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Accounting standards – Standard tearer

As 2005 approaches, most companies in the UK and across Europe are biting the bullet and preparing to adopt international accounting standards.

International standards sound like a great idea – especially with the introduction of a single European currency and the emergence of pan-European equity markets. In fact, a survey by PricewaterhouseCoopers* even shows that almost three-quarters of British FDs want to be able to adopt IASs ahead of time.

But at present, UK company law doesn’t allow that: UK GAAP must be used instead. A Department of Trade and Industry consultation paper is due to be issued this summer. In response to it, some are expected to argue that early adopters’ accounts would not be comparable with those of other UK companies, while others will say that the biggest FTSE-100 companies need to have accounts that are comparable with those of their global, IAS-adopting competitors; they don’t care about being comparable with FTSE-250 stocks, for example.

Even in 2005, the current EU directive only applies to listed companies: unlisted companies in the UK – including the subsidiaries of quoted companies – will still have to use national GAAP. Still, not to worry, because the UK’s Accounting Standards Board is pressing ahead with a programme to “converge” UK accounting standards so that they match the international standards – almost.

But while group accounts for 2004 will be prepared under UK GAAP (which will be closer to IASs than at present but not exactly matching) they will have to be recompiled using IASs in order to provide the prior year comparison with the first “proper” IAS accounts in 2005.

And just to confuse things a little further, there are now two standard ways to refer to IASs: the better-known terminology, IASs, is used to refer to those issued prior to 2002, while future standards are being designated as International Financial Reporting Standards, or IFRSs. (So, hereon in, putting clarity ahead of accuracy, we’ll refer to IFRSs throughout.)

What the ASB and chairman Mary Keegan are doing is looking over the full library of current IFRSs, deciding which ones are not going to be updated between now and 2005 and, if deemed appropriate, incorporating them into UK GAAP by, in effect, putting them between a set of ASB book covers, initially as FREDs and then later as FRSs. Additionally, as the International Accounting Standards Board issues proposed revisions to current IFRSs, these too may be issued as FREDs. As part of this programme, nine FREDs were issued in May and June covering a range of current and proposed IFRSs.

One striking – but quite different – aspect of the ASB’s convergence programme was the suspension on 2 July of the introduction of the highly controversial pensions accounting standard FRS17, which was due to start affecting companies from the middle of 2003 (and which had been issued prior to the European Commission’s announcement of its 2005 proposal).

Now that the IASB has said it is going to reconsider its own employee benefits standard, IFRS19, the ASB sees little point in forcing a change in pensions accounting if it’s now unclear what shape the IFRS will take when it’s eventually issued. Indeed, the European standard may move closer to FRS17.

Ernst & Young criticises the ASB’s convergence programme: it prefers a “Big Bang” approach, by which none of the IFRSs kick in until 2005.

Allister Wilson, head of financial reporting at Ernst & Young, says the ASB’s approach is “amazing” and that it is “putting companies through some phenomenal reiterations of their accounts: we’re going to have no comparability over the next three or four years in terms of historical trends and comparisons”.

“We’re used to change,” replies the ASB’s Mary Keegan. “Throughout the 1990s, UK companies introduced new accounting standards on an almost annual basis – so why should we suddenly stop until the year 2005?”

Moreover, the nine new FREDs cover “straight-forward” areas of accounting, she says, and are not very different from current UK practice. The differences between the original IFRSs and the FREDs seem minor, or even trivial: cross-references, for example, or the use of certain terms that are preferred in the UK such as “discontinued operations” rather than “discontinuing operations”.

But there are some UK-specific differences, such as adding the FRSSE get-out available for companies that are able to use the Financial Reporting Standard for Smaller Entities. And FRED 29 (which covers property, plant and equipment, as well as borrowing costs), for example, says that certain gains are to go through the statement of total recognised gains and losses, whereas the original IFRS says they are to be “credited directly to equity under the heading of revaluation surplus”.

The spat between the standards-setter and the Big Four firm brings to mind the 1990s disputes between then-ASB chairman Sir David Tweedie – now IASB chairman – and Ernst & Young partner Ron Paterson (now retired).

The rows between them – particularly over the Statement of Principles document – often prompted Tweedie, the renowned wit and ranconteur, to quip, “If you’ve half a mind to join Ernst & Young, you’re over-qualified.”

Ernst & Young says that the ASB has no support for what the accountancy firm calls the “piecemeal adoption of (IFRSs)”, claiming that the 23 responses to the Convergence Handbook issued by the ASB in November 2000 contained only two that were in favour of this process. Keegan told Financial Director: “I have to say that I must be doing something right if Ernst & Young think I’m worth fighting at the moment. I also find it a little sad that, while the ASB has a proper consultative process, it has been very noticeable that Ernst & Young has not been high on the list in volume of responses to our consultation documents, but that it chooses to run a campaign like this outside the consultation process.”

The PricewaterhouseCoopers research seems to favour Keegan’s argument, revealing support for early adoption of IFRSs amongst more than 50 of the 72 UK companies surveyed. It says that, while the ASB’s proposed new standards “will familiarise UK companies” with IFRSs, there is “a strong appetite for starting the change process as soon as possible”.

But back to the serious issues – and just to make life even more confusing, there are two moves that threaten to de-standardise the IFRSs even before they are properly standardised. Firstly, the European Commission – the body that wisely decided against creating new “European” standards in favour of the compulsory adoption of existing international standards – is setting up an endorsement mechanism to review any new IFRSs. “They will look at each one in turn and say, ‘Is this suitable for use in Europe?'” says PwC UK senior technical partner Peter Holgate. “Hopefully, they say yes on each occasion. But if they don’t like a particular one, or they get lobbied, you’ll get pure IAS as developed by the IASB and Euro-IAS – which totally undermines harmonisation.”

Secondly, without a European interpretation and enforcement regime – let alone a truly international one – it is entirely possible that there may emerge a series of national differences for any one IFRS. The French way of looking at certain standards could turn out to be at odds with the German way, or the British – or, for that matter, the Japanese. Chaque un a son gout is hardly the recipe for truly global accounting standards.

* 2005 – Ready or not: IAS in Europe – the views of over 650 CFOs;
For more information on Ernst & Young’s position see Adopting IAS in the UK at

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