Part II Country Studies (continued) An overview of UK, US, France and Germany GAAP Introduction National history and culture are necessary to understand diversity in accounting principles. Let’s quote a former UK Prime Minister, Sir W.Churchill :
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An overview of UK, US, France and Germany GAAP
National history and culture are necessary to understand diversity in accounting principles. Let’s quote a former UK Prime Minister, Sir W.Churchill :
“ In UK, everything that is not prohibited is permitted ;
In Germany, everything that is not permitted is prohibited ;
In the USSR, everything is prohibited, especially that is permitted ;
In Italy, everything is permitted, especially that is prohibited. ”
Somehow, things have changed a little bit but that’s still holds true on average and part of it may be applied to some other countries.
Key features for this country in the accountancy and financial reporting areas are : old bodies of professional accountants (1850s) now loosing part of their influence for setting standards( ASB, EU,IASB) ; common law country ; market driven financial reporting system ; normally tax does not affect the accounting system ;
Have exported to the EU the “ true and fair view perspective” and the “disclosure perspective” ( notes to the accounts) but imported the “ written law perspective”.
7.1. Types of company : 2,300 listed companies in the UK ; 12.4 000s public companies ( Plc) ; 1,349.2 000s private companies (Ltd). Specific reporting system for firms “ small or medium in size but large in numbers.”
7.2. Company Acts. Registration ( 1844),Limited Liability (1855). First major Act : Cy Act 1948 ( group accounts compulsory, distinction between “ reserves” and “provisions”, disclosure requirements, director’s report… followed by expanded information to be disclosed, increased powers for auditors.
Cy Act 1985 ( 747 sections/ 25 schedules) consolidated other provisions introduced for implementation of the 4th EU directive and further : Cy Act (1989) amended the accounting and auditing provisions of the act ( implementation of the 7th and 8th EU directives).
It is a significant change as prior to 1981, the UK regulation was rather permissive : mainly disclosure rules, “loose standards”, no SEC…
The Cy Act applies to all British limited companies with few exceptions and many exemptions for small and medium- sized companies. Basic requirements of the Act : Balance sheet and Profit and Loss Account conveying the “ true and fair view”. A parent or holding company must file group accounts although it is then exempted from filing its own profit and loss account.
7.2. Company Acts ( continued).
The main point is that the “ true and fair view” has never been defined but it does override the requirements of the Act as to the matters to be included in a company’s account or in notes to those accounts. The Act requires additional information to be provided where necessary and, in exceptional circumstances, the detailed provisions must be departed from. The 1989 Act amended the law to make it clear that directors can use the true and fair view override without first having to demonstrate that a true and fair view cannot be given by compliance with the Act supplemented by further disclosure. That would not be allowed in “ continental “ countries as Germany and France.
Formats for the BS and PLA are derived from the options of the EU directives and are different from the US [ Fixed assets and Equities in the upper part of the BS vs. Current Assents and Liabilities ; PLA by nature vs. destination]. Flexibility is allowed for presentation. Basic accounting principles did not change as UK joined the EU. Historical cost does apply but companies can depart from it by the revaluation of tangible fixed assets. Accounting requirements differ for large companies including all listed companies. Under some circumstances sending to Shareholders summary financial statements ( listed companies) or abbreviated accounts for MSB are permitted. Enforcement of rules is satisfactory. The Financial Reporting Review Panel has the power to apply to the court for an order requiring revised accounts.
The evolution departs now from history : process similar to the one in the USA, and now “influenced” by public authorities. But the relationship between accounting legislation and accounting standards remains obscure.
6 professional bodies ( ICAEW, ICAS,ICAI,ACCA,CIMA,CIPFA) in public practice but also in industry and commerce. Long standing influence on the regulation of financial reporting :1929/1948 Acts. An Accounting Standards Committee ( ASC) was set in the 70’s by the professions, issued 25 SSAP( with persuasive authority) and was replaced by an ASB in 1990 with reinforced staff /powers and supervised by a Financial Reporting Council independent of the profession. The ASB issued 19 FRS, reinforcing standards and disclosure requirements In addition to the FRC, two other bodies were set up in 1990 : The Financial Reporting Review Panel (FRRP) controlling material departures to the “ Fair View ”and the Urgent Issues Task Force (UITF) which tries to reach a consensus when conflicting or unsatisfactory views may arise from the extant standards.
Thus after a long evolution the UK was led to accept legally backed accounting standards with reinforced statutory requirements and only indirect influence of the accounting profession giving birth to ” an Accounting Law “. Statutory requirements did exist since the first part of the 19th century but until 1989 there was no recommendations or standards ( prior to 1942), professional recommendations, but no standards ( 1942-1970), non approved standards ( 1970-1989).
Expanded in recent years given the activities of the ASB, the governance issues, stock options granted to CEO. Annual reports include the following :
- chairman’s statement ( voluntary);
- operating and financial review (voluntary)
- report of the directors ;
- report of the remuneration committee;
- statement of corporate governance;
- financial statements [ also include statement of cash flow and STRGL ( similar to SFAS 130)
- auditor’s report preceded by a statement of the director’s responsibilities;
- shareholding information.
7.4.1. Assets and Liabilities. In 1999, with its adoption of a “ Statement of Principles for Financial Reporting “ the ASB adopted the “ conceptual framework view”.
Definitions of assets, liabilities, SH equity, income and expenses… recognition and measurement rules are very similar to US and IASC conceptual frameworks.
Departures from prior UK views is now FRS 10 requiring capitalization and amortization of acquired intangible assets ( unless indefinite life) separately from goodwill at fair value over useful life and not exceeding 20 years.
SSAP 13 allows capitalization of R&D costs in defined circumstances and disclosure of R&D costs written off and of movements in unamortized deferred development costs.
FRS 15 sets systematic rules for revaluation of fixed assets ( not on a piece meal but on class of assets basis, should be kept up to date, revaluation gains recognized in STRGL not in the PLA.
SSAP 19 accepts investment properties not to be depreciated but requires changes in the value of investment properties to be taken to an investment revaluation reserve via the STRGL.
SSAP 21 distinguishes between finance leases and operating leases but given the complexity of the standards further clarification may be welcome.
FRS 17 addresses benefit schemes. They should be measured at market value and scheme liabilities discounted using a high grade corporate bond interest rate Also actuarial gains and losses should be recognized immediately in the STRGL.
7.4.1. Assets and Liabilities ( continued) As far as new financial instruments are concerned, FRS 4 attempts to distinguish clearly between debt, equity shares and non equity shares and to assure that relevant information is provided. FRS 13 requires appropriate information on risks that companies might run because of the use of certain financial instruments , especially derivatives. Things are still underway for coping with risks arising from off balance sheet financing.
7.4.2. Creative accounting. FRS 5 requires financial statements to report the substance of transactions( who has got the benefit of the transaction? Overall perspective on transactions? Options on terms that make its exercise very likely). FRS 12 addresses the issue of “ big bath provisions”.
7.4.3. Consolidation and currency translation. Legal requirement dates 1947and company Act 1989 ( now FRS 2 and 9). Joint ventures and associates are accounted for using the gross equity method . FRS 10 which replaced SSAP 22 no longer permits writing off goodwill against reserves. True and fair view override applies whenever goodwill not amortized. Currency translation ( SSAP 20) prescribes closing rate ( differences taken to the STRGL) with possible use of average rate. Temporal method mainly used with the exception of hyperinflationary economies. ( revaluation of the subsidiaries “ non monetary assets”.
Strong influence on IASC creation ( Lord Benson, Sir Bryan Carsberg, David Cairns) but UK companies did not really support IASC provisions so far. Now share the same conceptual framework. Conflicts might be expected with the US perspective as a result of tradition of creative and professional perspective (UK) vs. lawyer’s perspective (USA).
UK/IAS differences are exemplified in the following exhibits.
Interesting country ( remember the industrial revolution appeared first in England ; In the 19th century the “ gold standard” was actually the “ UK standard”.) Financial market driven economy with all its consequences on financial reporting ; now strengthening its legislation to comply with EU rules and coping with opportunism and massage of accounts. Accounting similar to the US but strong differences remain( tradition different, attachment to individualism, mentalities)