AC506 lecture 18 International standards –Considerations for group accounts Source: Pierce/Brennan, chapters 13 and 14

International environment UK, Germany, USA, Australia frameworks International standards –IASC 1973 –Independent private sector body –International accounting standards –No formal authority, flexible –Suited to developing economies

Emergence of IASB Agreement with IOSCO – International Organisation of Securities Commissions Core set of standards by 1999 which would be regarded as appropriate in global marketplace for finance (accepted by IOSCO in 2000) IASC restructured to become the IASB

Emergence of IAS Several EU countries permit large companies to use IAS for local filing purposes (1998) SEC considers possibilities of international companies using IAS for cross-border offerings (February 2000) European directives (June 2000) –All listed companies in the EU to prepare accounts in accordance with international standards by 2005 IASs/IFRSs not mandatory unless individual entity or country chooses to adopt (Ireland)

Status of IASB IASB structure and responsibilities –Geographically diverse membership –Issues IFRS, formerly IASs –IFRIC, formerly SIC deals with urgent issues –Paul Volcker and David Tweedie –IASB now a key mover in establishing global harmonisation of accounting ASB unlikely to issue any more standards and will monitor existing standards to facilitate harmonisation with IAS

Group accounts standards Table 13.1 Pierce/Brennan –FRS 2/IAS 27 (Parent/subsidiary) –FRS 9/IAS 28, IAS 31 (Parent/associate or JV) –FRS 7, FRS 10, FRS 11/SIC 22, SIC 28 (Fair value and goodwill) –FRS 1/IAS 7 (Cash flow statements)

FRS 2 - Accounting for subsidiary undertakings Parent/subsidiary relationship exists if any of the following apply (Para 14): –Parent holds a majority of the voting rights –Parent is a member of the undertaking and has the right to appoint or remove directors holding a majority of the voting rights at meetings of the Board on all, or substantially all, matters –Parent has the right to exercise dominant influence (influence to control operating and financial policies, notwithstanding rights or influences of other parties)

FRS 2 - Accounting for subsidiary undertakings Examples of dominant influence –provisions contained in memorandum or articles of association –control contract authorised by memorandum or articles of association Parent is a member of the undertaking and controls it alone pursuant to agreement with other shareholders Parent has a participating influence and (i) actually exercises dominant influence or (ii) both are managed on a unified basis Parent of a subsidiary is also the parent of any sub-subsidiaries A participating influence is an interest held on a long term basis with a view to securing a contribution to its own activities. Twenty percent or more is presumed to be a participating influence.

IAS 27 equivalent More than half the voting rights Can appoint or remove the majority of the members of the board of directors or equivalent governing authority (membership not required) Power to govern the financial and operating policies (no mention or articles or memo of association) Power over more than half the voting rights by virtue of an agreement with other investors (membership not required)

Exemptions Group is classified as ‘small’. Two of following criteria must be met for two successive years: –balance sheet total< IR£6 million –annual turnover<IR£12 million –average number of employees<250 Parent undertaking is not a company limited by shares or by guarantee Intermediate parent undertaking –Irish parent is itself a 90% or greater subsidiary of an undertaking established under EU law and any minority have approved an exemption for Irish company from preparing group accounts Above exemptions do not apply to banks, insurance companies or public limited companies

IAS exemption equivalent Intermediate parents do not have to prepare group accounts where they themselves are >90% owned by a parent Where >90% owned but <100% owned, permission of the minority interest must be obtained Intermediate parent may be listed or may not have an EU parent – differs from FRS 2 Exempted parent must disclose why group accounts not prepared, how subsidiaries have been accounted for, name of ultimate parent and registered office of ultimate parent

Excluding subsidiaries FRS2 requires exclusion of subsidiaries in following circumstances: –severe long term restrictions substantially hinder the rights of the parent to the assets or management of the company –interest in the subsidiary is held exclusively for resale and has not previously been consolidated –activities of the subsidiary are so different from those of other undertakings to be included in the consolidation that to consolidate would be incompatible with the obligation to present a true and fair view FRS2 does not allow exclusion on the basis of undue expense or delay required to acquire the information

IAS equivalent IAS 27 requires exclusion of subsidiaries in following circumstances: –severe long term restrictions substantially hinder the rights of the parent to the assets or management of the company => include as financial asset investment at fair value (IAS 39) –interest in the subsidiary is held exclusively for resale and has not previously been consolidated => include as current asset at fair value (IAS 39) Subsidiaries with dissimilar activities should be consolidated

Uniform accounting policies FRS 2 requires that uniform accounting policies be used when consolidating parent and subsidiaries undertakings - rationale Policies will normally be those of the parent Single entity policies can and often differ True and fair justification for departure from uniform policies IAS reiterates that where policies differ, adjustments would normally be appropriate. If not practicable, that fact should be disclosed.

Coterminus accounting periods FRS 2 and legislative general principle - Parent, subsidiaries and associates dealt with in the group accounts should have co-terminus financial year-ends Non-coterminus year ends => choice of the following: –Include subsidiary interim statements to the parent’s year end –Subsidiary financial statements provided that year end of subsidiary not more than three months before the parent year end (must check for any material event between subsidiary year end and parent year end - accounting treatment in accordance with SSAP 17) IAS 27 does not differ from these requirements