASC starts

6. 6 International influences – the current reformed IASC IASC Foundation of 19 Trustees. IASC Foundation of 19 Trustees. Appoints members of IASB, IFRIC & SAC and raises money 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). IASB of 14 Board Members. Initially adopted 12 extant IASs but issues its own IFRS (International Financial Reporting Standards). Objectives: Objectives: To develop a single set of high quality, understandable and enforceable global accounting standardsTo develop a single set of high quality, understandable and enforceable global accounting standards To promote the use and rigorous application of those standards, andTo 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 solutionsTo 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. 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 SAC (Standards Advisory Council) – gives advice to IASB on agenda decisions and priorities in the Boards work

7. 7 IASB – Overview of Requirements The IASB reporting framework comprises an (overriding) requirement for fair presentation, a number of accounting principles and detailed rules The IASB reporting framework comprises an (overriding) requirement for fair presentation, a number of accounting principles and detailed rules Fair presentation Fair presentation Financial statements shall present fairly the financial position, financial performance and cash flows of an entity…The application of IFRS, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation (IAS 1, para. 13) Financial statements shall present fairly the financial position, financial performance and cash flows of an entity…The 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 requirement…if the relevant regulatory framework requires, or otherwise does not prohibit such a departure (IAS 1, para. 17) 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 requirement…if the relevant regulatory framework requires, or otherwise does not prohibit such a departure (IAS 1, para. 17)

8. 8 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: 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. 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. 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. 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.

9. 9 Principles (IAS 1, 20 ff.) Going concern (IAS 1, para. 23) Going concern (IAS 1, para. 23) Accruals (IAS 1 para. 25) Accruals (IAS 1 para. 25) Consistency (IAS 1 para 27) Consistency (IAS 1 para 27) Materiality and Aggregation (IAS 1 para 29) 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 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) 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 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? How does this differ from the UK Companies Act requirements?

10. 10 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 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). 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. 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). 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).

11. 11 International influences - Recent events 2002: 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 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 and EFRAG established: ARC - Accounting Regulatory Committee is the legal body for the endorsement mechanism 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. 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. What happens if IAS/IFRS are not endorsed, e.g. IAS 39? Amended July 2005. Is this a process initiated by default? Is this a process initiated by default?

12. 12 Accounting Harmonisation: a new Strategy vis-à-vis International Harmonisation EUs 1995 response to the problem 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. 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. 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. 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. 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 the creation of a European Accounting Standard Setting Body

13. 13 Application of EU Regulation in UK Compulsory use of IFRS for consolidated statements of listed companies Compulsory use of IFRS for consolidated statements of listed companies Optional for unlisted and unconsolidated statements Optional for unlisted and unconsolidated statements Enforcement of IFRS is at national level – in the UK via FRRP 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. 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 accounting be for company accounts, listed and unlisted? Unlisted groups? What will the role of company law be? What will the role of company law be? Will there be a role for UK accounting standards? Will there be a role for UK accounting standards?

14. 14 ASB response: March 2004 discussion paper UK Accounting Standards: A Strategy for Convergence with IFRS 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 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 ASB should not seek to issue new standards that are more demanding or restrictive than IFRS Proposes: Proposes: new ASB standards effective 2005 and 2006 will be implemented 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 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

15. 15 ASB response: March 2005 Exposure Draft Accounting Standard- setting in a Changing Environment setting out the ASBs views on its future role: 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 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 Contributing to the development and implementation of IFRS Influencing EU policy on accounting standards including the endorsement of IFRS Influencing EU policy on accounting standards including the endorsement of IFRS Achieving convergence of UK accounting standards with IFRS Achieving convergence of UK accounting standards with IFRS Improving other aspects of UK accounting standards Improving other aspects of UK accounting standards Improving communication between companies and investors Improving communication between companies and investors

16. 16 A set of global standards? Currently IASB and US are working on convergence: Currently IASB and US are working on convergence: All new projects are done jointly 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. FASB has agreed to work more actively with IASB to converge IFRs with US GAAP and remove virtually all differences before 2007.

17. 17 But why? The above international influences are all designed to harmonise national financial reporting frameworks particularly as a response to the globalisation of business. 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 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.. 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..