History of Accounting Standards in the UK

History of account statement Standards in the UK business relationship norms and standards, applicable for companies in the UK, flow from the Companies Act, 1985, amended later by the Companies Act, 1989, and by subsequent statutory instruments. dapple the Companies Act lays d receive minimum reporting requirements, such as register of accounts with the Registrar of Companies, former(a) agencies like the Accounting Standards Board, (ASB) and the Institute of Chartered Accountants of England and Wales, (ICAEW) argon responsible for laying rase rule of news report standards, and for the growing and regulation of the score profession. The ICAEW, the English and Welsh accountancy body for accountants and auditors plays a major region in controlling the accountancy profession, and the conduct of its members.Accounting standards, known as monetary written reporting Standards, (FRSs) are issued by the ASB and form the guide take come go forths for facility of accounting stat ements. The Gener bothy Accepted Accounting commercialismtrines, known as UK GAAP, g everywherened the preparation of accounts, in the UK, until 2005. Most countries, in the retiring(a), had their own national GAAPs, each being quite an different from the other. The international initiative for harmonisation of accounting practice has light-emitting diode to the adoption of International Financial reporting Standards, (IFRSs) by all listed companies in Europe. Listed companies in the UK apply to prepare accounting and financial statements, in line with IFRS requirements, from 2005. Unlisted companies bottom of the inning continue to prepare their accounting statements under UK GAAP, and can switch to IFRS standards with more(prenominal) comfort.Accounting methods, in the UK, limit believe traditionally depended upon legitimate accounting principles, rather than a body of regularisations. Accounting statements aim to show the nature of accounting entities operating in a free delivery characterised by private ownership of property, (Principles give or rein based accounting standards, 2006) and depend upon concepts like those of ownership, entity and funds. The objectives and concepts of accounting resulted in the fundamental law of widely accepted accounting principles, namely (a) cost principle, (b) r flushue principle, (c) twinned principle, (d) objectivity principle (e) consistency principle, (f) full disclosure principle, (g) conservatism principle, (h) corporeality principle (i) uniformity principle and (j) comparability principle. (Riahi-Belkaoui, 2004) With time, these principles direct to the development of techniques, and rules, to relieve functioning, and ensure uniformity of interposition, on a large scale, by professional persons and companies.In the US, where accounting developed parallely to the UK, accounting standards were to a fault based upon established principles. However, over time, the demands of the business environm ent in the US led to the creation of convoluted rules that dictated the preparation of accounting statements. The major reasons for this were easier en officeability, better comparability and consistency, return in situations that were complex and needed sophisticated interpretation, control of earnings counselling and creative accounting, and resolution of inconsistencies in existing standards. While there is nearly truth in these assertions, (with rules undoubtedly developing because of the demands and challenges cased by the accounting and business fraternity), this enormous body of rules grew into a multi headed hydra that worked against the basic reasons that had necessitated their creation. The change magnitude complexity and sheer volume of successive rules led to their adherence become more important than the underlying principles. This, in turn, led to a lean of undesirable results including the development of a box ticking approach, the usage of the word of rules, by unscrupulous manipulators, for window dressing and creative accounting, overloads and delays in preparation of accounting statements, delays in framing of new rules in response to changes in the marketplace, and the propensity for professionals to take refuge in rules rather than in representing elusive and uncomfortable realities. A significant body of opinion relates the numerous frauds that emerged in the US in the late nineties, and the early years of this century, notably the Enron and WorldCom episodes, to the rules based accounting transcription of the United States.Many experts feel that the accounting system of the UK, based upon adherence to accounting principles rather than rules, has helped in protecting the British economy from such disasters. Principle based accounting standards arise out of a conceptual and theoretical fashion model of transparence and simplicity with a hierarchical and overriding position of principles in the determination of accounting decisi ons. Principle based accounting requires three elements (a) overarching concepts, (b) principles that reflect these overarching concepts and (c) limited guidance. Guidances are necessarily limited, in principle based accounting, and apart from a trivial reckon of interpretations on major issues, are built in, by way of small explanations, in the standards themselves. Usage of this approach naturally requires much broader affaire and responsibility on the part of the directors of companies, as puff up as from professional accountants and auditors, and enjoins them to ensure the founding of accounts in strict accordance with principles.The adoption of IFRS, since 2005, has led to the usage of new Financial Reporting Standards in the preparation of accounts in the UK. While some changes let been necessary, especially in the treatment of goodwill and other intangibles, the number of jetalities betwixt UK GAAP and IFRS, (primarily because the IFRS also follows a principle-bas ed approach) have helped in making the change smooth and trouble free. IFRS 1 illustrates the green shared by UK GAAP and IFRS on principles. The key principle back IFRS 1 is full retrospective practical application of all IFRS, in force at the closing balance sheet date, for the firstly IFRS financial statements. It yields guidance in the use of hindsight and the application of several versions of the same standards. While it works on principles, with companies given significant flexibility in their reporting, it expects companies to maintain transparency and achieve comparability.The principle-based approach is also the base for the enrol of ethics arrangement accounting professionals, and the code of corporate governance in the UK. Over the past fifteen years, the UK government has initiated a number of studies into improving corporate governance by eminent and experienced individuals. The Greenbury Report (1995), the Hampel Report (1998), and the Turnbull Report (1999) followed the Cadbury Report of 1992. The Cadbury report stands out, not just because it was the first of various studies that helped in the development of corporate governance in the UK only when also because it was clear in adopting a principle based approach that originated a self regulative approach whereby reporting of compliance (became) part of the listing requirements for public companies. (J mavins and Pollit, 2003)The dialect on the board as a focal decision tailor could be said to be led by Cadbury, as could be the emphasis on appropriately constituted board sub-committees (remuneration, audit and nomination), self- accompaniment non-executive directors and the separation of chairperson and chief executive positions. Many of the recommendations of the Cadbury enactment have been incorporated into the OECD Principles of Corporate governance (OECD, 1999) and into other national Corporate Governance Codes (Cadbury, 2000). (Jones and Pollit, 2003)These various studies, as well as a farsighted rail Company Law Review, carried out at the instance of the UK government, led first to the formulation of the Combined Code of Corporate Governance, 2003, and then to its replacement, with the Combined Code of Corporate Governance, 2006, applicable for reporting years beginning on or after November1, 2006. The combine code stresses the primacy of principles, and self-regulation, by caller-out boards. The code contains principles, and supporting supplyings, with listing requirements making corporate governance disclosure statements, prepared in two parts, mandatory. While the first part requires companies to report on the application of the principles contained in the code, the second part requires them to confirm compliance with the codes provisions, with appropriate explanations if they do not. The comply or explain approach helps two companies and investors, and allows shareholders to make their own judgements. Some of the main principles embodied in the combined code require (a) every company to be headed by an rough-and-ready board, collectively responsible for the success of the company (b) clear division of responsibilities at the head of the company, between the running of the board, and the executive responsible for running the companys business, (with no individual having unfettered powers of decision), (c) a balance between executive and non-executive (in particular (independent non-executive) directors, (d) formal, rigorous and transparent procedures for appointment of new directors, (e) the provision of information to the board, in a timely manner, and of gauge appropriate for it to make proper decisions, (f) the need for the board to evaluate its own performance, as well as that of its directors (g) the regular re-election of directors and planed and progressive refreshment of the board,(h) a remuneration policy, (sufficient but not excessive), and structured to link remuneration with performance, for the executive directors, (i) transparency in fixation of remuneration, with directors not to be involved in fixing their own remuneration, (j) the presentation of a balanced and understandable assessment of the companys position and (k) a sound system of internal control for safeguarding investor riches and company assets. While the combined code contains a number of other principles, the ones illustrated above emphasise that company boards are enjoined to act responsibly, and with common sense, be transparent in their actions, and adopt a principled and virtuous pathway in corporate action. The principle-based approach ensures freedom and flexibility in trading operations while necessitating the highest codes of corporate conduct. (The combined code on corporate governance, 2006)The code of ethics adopted by the ICAEW, effective September 1, 2006, requires adherence to cinquer key principles, namely, integrity, objectivity, professional competence and due care, confidentiality and professi onal behaviour. The code, which has three parts, establishes the five fundamental principles that govern professional ethics and provides a conceptual framework for applying these principles. It provides vitrines of safeguards that may be appropriate to address threats to compliance with the fundamental principles and also provides examples of situations where safeguards are not available to address the threats and consequently the activity or relationship creating the threats should be avoided. (Code of Ethics, 2006) The code elaborates that threats could arise from self-interest, self-review, advocacy, familiarity and intimidation. It is exhaustive in the treatment of fundamental ethical principles, the threats that may arise and compromise these principles and the approach outdo suited by professional accountants in facing and overcoming these threats. The guidance provided is more than adequate for trained and committed accountants to conduct themselves in the best traditions of ethicality even without having to follow voluminous and complex rules.Shaken by the Enron and WorldCom affairs the American establishment pushed through the Sarbanes Oxley Act (Sox) in 2002, aiming to increase transparency, and rid the US corporate world of potential conflict-of-interest issues between a broad dispersed of parties, including clients and auditors. Sox has some distinctive features, namely rigorous new reporting requirements for all listed companies, sharply enhanced responsibilities for senior management in the presentation of accounts, (including the wraith of long jail terms for offences like fudging figures and misreporting), and restrictions on auditors dealing with clients for long periods. Sox is the most important piece of accounting and corporate governance to have come out of the US since the Great Depression. (Holliday, 2003) Apart from laying down much greater responsibilities for members of top management, it has also opened a great debate in the USA on effecting a changeover from rule based accounting to principle based accounting.It does this first in particle 108(d), which requires the SEC to study the accounting system to ascertain the extent to which it is principles-based, as opposed to rules-based, and to tell us how long it will take for us to achieve a principles-based system and second, in section 108(a), which requires the Financial Accounting Standards Board (FASB) and any other approved standards-setting body to adopt procedures ensuring sprightly consideration of new rules reflecting international convergence on high quality accounting standards. (Bratton, Abstract, 2003)While significant change on this front is all the same to happen, US GAAP and IFRS practices are converging with each other. The IASB and the FASB are working together, since 2002, to reduce and eliminate differences between IFRS and US GAAP. IFRS 3, for example, provides a good example of how IFRS has come tod substantially towards US GAAP. T he phasing out of the pooling of interests method, under IFRS made it mandatory, from blemish 31, 2004, for companies in the EU to identify the acquiring entity, adopt the purchase method of accounting, and replace amortisation of goodwill with the befooling method. While the calculation of impairment of goodwill differs under US GAAP, the principles, in both cases, remain the same.IFRS 5, one of the more important standards deals with non current assets held for sale and presentation of discontinued operations. Non current assets need classification as held for sale subject to certain conditions being met, and income statements need to disclose a single amount on the face of the income statement that includes details of profits, capital gains and cash flows from discontinued operations. While the move to reclassify non-current assets appears to be unquestionable, the stripping out of all commercial set up of discontinued operations is sensible and based upon the business entity principle. It will provide a much clearer vision of current economic performance. (Kirk, 2006)As the countries of Europe, on with New Zealand and some other states, move towards adoption of IFRS, the global execution towards implementation of principle based accounting is becoming stronger. Adoption of common standards becomes feasible only if they work upon principles and not rules. It becomes well nigh hopeless to find commonality between two sets of voluminous rules that arise out of location and situation specific circumstances. Principles, on the other hand, represent globally common moral and ethical values, and provide opportunities for common grounds for handling and decision. This is also the main reason why accountants in the UK have found it comparatively easy to adopt IFRS practices.BibliographyApproach, Scope and Authority, 2006, Code of Ethics, ICAEW, Retrieved April 23, 2007 from www.icaew.com/index.cfm?route=143703Bullen, H, and Cafini, R, 2006, Accounting Standa rds Regarding Intellectual Assets, UN Department of Economic and Social Affairs, Retrieved April 16, 2007 from unstats.un.org/unsd/nationalaccount/ia10.pdfBratton, W, 2003, Enron, Sarbanes-Oxley and Accounting Rules Versus Principles Versus Rents, Abstract, Villa Nova Law Review, Retrieved April 23, 2007 from papers.ssrn.com/sol3/papers.cfm?abstract_id=473242FASB Financial Accounting Standard Board, 2006, Retrieved April 16, 2007 from www.fasb.orgCode of ethic, 2006, ICAEW, Retrieved April 23, 2007 from www.icaew.com/index.cfm?route=143703IFRS and US GAAP, 2005, IAS Plus Deloitte, Retrieved April 16, 2007 from deloitte.net/dtt/cda/doc/content/dtt_audit_iasplusgl_073106.pdfHigson, C and Sproul, M, 2005, Coping with IFRS, London Business School, Retrieved April 16, 2007 from www.london.edu/assets/documents/PDF/Chris_Higson_paper_IFRS.pdf Holliday, I, 2003, Why these folk mean business, Financial World, Retrieved April 23, 2007 from www.tavakolistructuredfinance.com/FWOct03.pdf Intang ible assets brand valuation, 2004, IFRS News Brand Valuation, Retrieved April 16, 2007 from www.pwc.com/gx/eng/ some/svcs/corporatereporting/IFRSNewsCatalogue.pdfJones, I, and Pollit, M, 2003, Understanding how issues in corporate governance develop, University of Cambridge, Retrieved April 23, 2007 from www.cbr.cam.ac.uk/pdf/wp277.pdfKirk, R, 2006, IFRS 5, Non current assets held for sale and presentation of discontinued operations, Financial reporting, Retrieved April 23, 2007 from http//www.cpaireland.ie/UserFiles/File/AccPlus%20IFRS5.pdf.Lycklama, M.P., 2005, Goodwill and value creation of acquisitions, Retrieved April 16, 2007 from www.bedrijfswetenschappen.leidenuniv.nl/content_docs/PDF/goodwill_and_value_creation_of_acquisitions.pdfNobes, C. and Parker, R., 2004, relative International Accounting (9th edition), Prentice HallRadebaugh, L.H., Gray, S.J., Black, E.L., 2006, International Accounting and transnational Enterprises, 6th edition, John Wiley and Sons, inc., USARobert s, C, Weetman, P, and Gordon, P, 2005, International Financial Reporting A Comparative Approach, 3rd edition, FT Prentice Hall, USASimilarities and Differences, 2005, A affinity of IFRS, US GAAP and Belgian GAAP, PriceWaterhouseCoopers, Retrieved April 16, 2007 from www.pwc.com/extweb/pwcpublications.nsf/docid/74d6c09e0a4ee610802569a1003354c8