This year's preliminary results season has been something of a landmark. Last year was to be the last reporting period where listed companies presented their results according to UK generally accepted accounting principles (GAAP). After that, they would be required to use international financial reporting standards (IFRS) to prepare their consolidated financial statements for accounting periods commencing on or after 1st January 2005 (http://search.ft.com, 2004). The requirement to adopt IFRS applies only to those companies that are active direct participants in the capital market (i.e. those that have securities that are publicly traded on recognised stock markets). There are estimated to be about 7,000 such companies in the EU, of whom 2,500 are in the UK (www.accountancyage.com, 2004).
The rules are changing for two main reasons. The investors chronicle seeks to explain this first by suggesting that in the wake of accounting scandals in both Europe and the US, regulators want greater convergence between standards. Listed company accounts in the UK and US exist primarily for the benefit of shareholders. Conversely, in parts of Europe, the banking system has historically been the main provider of finance to industry, so company accounts have evolved with creditors in mind. In some European countries it will bring fundamental change, particularly where medium-sized companies have traditionally had closer relationships with their banks than with their shareholders. As a result, their financial statements have tended to be more conservative, and placed greater emphasis on assets. Harmonising the two systems so that there is greater convergence between European and non-European conventions is what IFRS is partly about.' (http://search.ft.com/, 2004) The other aim is to keep abreast of the growing popularity of options and derivatives. Current accounting practices originated in the 16th century, and were significantly updated in the 19th century. Things were simpler in those days - there were credits and debits, assets and liabilities. The idea of a derivative instrument that could give rise to a profit or a loss was alien. In effect, switching to the new standards, therefore, should not just alter what companies and their auditors do with financial information when they get it, but how firms run and report on their businesses (http://search.ft.com/, 2004). In the UK, the Department of Trade & Industry has announced that publicly traded companies in the UK will be permitted to use IFRS in their individual accounts, alongside their group accounts, from the same date. Other companies and limited liability partnerships in the UK will also be permitted to use IFRS in both their individual and consolidated accounts. It is likely that subsidiaries and associates of listed companies will need to supply consolidation information based on IFRS. A number of unlisted companies, especially those considering listing in the near future, may well want to take up this option. All UK companies not using IFRS for their accounts will be expected to continue to comply with UK standards and the accounting requirements of the Companies Act (www.accountancyage.com, 2004). The Accounting Standards Board (ASB) is, however, aiming to achieve almost complete convergence between UK GAAP and IFRS as quickly as possible whilst at the same time avoiding the burden of excessive changes in one year and, in particular, minimising the cases where an entity using UK standards may be required to make successive changes of accounting policy in respect of the same matter.' (www.accountancyage.com, 2004). The most significant difference in terms of broad treatments of items between UK GAAP and IFRS are in the following areas:
Pension costs for defined benefit schemes
Deferred tax, especially on revaluations and discounting of provisions
Financial instruments (in respect to derivatives and investments at fair values)
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