History of Accounting Standards in the UK

History of explanation Standards in the UKAccounting norms and standards, applicable for companies in the UK, emanate from the Companies Act, 1985, amended later by the Companies Act, 1989, and by subsequent statutory instruments. sequence the Companies Act lays d have got minimum reporting pick outments, such as filing of accounts with the Registrar of Companies, early(a) agencies like the Accounting Standards Board, (ASB) and the Institute of Chartered Accountants of England and Wales, (ICAEW) are trusty for laying down be standards, and for the development and regulation of the report profession. The ICAEW, the English and Welsh accountancy body for accountants and auditors plays a major(ip) role in absolute the accountancy profession, and the conduct of its members.Accounting standards, known as Financial narrativeing Standards, (FRSs) are issued by the ASB and form the guidelines for preparation of accounting statements. The Generally Accepted Accounting Principles, know n as UK generally accepted accounting principles, governed the preparation of accounts, in the UK, until 2005. Most countries, in the past, had their own national GAAPs, each being quite different from the other. The international initiative for harmonisation of accounting practice has led to the adoption of International Financial reporting Standards, (IFRSs) by all listed companies in Europe. Listed companies in the UK have to prepare accounting and pecuniary statements, in line with IFRS requirements, from 2005. Unlisted companies can continue to prepare their accounting statements under UK GAAP, and can switch to IFRS standards with more comfort.Accounting methods, in the UK, have traditionally depended upon accepted accounting principles, rather than a body of rules. Accounting statements aim to portray the nature of accounting entities operating in a free miserliness characterised by private ownership of property, (Principles base or rule based accounting standards, 2006) a nd depend upon concepts like those of ownership, entity and funds. The objectives and concepts of accounting resulted in the establishment of widely accepted accounting principles, namely (a) cost principle, (b) r nonethelessue principle, (c) matching principle, (d) objectivity principle (e) consistency principle, (f) full disclosure principle, (g) conservatism principle, (h) materiality principle (i) unity principle and (j) comparability principle. (Riahi-Belkaoui, 2004) With time, these principles led to the development of techniques, and rules, to facilitate functioning, and ensure uniformity of treatment, on a large scale, by professionals and companies.In the US, where accounting developed parallely to the UK, accounting standards were too based upon established principles. However, over time, the demands of the business environment in the US led to the creation of voluminous rules that dictated the preparation of accounting statements. The major lawsuits for this were easi er enforceability, better comparability and consistency, usefulness in occurrences that were complex and needed sophisticated interpretation, control of earnings management and creative accounting, and resolution of inconsistencies in existing standards. term there is some truth in these assertions, (with rules undoubtedly developing because of the demands and challenges faced by the accounting and business fraternity), this enormous body of rules grew into a multi headed hydra that worked against the introductory reasons that had necessitated their creation. The increasing complexity and sheer volume of successive rules led to their adherence becoming more important than the underlying principles. This, in turn, led to a turning of undesirable results including the development of a box ticking antenna, the work of the wording of rules, by unscrupulous manipulators, for window dressing and creative accounting, overloads and delays in preparation of accounting statements, delay s in framing of new rules in response to changes in the marketplace, and the propensity for professionals to take for refuge in rules rather than in representing difficult 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 system of the get together 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 framework of transparentness and simplicity with a hierarchical and overriding position of principles in the ending of accounting decisions. 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 elfin deed of interpretations on major issues, are built in, by way of small explanations, in the standards themselves. Usage of this approach naturally requires much greater booking and responsibility on the part of the directors of companies, as well as from professional accountants and auditors, and enjoins them to ensure the presentation 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 have been necessary, especially in the treatment of saving grace and other intangibles, the number of commonalities between UK GAAP and IFRS, (primarily because the IFRS also follows a principle-based approach) have helped in making the change smooth and trouble free. IFRS 1 illustrates the commonality shared by UK GAAP and IFRS on principles. The key principle behind IFRS 1 is full retrospective application of all IFRS, in force at the closing balance airplane date, for the offset IFRS financial statements. It provides 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 code of ethics governing accounting professionals, and the code of integrated governance in the UK. all over the past fifteen years, the UK government has initiated a number of studies into improving bodily 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 developmen t of corporate governance in the UK but also because it was clear in adopting a principle based approach that originated a self regulatory approach whereby reporting of compliance (became) part of the listing requirements for public companies. (Jones and Pollit, 2003)The emphasis on the bill as a focal decision point could be said to be led by Cadbury, as could be the emphasis on fitly constituted board sub-committees (remuneration, audit and nomination), independent non-executive directors and the separation of chairperson and chief executive positions. Many of the recommendations of the Cadbury Code 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 long ladder Company Law Review, carried out at the obiter dictum 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 combined code stresses the primacy of principles, and self-regulation, by company boards. The code contains principles, and supporting provisions, 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 purloin explanations if they do not. The comply or explain approach helps both 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 effective 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 logical procedures for appointment of new directors, (e) the provision of information to the board, in a timely manner, and of quality 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 compa nys position and (k) a sound system of internal control for safeguarding investor wealth and company assets. While the combined code contains a number of other principles, the ones illustrated to a higher place emphasise that company boards are enjoined to act responsibly, and with common sense, be transparent in their actions, and adopt a principled and virtuous path in corporate action. The principle-based approach ensures freedom and flexibility in 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 five key principles, namely, integrity, objectivity, professional competence and due care, confidentiality and professional 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 examp les 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 thence 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 best 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 tran sparency, and rid the US corporate world of potential conflict-of-interest issues between a broad spread of parties, including clients and auditors. Sox has some distinctive features, namely rigorous new reporting requirements for all listed companies, sharply raise responsibilities for senior management in the presentation of accounts, (including the spectre 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 ensnare 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 section 108(d), which requires the SEC to study the accounting system to ascertain the extent to which it is princ iples-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 breathe in consideration of new rules reflecting international convergence on high quality accounting standards. (Bratton, Abstract, 2003)While significant change on this front is yet 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 moved well towards US GAAP. The phasing out of the pooling of interests method, under IFRS made it mandatory, from March 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 impairment 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 exchange 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 of money 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 commercialised effects 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, along with New Zealand and some other states, move towards adoption of IFRS, the global movement toward s implementation of principle based accounting is becoming stronger. Adoption of common standards becomes operable only if they work upon principles and not rules. It becomes well nigh impossible 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 discussion and decision. 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