Comparatie Ias - Ukgaap-us Gaap

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G l o b a l A s s u r a n c e9 5 5 7

Global accounting

UK, IAS and US compared

Globalaccounting

U

K,IASandUScompared


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K P M G i s t h e p r o f e s s i o n a l a d v i s o r y f i r m

w h o s e a i m i s t o t u r n k n o w l e d g e i n t o v a l u ef o r t h e b e n e f i t o f i t s c l i e n t s , i t s p e o p l e a n d

i t s c o m m u n it i e s . W i t h m o r e t h a n 1 0 0 , 0 0 0

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e

UK, IAS and US compared

Global accounting


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Contents

1. Executive summary..............................................................................................

2. Introduction...........................................................................................................

3. Regulatory background........................................................................................

3.1 Generally accepted accounting principles .................................................

3.2 Legal and listin g requir ements ...................................................................

4. Financial statement requirements......................................................................

4.1 Form of the fin ancial statements ................................................................4.2 Comparatives................................................................................................

4.3 Audit reports .................................................................................................

4.4 Accompanying financial and other information ........................................

5. General issues.......................................................................................................

5.1 Classification and presentation within the financial statements .............

5.2 Prior period adjustments and other accounting changes........................

5.3 Statement of cash fl ows ..............................................................................

5.4 Basis of accounting......................................................................................

5.5 Reporting the substance of t ransactions....................................................

5.6 Consolidation................................................................................................

5.7 Business combinations ................................................................................

5.8 Foreign currency translation .......................................................................

5.9 Hedging .........................................................................................................

5.10 Interim financial reporting ...........................................................................

6. Specific balance sheet items...............................................................................

6.1 Intangible assets...........................................................................................6.2 Fixed tangible assets....................................................................................

6.3 Capitalisation of interest..............................................................................

6.4 Impairm ent of fixed assets other than investments .................................

6.5 Investments in associates and joint ventures............................................

6.6 Other investments and financial instruments............................................

6.7 Stock..............................................................................................................

6.8 Debt instrum ents..........................................................................................

6.9 Leases............................................................................................................

6.10 Product financing arrangements.................................................................

6.11 Tax prov ision s................. ............................ ........................... .......................

6.12 Other prov ision s......... ........................... ........................... ............................

6.13 Contin gencies .......................... ........................... ............................ ..............

6.14 Capital & reserves, or shareholders funds ...............................................

7. Specific profit and loss account items ...............................................................

7.1 Revenue.........................................................................................................

7.2 Advertising costs..........................................................................................7.3 Non-monetary transactions.........................................................................

7.4 Holiday pay...................................................................................................

7.5 Pensions and other post-retirement benefits ............................................

7.6 Other po st-employment benefits................................................................

7.7 Other long-term employee benefits ...........................................................

7.8 Employee share purchase and option schemes........................................

7.9 Exceptional items .........................................................................................

7.10 Sale or terminati on of an operation & discontinued operations.............

7.11 Sales of property ..........................................................................................

7.12 Imputation of an interest cost.....................................................................

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This book has been prepared to assist clients and others in understanding the differences of

principle between accounting standards and the accounting requirements of company law in the

United Kingdom, generally accepted accounting principles in the United States and accounting

standards and other pronouncements of the International Accounting Standards Committee.

Whilst care has been taken in its preparation, reference to the standards, statutes and other

authoritative material should be made, and specific advice sought, in respect of any particular

transaction. No responsibility for loss occasioned to any person acting or refraining from action

as a result of any material in this publication can be accepted by any member of KPMG

International.

ISBN 1 85061 2560

2000 KPMG International, a Swiss association. All rights reserved. Printed in the

Netherlands.

KPMG and the KPMG logo are trademarks of KPMG International.

No part of this publication may be reproduced, stored in any retrieval system or transmitted in

any form by any means, electronic, mechanical, photocopying, recording or otherwise, without

the prior permission of the publisher.

Designed and produced by Mattmo concept & design, Amsterdam.

Printed by Drukkerij Dombosch, Raamsdonklsveer


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1. Executive summary

IntroductionDespite having a great deal of common purpose and common concepts, the accounting

principles in the UK and the US and under International Accounting Standards (IASs) can lead

to markedly different financial statements. This is not merely of academic interest. In the global

market for capital, t he differences need to be understood and, eventually, eliminated.

This book examines, but not exhaustively, those areas of UK, IAS and US requirements mostfrequently encountered where principles, or t heir application, differ.

Regulatory backgroundThe overriding requirements for a UK companys financial statements is that they give a true

and fair view. Accounting standards are an authoritative source as to what is and is not a tr ue

and fair view, but do not define it unequivocally. Ad hoc adaptations to specific circumstances

may be required. Moreover, if, rarely, following the requirements of standards would fail to give

a true and fair view, those requirements must be departed from to the extent necessary to give

a true and fair view. Under IAS the situation is very similar. In the US however, financial

statements are more closely tied into the rule-book by the requirement that they be prepared in

accordance with GAAP.

General issues

Substance

The true and fair approach is typified by the UK standard that requires transactions to be

accounted for in accordance with their substance. Whilst the real targets of this requirement

were the (now defunct) off balance sheet finance schemes, it is significant that the way in which

this has been achieved is by a highly conceptual standard. Assets and liabilities are def ined and

attention is directed toward analysing probable changes in benefits, risks and obligations in

order to determine the substance - the so called risk-and-rewards approach. In contrast, the US

deals with similar issues by detailed prescription for each type of transaction, eg leasing,

product financing, sale of properties or transfers of financial assets and those prescriptions do

not necessarily follow a risks-and-rewards approach, for example transfers of financial assets

are on the so-called financial components basis (see below). As a general principle IASs follow

the risk-and-rewards approach but have rather less guidance as to how this might be carried out;

and in the case of transfers of financial assets they follow t he American components approach.

Revaluation

Having established that an asset exists, the IAS and British bases of measurement can befundamentally different from that of America. In Britain and under IASs certain classes of

assets, principally but not solely property, may be revalued provided that this is done

consistently and the valuations are kept up to date. In America the historical basis must be

retained (aside from certain financial instruments).

Business combinations

Business combinations are often a source of accounting issues. A few, important differences

remain between the three GAAPs. Both IAS and the UK include a size test in their uniting/

pooling-of-interests (merger) criteria; the US does not. As a result, pooling-of-interests

accounting is comparatively common in the US but not in the UK or under IAS. When

1 . E x e c u t i v e s u m m a r y 1

7.13 Extraordinary items......................................................................................

7.14 Divi dends ......................... ............................ ........................... ......................

7.15 Earning s per share (EPS)............................ ............................ .....................

8. Specific major disclosure items..........................................................................

8.1 Segmental reporting ....................................................................................

8.2 Disclosures about financial instrum ents....................................................

8.3 Related party transactions ..........................................................................

AppendicesI Common differences in accounting termin ology......................................

II Common accounting abbreviations ...........................................................

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Specific balance sheet items

Intangibles

For many years perhaps the most signif icant differences between the three approaches lay in the

area of intangibles. In the US, the long standing treatment of (positive) goodwill is the same as

for any other acquired intangible. Such assets must be capitalised and subsequently amortised

over their expected useful lives which may not exceed 40 years (although there are some

proposals to modify this). Before 1998 in the UK and before 1995 under IASs, (positive)

goodwill could be written off directly to shareholders funds and usually was. This has now

changed and (positive) goodwill must be capitalised in both regimes. However, it should not be

overlooked that both sets of transitional rules permit the old goodwill to remain in shareholdersfunds.

A new set of differences now arises in respect of amortisation of (positive) goodwill and

intangibles. Under IASs the life is usually limited to 20 years but this may be rebutted and a

longer, but finite period may be used. In such a case annual impairment testing of the (positive)

goodwill or intangible is required. The UK approach is very similar save that it is permitted for

the life even to be indefinite.

In addition, the US rules prohibit the carrying of development costs as an asset. In the UK they

may, at the companys option, be carried as an asset if certain conditions are satisfied. Under

IASs they mustbe carried as an asset, again if certain conditions are met.

Fixed tangible assets (property, plant and equipment)

As mentioned above, this is the principal category of assets subject to optional revaluation in

Britain and under IASs. However, in Britain one category of asset - investment properties - must

be revalued. Moreover, these investment properties must not be depreciated because of theirspecial purpose. IASs take a different approach to i nvestment properties. From 2001 they need

not be depreciated, in which case they must instead be stated at market value with changes

therein flowing through the profit and l oss account. In the US all property other than land must

be depreciated but not be revalued.

The US also requires interest to be capitalised during the period of an assets being made ready

for use. Under IASs and in the UK this is optional.

Impairment

The existence of an impairment is judged differently by the US on the one hand and the UK and

IASs on the other. The US considers that an asset is impaired only if its book value exceeds the

undiscounted cash flows expected to be obtained from its use. If that is the case then it is written

down to its fair value, which may be thepresent value of those cash flows (if fair value cannot

be determined in other ways). Under both IAS and UK principles recognition and measurement

are consistent: an impairment occurs when and to the extent that the book value exceeds the

higher of the net r ealisable value and the present value of the cash flows expected to arise fromthe continued use of the asset.

The US does not permit any subsequent reversal of the impairment. Both IASs and the UK do

permit reversal but in respect of goodwill (IAS) and goodwill and intangibles (UK). There are

some restrictions on this.

Associates and joint ventures

Under US GAAP there is no accounting distinction between associates and joint ventures: both

are equity accounted. Under IASs certain types of joint venture may, optionally, be

proportionately consolidated. In the UK joint ventures may not be proportionately consolidated,


acquisition accounting applies the UK requires any restructuring of the acquired entity to be

charged in the post-acquisition profit and loss account. Under IAS and US requirements some

such restructurings may increase the goodwill.

In addition, where the fair value of the acquired assets and liabilities is greater than the price

paid - negative goodwill - the US rules require the non-current asset fair values to be reduced

to eliminate the difference and thereafter a deferred credit arises for any remaining difference

and is amortised over up to 40 years. The UK records negative goodwill as a separately

disclosed deduction from positive goodwill and amortises it in line with depreciation and sale

of the acquired non-monetary assets. Any remainder is taken to the profit and loss account in

the periods expected to benefit. The IAS approach involves a similar presentation but therelease to the profit and loss account is as follows: first, to match any costs that it has been

identified with; then to match and to the extent of the depreciation of acquired non-monetary

assets; and any balance thereafter is taken immediately to income.

Foreign currency translation

The translation of foreign currency financial statements of foreign operations throw up some

important differences. All use the closing rate/ net investment method but in the UK the profit

and loss account may be translated at either the average or the closing rate. Some companies do

choose the latter. Under IASs and in the US the actual, or an average rate, must be used.

Moreover, under IASs it is a matter of choice as to whether to include capitalised goodwill and

fair value adjustments as part of the retranslated net investment, whereas in the UK and US they

are always included.

Lastly, under IASs and US GAAP the cumulative translation adjustment on a net investment is

recycled through the profit and loss account on disposal of the net investment. In the UK thereis no recycling.

Hedging

Both IASs and US GAAP have comprehensive standards on hedging; the UK does not. Some of

the differences in approach here are typified by the case of a hedge of a future transaction, which

can be either a contracted future transaction or a forecast one. In the UK the hedge would usually

be held off balance sheet until the transaction occurs, the transaction then being stated on the

hedged basis. Under IASs the cash flow hedging model is applied to this hedge: the hedge is stated

at fair value with the resulting adjustment, so far as it is an effective hedge, taken directly to equity;

it is held there until the transaction occurs when it is then recycled out to adjust the transaction

(either affecting the profit and loss account immediately or adjusting the cost of the purchased

asset as appropriate). The US uses the cash flow hedging model for hedges of forecast

transactions; however, the gains and losses initially taken to equity are not recycled into the cost

of the hedged purchased asset (if that is the case) but are instead recycled into the profit and loss

account to match the cost of the asset as it flows through, eg as it is depreciated. Where the future

transaction is a contracted one the US uses the fair value model: the hedge is stated at fair valuewith the resulting adjustment flowing through the profit and loss account; the hedged item, in this

case the contract, is stated at fair value to the extent hedged with the resulting adjustment flowing

through the profit and loss account. (IASs also use the fair value model for some hedges.)

Cash flow

The statement of cash flows of a British company is markedly different. It is based on pure

cash - cash deposits and overdrafts both of which are r epayable on demand. Both the IAS and

US GAAP statements are based not only on cash but also on cash equivalents, ie short-term

highly liquid investments. In addition, the US excludes overdrafts and IASs may in some cases

include them.

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gain or loss is required to be treated as an extraordinary item. The IAS guidance is somewhat

more brief, and the UK guidance very much so, but for all practical purposes neither permits

classification as extraordinary.

Deferred tax

Under UK principles deferred tax is provided in respect of timing differences - differences

between the timing of inclusion of items in accounting and in taxable profit. The IAS and US

provisions are in respect of the rather different, wider concept of temporary differences. These

are the differences between the balance sheet carrying amounts of assets and liabilities and

those carried in the tax computation. The purpose is to provide for the tax arising on the

recovery of each asset (or settlement of each liability) at book value whether that recovery isthrough use, realisation or whatever.

Furthermore, in the US and under IAS, provision is made in full for all liabilities (and for assets

but subject to a recoverability test). In the UK the provision is only for that element of the full

potential liability that will probably crystallise. In determining this partial provision, account

is taken of the effect of future transactions (eg, capital expenditure) on the deferral, perhaps

indefinitely, of crystallisation of the tax relating to past timing differences. However, the UKs

partial provision approach looks set to change towards full provision.

Other provisions

The UK and IASC standards on provisions are virtually identical, as IASC based its standard

on the UK one. They provide comprehensive frameworks for provisions, whereas the US does

not. One of the main UK and IASC principles is that all restructuring costs are provided on the

basis only of a commitment resulting from some form of external action; the same applies in

the US as regards redundancy costs, but other costs are still provided on a decision-basis. On

the other hand, the US prohibits provision for voluntary redundancies until an employee hasaccepted the invitation. Under UK and IAS standards provision is made for the expected take

up once the terms have been announced.

Decommissioning costs are another specific area of difference. In the UK and under IAS the

cost of necessary decommissioning of a plant or facility is made, on a discounted basis, when

the plant is constructed and is charged as part of its cost (and then depreciated). In practice in

the US such costs are usually spread over the plants life on an undiscounted basis. A further

specific area is repairs and maintenance. The UK and IAS prohibit provision for the

maintenance of own assets, but the US does not.

Purchase of own shares

It is a permitted, and not uncommon practice, for US companies to hold their own shares as

treasury stock. Such shares are shown as a deduction from stockholdersequity (shareholders

funds); IASs require the same treatment. Under UK law a company cannot formally hold its

own shares without cancelling them. Nevertheless companies may hold such shares in

substance in connection with employee share option schemes. Such shares are shown as an assetin the balance sheet (usually a fixed asset).

Specific profit and loss account items

Defined benefit pensions and similar

The current UK standard is quite different from those of the US and IAS. The UK approach

could be termed actuarial: it uses valuation assumptions, for both assets and liabilities, that look

to the long-term outcome. The US and IASs use current market rates for high quality corporate

bonds to discount the obligation and use market values for the assets (although in the US certain


although the equity accounting is expanded somewhat to give a similar effect in the profit and

loss account. It is also worth noting that the US and IASs presume a 20% investee to be an

associate whereas the UK has no such presumption but more closely defines significant

influence. In addition, IASs distinguish between types of joint venture on the basis of legal

form, whereas the UK uses substance.

Financial instruments

Comprehensive standards in this area are a recent innovation. IASs and US GAAP have them;

the UK does not. The IAS and US standards are very similar. They have three different

treatments for financial instruments (other than hedges, for which see above). One is amortised

cost. This is reserved firstly for a very restricted class of assets for which there is the positiveintention and ability to hold it to maturity. It also applies under IAS to any loan or receivable

originated by the company, or in the US to any non-marketable equity securities and any debts

that are not securities. Next, any financial instrument (IAS) or security (US) held for trading

purposes, and all derivatives other than those held as certain hedges, are stated at fair value with

the resulting adjustments taken to the profit and loss account. Lastly, any asset (US a security)

not fitting in the other categories is known as available-for-sale. These are stated at fair value

also. In the US the fair value adjustments are taken to shareholders funds (through other

comprehensive income) and are recycled into the profit and loss account when the item is sold.

Under IASs a company may choose to use the US treatment for the fair value adjustments or to

take them immediately to the profit and loss account.

In the UK market-makers, for example, mark their financial instruments to market through the

profit and loss account but otherwise investments are usually held at amortised cost.

Investments may be revalued but the resulting adjustment goes directly to shareholders funds

and is not recycled.

The UK does, however, have a standard dealing with transfers of financial assets. An asset is

derecognised on a substance basis, ie only if all significant risks and rewards of the assets are

transferred. If credit risk is retained then the asset remains on the balance sheet. Under the US

and IAS f inancial components approach, however, a credit risk component would be retained to

portray the credit risk but the r est of the asset would be taken off the balance sheet.

Stock (inventory)

In Britain the LIFO method of establishing the cost of stock would rarely be appropriate; in

America and under IASs it is acceptable.

Debt

Where a companys own shares contain an obligation, as for example some preference shares

do, IASs classify them as debt. I n the UK they would be classed as shareholders funds, albeit

the non-equityelement thereof. Under US GAAP there is mezzanine level shown separately

from both debt and shareholders funds; preference shares whose redemption is not controlled

by the company are reported at this level.

Where an instrument contains both debt and equity-share characteristics, for example

convertible debt, IASs split the two elements and report them as debt and shareholders funds

respectively. In the UK and US this is only done if the equity element is actually separable.

There are also differing treatments for the maturity classification of debt. Under IASs and US

GAAP a short-term debt can be reclassified as long-term on the basis of a post-balance sheet

long-term refinancing. This is not possible in the UK.

The US rules provide copious guidance on the extinguishment of debt and in many cases any



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amounts reported internally irrespective of whether they are on the same basis as the external

financial statements. (A reconciliation must, of course, be included.) Under IASs, broadly

speaking, the management approach is used to identify the segments but the UK approach is used

to report fi gures for them. In addition, under IAS the amounts disclosed include gross assets and

liabilities, depreciation and cash flow information; none of these is given in the UK; in the US

gross assets are required and other items may be required depending upon the internal reporting.

Financial instruments

All three GAAPs have plentiful disclosure requirements for financial instruments. However, there

are a number of differences between them. First of all, the UK has a wide requirement to make

qualitative disclosure of the objectives, policies and strategies for holding or issuing financialinstruments. The SEC requirement in the US is very similar. Under IASs the equivalent disclosure

is in relation only to instruments held for risk management.

IASs require disclosure for all financial instruments of the terms and conditions, which may include

notional principals, maturities, amount and timing of future cash payments etc. In the UK there are no

general terms and conditions disclosures at all. In the US this sort of disclosure is similar to the

tabularoptions for dealing with market risk (the other two options are sensitivity analysis and value-

at-risk). Further, the US requires separate disclosure about four components of market risk: interest,

currency, commodity and other market risk, such as equity price risk. The UK has requirements for

interest and currency but only encourages other market price risk disclosures. IAS has specific

requirements only for interest risk and otherwise other market risks are dealt with only by the general

terms and conditions disclosures (which would have some similarities with the US tabular option).

The UK does not require any disclosure of credit risk. On the other hand US GAAP calls for

disclosure of concentrations of credit risk. IASs go further and require all credit risk, as well as

all concentrations thereof, to be disclosed.

Lastly on financial instruments, the UK requires disclosures about unrecognised or deferred

gains and losses on all hedges other than of net investments in foreign entities. Under US GAAP

and IASs the equivalent requirements apply only to cash flow hedges, which are used, for

example, for hedges of future transactions whether contracted or uncontracted in the case of IAS

and, for example, for hedges of forecast (eg, future uncontracted) transactions in the US.

Future developments

In all three GAAPs a number of areas of accounting practice are under review, although having

emerged from a period of intense standard setting there is perhaps less just over the horizon than

is usual. Those that are under review are quite major areas.

In some instances the UK proposals would, if carried through to future standards, narrow but

not eliminate some areas of difference with the US and IASs. First, it is proposed that deferred

tax will remain on the timing differences basis but will move towards full provision. Second,

after drawn out debate it looks as though the measurement principles for pensions will bealigned with IASs; however there will be no spreading at all - the whole change in value will

go onto the balance sheet immediately but with the other entry split between the profit and loss

account and the statement of total recognised gains and losses (other comprehensive income).

In the US also, some of the proposals would also narrow the differences. At present it is fairly

common for US business combinations to use pooling/ uniting-of-interests (merger)

accounting, whereas it is comparatively rare under UK and IAS principles. The FASB proposes

to prohibit the method entirely. The IASC is monitoring US developments and may re-examine

this area. The FASB has also proposed that the maximum life of goodwill should be reduced to

20 years. However, other intangibles might in some cases have longer lives, even indefinite lives

if there is an observable market price for the intangible.


de minimis fluctuations may be ignored and some averaging of asset market values is

permitted). Moreover, the US and IAS rules prescribe particular actuarial methods and

assumptions. The UK standard does not. The differences may sound trivial but in the field of

pensions a small change in an assumption can be magnified to a large monetary amount.

In the UK all variations from the regular costs are spread over the remaining working lives of

the employees. In the US there is an option not to account for any variation if it falls within

certain limits known as the corridor. Under IASs any vested past service costs are booked

immediately; all other variations are either spread forward if they fall outside a similar corridor,

or instead any faster, systematic recognition method may be used.

The cost of employee share schemes

Where an employee is awarded a share option the cost to the company is based, in the UK, on

the intrinsic value (the difference between the option exercise price and the shares market price)

at the grant date. In the US the cost may be based either on intrinsic value at a measurement

date that may be later than the grant date, or on the fair value of the option itself. (It should be

noted that in both countries, if certain conditions are met, no intrinsic value-based cost at all is

accrued.) IASs have no rules on share-based remuneration.

Sale or terminat ion of an operation and discontinued operations

The US definition of a discontinued operation is more narrowly drawn than that of the UK; that

of IASs is between the two. In addition, a major difference arises in the presentation of

discontinued operations. In the US the post-tax results are presented as a single line item

positioned immediately before extraordinary items. Furthermore, the assets and li abilities of the

operation are presented as a single net amount in the balance sheet. In the UK the revenues,

expenses, assets and liabilities remain in their normal locations in the accounts. The results of

the discontinued operation are separately identified but only by analysis, on the face of theprofit and loss account, of the turnover and operating profit of the whole group into continuing

and discontinued elements. The assets and liabilities are not identified. The IAS requirements

are similar to those of the US insofar as they require all profit and loss account items down to

profit after tax, and assets and liabilities, to be attributed to discontinued operations. However,

it is not clear whether the US single line item presentation is possible under IAS; and, in contrast

to the UK, amounts so attributed may be given in the notes rather t han on the face.

So far as provisions for sales or terminations of operations are concerned the US rules require

provision for a discontinued operation to be made on a decision-basis. IAS and the UK require

a commitment basis, whether the sold or terminated operation is a discontinued one or not.

When provision is made the UK and US approaches include certain operating losses in that

provision, but under IAS they may not be included.

Dividends

In the UK a dividend declared after the year end, but in respect of the year just ended, is

accounted for in that previous year. In the US and under IAS such a dividend would be dealtwith in the year of declaration.

Specific major disclosure items

Segmental reporting

Rather different approaches are taken by the three for segmental reporting. In the UK segments

are distinguished from one another by their differing risks and returns and the amounts reported

therefor are analyses of the relevant f igures as stated in the financial statements. By contrast, the

US uses the management approach whereby the company is split into segments in line with the

internal reporting structure, whatever that may be. Moreover, the amounts reported are the



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constitutional arrangements for setting IASs have been put in place in order to improve both

that process and the relationship with national standard setters and others. Where these reviews

and new arrangements will i n practice leave the balance between IASs and national standards,

such as those of the UK and US, is difficult to predict. If US endorsement is slow in coming

then IASs may be marginalised. But there might then develop a powerful IAS-bloc, perhaps

centred on the European Union, including the UK, to rival the other standard setters power-

bases. The European Commission is already proposing, again with some qualification, that

IASs become mandatory for listed European companies. On the other hand, the IAS table might

become the place where national standard setters thrash out agreed treatments to be put into

their own national standards and into IASs. Or IASs might even become the single global super-

code replacing national standards altogether indeed, this is the only rational long-termobjective.

Notwithstanding this hurly-burly, none of UK, IAS or US standards will disappear overnight.

Important differences between them, and the need to cope with them, will remain for some

years to come.

This book describes the signif icant differences between accounting principles followed in the

UK, under IASs and in the US. I t is not a complete listing; rather it is a summary of those areas

most frequently encountered where the principles differ or where there is a difference in

emphasis between the three. Furthermore, it does not address accounting in specialised

industries, for example banking and insurance. It looks first at the regulatory background and

at general requirements and issues before turning to specific matters affecting the balance sheet,

the profit and loss account and finally major disclosure matters. The comparison is effected by

examining the UK principles in the l eft-hand column, those of IASs in the middle and those of

the US on the right. As far as possible then, the requirements of the three frameworks dealing

with the same circumstances are set out side-by-side. The narratives use the terminology of theUK, IASs or the US as appropriate. A table of common differences in terminology is provided

in Appendix I. In addition, the narratives usually refer to the reporting entity, for the sake of

convenience, as being a company. However, the terms entity, enterprise or undertaking are

used where the context requires it (eg, where an entity is a quasi-subsidiary). References to the

sources of the accounting requirements or practices are included in the headings or sub-

headings as appropriate. The key to these and other abbreviations is set out in Appendix II. US

references which comprise a letter followed by a number (eg, B50 for business combinations)

are to the section of the Current text(a condensed version of the requirements of the standards

ordered by subject and issued by the FASB) with that same reference. The last standards which

were taken into consideration in writing this book were FRS 16 (Current taxation) in the UK,

IAS 40 (Investment property) and the USs SFAS 138 (Accounting for certain derivative

instruments and certain hedging activities - an amendment of FASB Statement No 133 ); the text

reflects the latest standards even though some of them are not yet mandatory.

The matters referred to in this book are complex. Legislation, accounting standards and other

authoritative material are, of course, subject to change. Accordingly, professional advice should

be sought before acting on, or refraining from acting on, any material in this book.

2 . I n t r o d u c t i o n 9

2. Introduction

As this book rolls off the presses, the course of international accounting harmonisation has

reached a defining but as yet unclosed chapter in its history. There will soon crystallise into

reality the international relationship between different standards, and their standard setters, for

many years to come. Before looking forward to that, the progress to date should not be

overlooked. The force that drove it, and continues to do so, can be stated in three words: global

capital markets.

Both Britain and America have long histories of exchange traded equity investment by thepublic and their accounting has developed to report companiesactivities from this perspective.

As the capital markets become increasingly global other countries that have hitherto used, say,

the perspective of the tax authorities or lenders as their accounting model, have found that to

participate in the market they need to adopt its perspective. At the same time globalisation

demands that the various versions of that perspective come closer together, if not become

replaced by a single version. Here International Accounting Standards, IASs, join the story.

IASs are another version of that Anglo-Saxon model. But with the world as their constituency

they have the potential to achieve more widespread acceptability than other versions. In so

saying, one cannot but recognise that these three are indeed differentversions of the same basic

model. The apparently common language of the capital markets has marked differences when

put into effect by these three proponents. Why should this be so?

There are probably many factors at work. On the cultural side, the US puts the emphasis on

consistency between companies and, combined with a traditionally litigious environment, this

tends toward the formulation of accounting rules for almost all conceivable circumstances. Inthe UK and under IASs the drive has been towards a few principles (although the detailed rule

approach has made a modest showing of late) and a more pragmatic approach. Moreover, the

British and IAS standard setting processes started only in the 1970s - America had something

like a 30 year head start. The result is that in the US there is very little scope for alternative

treatments, whilst a range of detailed adaptations of the principles to specific cases is often

possible in the UK. On the academic side there are the i ntractable accounting problems, such as

deferred tax - is it really a liability and if so how much should be recognised? There are various

solutions to the intractables but no one solution is without its drawbacks. The result is that

different nations opt for different drawbacks just as much as they opt for different solutions.

IASs are perhaps mid-Atlantic. In some areas the UK approach is favoured, for example the true

and fair view and, usually, substance; in others the US approach is adopted, for example the

components approach to financial asset transactions.

However, the gap between the GAAPs has narrowed of late. IASs have undergone a period of

overhaul, eliminating many of the optional treatments; the UK has changed to deal with some

of the i ntractables, for example goodwill, by accepting largely the same drawbacks as others do;

and in the US there has even been recognition that its standards are not the most rigorous when

it comes to the availability of pooling (merger) accounting. Moreover, the standard setters in

different countries have co-operated on issues such as the overhaul of earnings-per-share

standards. So there is cause to hope that there might be less divergence in the use of the

common concepts.

Looking forward, whilst IASs have received endorsement, albeit somewhat qualified, fr om the

International Organisation of Securities Commissions (IOSCO), significantly they await the

results of a review by the US Securities and Exchange Commission that may bring about a good

degree of endorsement for their use in the US by non-US registrants. And lately, new

2 . I n t r o d u c t i o n8

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U K U S I A S

3. Regulatory background

3.1 Generally accepted accountingprinciples

The term generally accepted accounting principles

has no formal meaning in the UK. The term

generally accepted accounting practices (GAAP)

is used informally in the UK to denote the corpus of

practices forming the basis for determining what

constitutes a true and fair view: that is, broadly,

accounting standards and, where relevant, theaccounting requirements of company law and The

Listing Rules of the Financial Services Authority.

Accounting standards are applicable to the accounts

of a reporting entity that are intended to give a true

and fair view (see 3.2 below) of its state of affairs at

the balance sheet date and of its prof it or loss for the

financial period ending on that date. The

development of such standards is overseen by the

Financial Reporting Council (FRC), a body

representing a wide constituency of interests. Its

function is primarily to guide the Accounting

Standards Board (ASB), its subsidiary body, on its

work programmes and issues of public concern. The

ASB does the work of developing, issuing and

withdrawing accounting standards. Such standards

developed and issued by the ASB are known as

Financial Reporting Standards (FRSs); the standards

issued by the ASBs predecessor body, and which

3.1 Generally accepted accountingprinciples(IAS 1, SIC 18)

Under IASs there is no formal term generally

accepted accounting principles (or practices),

although GAAP may occasionally be used to

signify the whole body of IASC authoritative

literature.

The sources of such accounting requirements arethe International Accounting Standards (IASs)

themselves and interpretations thereof made by the

IASCs Standing Interpretations Committee (such

pronouncements being known as SICs). When

these sources do not cover a particular issue then

the IASCs conceptual framework, Framework for

the preparation and presentation of financial

statements (the Framework), should be consulted.

If that does not provide guidance then it is

permitted to look to the pronouncements of other

standard setting bodies (eg, the UKs ASB and the

USs FASB) and to accepted industry practice,

provided that conflicts with neither IASs, SICs nor

the Framework.

IASs sometimes include optional treatments. One

is designated the Benchmark Treatment and the

other is designated the Allowed Alternative

Treatment. For each such choice a company should

3.1 Generally accepted accountingprinciples

The principal sources of generally accepted

accounting principles (GAAP) are Statements of

Financial Accounting Standards (SFASs) issued by

the Financial Accounting Standards Board (FASB)

together with Accounting Research Bulletins

(ARBs) and Accounting Principles Board Opinions

(APBs) which were issued by predecessor bodies ofthe FASB. The FASB is the designated organisation

in the private sector for establishing financial

accounting and reporting standards. Its board is

composed entirely of full time members. It also

issues Interpretations (to clarify, explain, or

elaborate on existing SFASs, ARBs or APBs) and

Technical Bulletins (to address issues not directly

covered by existing standards). US pronouncements

are issued sequentially. They are not withdrawn but

may be revised or superseded by subsequent

pronouncements.

The FASB publishes each year the updated

Original pronouncements and the Current text. The

former contains the original text of all FASB

pronouncements, Interpretations and Technical

Bulletins presented in sequential order. The

latter is a reorganised version of the Original

pronouncements categorised by subject. As


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have been adopted or amended by the ASB, are

known as Statements of Standard Accounting

Practice (SSAPs). The ASB is composed of two full-

time and eight part-time members.

A committee of the ASB, known as the Urgent

Issues Task Force (UITF), assists the ASB in areas

where an accounting standard (or a Companies Act

provision) exists, but where unsatisfactory or

conflicting interpretations have developed or seem

likely to develop. In these circumstances the UITF

will seek a consensus as to the appropriate

accounting treatment. The ASB publishes abstracts

of the UITFs consensuses (known informally as

UITFs) which are considered to be part of the

body of practices forming the basis for determining

what constitutes a true and fair view.

3.2 Legal and listing requirements(CA 85, UITF 7, The Listing Rules)

Significant difference

The overriding requirement is for the financial

statements to give a true and fair view .

The Companies Act 1985 sets out the accounting

requirements for companies. The overriding

requirement is for the accounts to give a true and

fair view of the companys (or groups) state of

affairs as at the balance sheet date and of the profit

or loss for the financial period ending on that date.

apply the Benchmark or Allowed Alternative

consistently.

IASs are developed and issued by the board of the

IASC, which was hitherto composed entirely of

part-time members. The board has now being

reconstituted to become composed of twelve full-

time members and two part-time members, all of

whom will be appointed by the trustees of an IASC,

itself newly constituted as an independent

foundation. SICs are developed by the Standing

Interpretations Committee, a sub-committee of the

IASC, and are approved by that committee and by

the board. SICs are intended to give guidance in

cases when IASs are unclear or silent.

3.2 Legal and listing requirements(IAS 1)


The overriding requirement is for the financial

statements to give a fair presentation.

There is no legal framework under which IASC

standards operate. The IASC is an international

foundation representing a wide constituency of

interests. Its objective is to develop, in the public

interest, accounting standards, promote their

world-wide use and rigorous application and to

pronouncements are not withdrawn nor

(necessarily) revised as they are affected by

subsequent publications, it is usually advisable to

consult the Current text rather than the Original

pronouncements. The Original pronouncements do,

however, contain background information and the

basis for the FASBs conclusions which may be

valuable to a reader unfamiliar with the related

concepts or accounting treatments.

Further accounting guidance is provided by

consensuses of the FASB Emerging Issues Task

Force (EITF) and Statements of Position, Issues

Papers and Industry Audit and Accounting Guides

issued by the American Institute of Certified Public

Accountants (AICPA).

3.2 Legal and listing requirements(Securities Act 1933, Securities Act 1934)


The main requirement is for (domestic

companies) financial statements to be

prepared in accordance w ith US GAAP.

In general, only those companies which are

registered with the Securities and Exchange

Commission (SEC) are under any legal obligation to

publish audited financial statements. Certain other

companies may publish audited financial statements

due to other regulatory requirements (for example

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A true and fair view is not defined but for a

combination of reasons, including the authorisation

of the ASB to issue accounting standards under the

Act, it is generally accepted as requiring compliance

with applicable accounting standards - indeed the

ASB has received, and published, legal opinion to

this effect. However, since the true and fair

requirement is an overriding one, companies must

depart from any specific accounting practices

prescribed by law or by standards if those practices

would fail to give a true and fair view in the

particular circumstances and to adopt some

alternative that does give such a view. Such

circumstances are expected to occur only rarely and

when they do a company is required to disclose the

particulars of the departure (the prescribed

treatment that would fail to give a true and fair view

and the alternative adopted), the reasons for it (why

the prescribed treatment would so fail) and its

effect.

The Act sets out the detailed requirements for all

companies to prepare accounts, prescribes their

form and content, prescribes the requirements for

audit and requires publication of the accounts to

shareholders and others including their filing on

public record with the Registrar of Companies.

There are some derogations of the rules for

accounting disclosure and for filing by small and

medium sized companies (as defined) and, for

certain very small companies (as defined), there is

an exemption from the requirement for audit.

Significantly, the Act provides for the Secretary of

State (for Trade and Industry) to enquire into

accounts where it appears that the requirements of

the Act - including the true and fair requirement

and thus requirements of accounting standards -

might have been breached. Where such accounts do

work to bring about convergence of IASs and

national accounting standards. The IASC itself has

no power to require companies to adopt its

standards, although some countries may permit

their companies to do so (as an alternative to

national standards) or may require it by importing

the standards wholesale. However, any company

claiming compliance with IASC standards must

comply with all IASs and all SICs.

Similarly to the UK, the overriding requirement is

for a fair presentation, which is not defined. Thus

companies must depart from the specific

provisions of standards in order to give such a view

when to do otherwise would not. In these

extremely rare cases, disclosures similar to those

required in the UK are to be given.

The IASC does not carry out any inquiry or

enforcement role regarding the application of itsstandards.

In addition, accounts prepared under IASC

standards often contain supplementary information

required by local statute or listing requirements.

banks). The financial statements of domestic SEC

registrants must be prepared in accordance with US

GAAP and in conformity with other SEC

regulations regarding accounting and disclosures,

and form part of the Annual Report on Form 10-K

filed on public record with the SEC. Foreign

registrants are required to prepare and file their

Annual Report on Form 20-F, in accordance either

with US GAAP or with foreign GAAP including

reconciliations to US GAAP, and which is similar to

Form 10-K. In addition to 10-K and 20-F filings,

SEC registrants must make regular filings of

additional financial information.

Many companies which are not required to register

with the SEC include the additional accounting and

disclosure requirements imposed on SEC

registrants.

In addition to the SEC various other regulatoryorganisations, such as the Governmental

Accounting Standards Board and the Office of

Thrift Supervision, issue accounting and reporting

requirements relevant to entities within their

jurisdictions.

Forms 10-K and 20-F are periodically reviewed by

the SEC for compliance with GAAP (including the

local GAAP of a foreign registrant) and other

relevant regulations. The review findings are

communicated by private comment-letters to the

company. Significant inadequacies can lead to re-

issue of prior year financial statements. Lesser

problems may be dealt with by amended current

year filings or improved disclosures in future

financial statements.


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appear to be defective he may require the directors

to revise the accounts, applying to the Courts if

necessary to enforce this. The Secretary of State

has, under the Act, authorised the Financial

Reporting Review Panel (FRRP) - a subsidiary body

of the FRC - to carry out this enquiry and

enforcement role in respect of large companies (as

defined). To date the FRRP has not found it

necessary to apply to the Courts in order to enforce

its will.

The Financial Services Authority (a regulatory

body) imposes some additional disclosure

requirements on companies whose securities are

listed. The requirements are contained in its rule

book, The Listing Rules.

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4. Financial statement requirements

4.1 Form of the financial statements(CA 85, FRS 1, FRS 3)

The following are normally presented:

balance sheet;

profit and loss account;

statement of total recognised gains and losses,

known informally as the STRGL (see 5.1);

note of historical cost profits and losses (see 5.1);

cash flow statement; and

notes to the accounts (including the reconciliationof movements in shareholdersfunds).

The reconciliation of movements in shareholders

funds (equivalent to the IAS or US statements of

changes in shareholders equity) may also be shown

as a primary statement but may not be combined

with the STRGL.

A parent company must present consolidated

accounts, subject to three exemptions. The first, and

major, exemption is that, broadly speaking, if the

company is itself a wholly owned subsidiary of

another European Union (EU) company in whose

consolidated accounts it is included then it need not

prepare consolidated accounts itself. The second

exemption is similar to this but applies where the

company is only majority owned by another EU

parent (but subject to certain minority protection

procedures). Lastly, certain medium and small sized

4.1 Form of the financial statements(Framework, IAS 1, IAS 27)


balance sheet;

income statement;

a statement of changes in equity, or a statement

of recognised gains and losses (see 5.1);

cash flow statement; and

notes to the accounts.

A parent company must present consolidated

financial statements unless it is itself a wholly

owned subsidiary or, subject to the minoritys

consent, is virtually wholly owned (usually 90% or

more of the voting power). Usually only

consolidated financial statements are presented as

international standards do not contain a

requirement to present the parent companys

financial statements. However, if such statements

are prepared, all relevant standards would apply

equally to the individual financial statements.

4.1 Form of the financial statements(SFAS 130, ARB 43, F43, Regulati on S-X )


balance sheet (or statement of financial

position);

income statement (also known as statement of

earnings or statement of operations);

statement of changes in stockholders equity

(sometimes combined with the income

statement, occasionally included in the notes);statement of cash flows; and

notes to the financial statements (including the

statement of comprehensive income - see 5.1).

Usually consolidated financial statements only are

presented.


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4.Financialstatem

entrequirem

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companies (as defined) may opt not to prepare

consolidated accounts.

Where consolidated accounts are required, the

parent companys balance sheet (but not its other

statements), and related notes, and certain other

disclosures are nevertheless required to be given.

A cash flow statement is not required for a company thatis a 90% or more owned subsidiary of another company

in whose publicly available consolidated accounts it is

included. In addition, a cash flow statement is not

required of a small company (as defined).

4.2 Comparatives(CA 85)

Financial statements are presented for the currentand the preceding periods only.

4.3 Audit reports(CA 85, SAS 600)

The audit report refers to the current year only

(although a mis-statement in the comparatives

would probably lead to a qualification since those

comparatives would not have been properly

prepared in accordance with the Companies Act

1985 - see below).

4.2 Comparatives(Framework, IAS 1)

The financial statements cover the current andpreceding periods only.

4.3 Audit reports(ISA 700, ISA 710)

The IASC does not issue auditing standards.

Audits of IAS financial statements would usually

be carried out under local standards, or, often,

International Standards on Auditing (ISAs)

issued by the International Auditing Practices

Committee of the International Federation of

4.2 Comparatives(ARB 43, F43, Regulation S-X)

Except for SEC registrants, financial statements areusually presented for the current and the preceding

years. SEC registrants are generally required to

present income statements, statements of changes in

stockholders equity and statements of cash flows

for each of the most recent three years and balance

sheets for each of the most recent two years.

4.3 Audit reports(SAS 58, SAS 64)

The audit report refers to all years presented.

Statements on Auditing Standards (issued by the

Auditing Standards Board of the AICPA) prescribe

the form of the report, which usually states that the

audit has been conducted in accordance with

generally accepted auditing standards and whether

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The Companies Act 1985 requires auditors to report

whether or not the accounts give a true and fair view

and whether they have been properly prepared in

accordance with that Act; Statements of Auditing

Standards (SASs), issued by the Auditing Practices

Board (APB), prescribe the form of that report. The

report distinguishes the respective responsibilities

of company directors and of auditors; describes in

general terms the audit process (confirming that ithas been carried out in accordance with Auditing

Standards) as the basis of the audit opinion; and

states the auditors opinion.

The report would be qualified if the scope of the

audit was limited or if the auditor disagreed with an

accounting treatment or disclosure (including the

comparatives). In addition, where proper accounting

records had not been maintained or where all

necessary information and explanation had notbeen

received by the auditor, this would be stated in thereport. Uncertainties, if properly disclosed in the

accounts, would not result in a qualified audit report

but if fundamental would be mentioned in the

report.

4.4 Accompanying financial andother information(CA 85, The Listing Rules, SAS 600)

The accounts must be accompanied by a Directors

Report containing certain information specified by

the Companies Act 1985. That Directors Report is

usually rather brief and it must be filed, with the

accounts, on public record with the Registrar of

Companies, except for the case of small companies

(as defined) which need not file the report.

Accountants, a private sector international

professional body.

Under ISAs the audit report refers to the current

year and/ or the prior year depending on whether

the comparatives are seen as a sub-set of the current

year financial statements or as a separate set of

financial statements. (Even if not ordinarily

referred to, a misstatement in the comparativeswould probably lead to a qualification if the

misstatement was considered material in the

current year comparison). The report states whether

the financial statements present fairly in all

material respects (or give a true and fair view of)

the financial position, performance and cash flows.

The format of the report is similar to that of the

UK: respective responsibilities are explained; the

audit process is described; and the opinion is stated.

The report would be qualified if the scope of theaudit was limited, there was a disagreement over an

accounting treatment or information could not be

obtained. In some situations it will be appropriate

to include an emphasis of matter referring to an

uncertainty; such emphasis is not a qualification.

4.4 Accompanying financial andother information(IAS 1)

In the UK and US the accompanying information

arises out of legal and listing requirements. Since

IASs do not relate to any particular legal or listing

framework, there are no such requirements,

although, of course, the particular company using

IASs will be subject to its own such requirements.

However, IAS 1 does encourage but does not

or not the financial statements are presented fairly

in conformity with GAAP. Certain situations must

be disclosed in the audit report, such as when the

financial statements are not in accordance with

GAAP, significant uncertainties exist, the scope of

the audit was limited or necessary information

could not be obtained.

SEC regulations (where applicable) are also relevantto the form of report given. For example, the report

may have to be extended to cover certain schedules

required by the SEC.

4.4 Accompanying financial andother information(Regulation S-K, Regulation S-X)

The annual financial statements filed on Form 10-K

or 20-F must be accompanied by a number of

additional SEC disclosures including managements

discussion and analysis of financial conditions and

results of operations (MD&A), selected financial

data, supplementary financial information and

certain prescribed financial schedules.


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The accounts will in practice be accompanied by a

statement acknowledging the directors

responsibilities, principally for the preparation of

the accounts. (The audit report refers readers to this

statement and, if the statement is not present, the

auditors would give the equivalent information in

their report).

The directors of a company often use the annualreport and accounts as an opportunity to include

information for shareholders on selected operating

and financial matters. The ASB has sought to

regularise the completeness and content of such

information. It has issued a non-mandatory

statement setting out its recommendations for a

thorough Operating and Financial Review.

In addition to this, listed companies are required to

include in their annual report and accounts a

statement as to the extent to which they havecomplied with a code of corporate governance best

practice (known as the Combined Code), a

statement dealing with how the Combined Codes

principles have been applied and certain details of

directors emoluments (over and above that required

by law). The code covers the proceedings and

composition of the board - including the need for

and role of non-executives - directorsremuneration,

relations with shareholders and certain board

responsibilities in connection with financial

reporting and internal controls. Furthermore, the

directors of all listed companies are required in all

cases to make a statement as to whether the business

is a going concern with supporting assumptions and

qualifications as necessary.

require, a financial review by management which

describes and explains the main features of the

companys financial performance and position and

the principal uncertainties it faces.

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5. General issues

5.1 Classification and presentationwithin the financial statements

Balance sheet (CA 85, UITF 4, FRS 4)

The Companies Act 1985 prescribes the available

balance sheet formats. The format usually adopted

is one where total assets less liabilities balances

with capital and reserves (shareholders funds) plus

minority interests. Assets are generally presented in

ascending order of liquidity (least liquid first) andliabilities in descending order (most liquid first).

The Act prescribes minimum standards of balance

sheet disclosure, specifying certain balance sheet

captions and the allocation of items between those

captions.

Current assets and current liabilities are separately

presented from other assets and liabilities. Current

assets are those which are not intended for use on a

continuing basis in the companys activities.

However, an anomaly arises in that current assets

could include amounts receivable after more than

one year. If the amount concerned is sufficiently

material (in the context of total net current assets)

then that amount must be disclosed on the face of

the balance sheet.

Current liabilities comprise creditors falling due

within one year. Short-term obligations are included

5.1 Classification and presentationwithin the financial statements(IAS 1)

Balance sheet

Whilst certain items are, as a minimum, required to

be shown on the face of the balance sheet, there is

no prescribed format in which they should be

presented. However, there is a general requirement

to present the balance sheet either on the basis of

distinguishing current from non-current assets andliabilities, or broadly in order of liquidity.

Current assets are those assets that are: either

expected to be realised in, or are held for sale or

consumption in, the normal course of the

companys operating cycle; or are held primarily

for trading purposes or for the short-term and are

expected to be realised within twelve months of the

balance sheet date. Current liabilities are those

liabilities that are expected to be settled in the

normal course of the companys operating cycle, or

are due to be settled within twelve months of the

balance sheet date.

The current portion of long-term debt (but not short-

term debt itself) should be classified as non-current

if there is an intention and supporting agreement to

refinance on a long-term basis (see 6.8).

5.1 Classification and presentationwithin the financial statements(SFAS 130, ARB 43, B05, C49, Regulatio n S-X )

Balance sheet

The balance sheet is generally presented as total

assets balancing with total liabilities and

stockholders equity. Assets and liabilities are

generally presented in descending order of liquidity

(most liquid first). SEC regulations prescribe the

format and certain minimum balance sheetdisclosures for public companies. Otherwise,

balance sheet detail should generally be suff icient to

enable material components to be identified.

The balance sheet usually presents current assets

and current liabilities separately from other assets

and liabilities (known as a classified balance

sheet). The current classification applies to those

assets which will be realised in cash, sold or

consumed within one year (or within one operating

cycle, if longer), and those liabilities that will be

discharged by the use of current assets or the

creation of other current liabilities within one year

(or operating cycle, if longer).

The current liability classification includes

obligations that, by their terms, are due on demand

or will be due within one year (or operating cycle, if

longer) from the balance sheet date, even though


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within current liabilities regardless of anticipated

re-financing subject to one narrow exception.

Where a committed back-up facility is effectively an

integral part of the related debt (according to

narrowly defined conditions), then that debt may be

classified according to the maturity of the back-up

facility (see 6.8).

Shareholders funds and minority interests are eachrequired to be analysed into equity and non-equity

elements (as defined - see 6.14). If the non-equity

element is immaterial then the analysis may be

given in the notes.

Profit and loss account (CA 85, FRS 3)

The Companies Act 1985 specifies four acceptable

formats for the profit and loss account (of which

only two are often used in practice), prescribes

minimum standards of disclosure and specifies how

certain items should be allocated in the profit andloss account. Both of the commonly used formats

reconcile turnover to the profit for the financial

year, from which dividends are then deducted.

Format 1, the more common of the two, analyses

expenses by function (cost of sales, distribution

costs, administrative expenses) and requires gross

profit to be disclosed. Format 2 analyses expenses

by type, such as salaries and wages, and does not

show gross profit. FRS 3 supplements the statutory

formats with an operating profit sub-total and three

additional, or supplementary, format items which

appear after operating profit but before interest:

profits or losses on sale or termination of an

operation (paragraph 20(a) FRS 3);

costs of a fundamental restructuring (paragraph

20(b) FRS 3); and

profits or losses on the disposal of fixed assets

(paragraph 20(c) FRS 3).

Income statement

Certain items are required, as a minimum, to be

presented on the face of the income statement.

Appropriate additional line items, headings and

sub-totals must also be given where this is

necessary to achieve a fair presentation.

In addition, an analysis of expenses by either their

type or function should be disclosed on the face of

the income statement or in the notes.

they may not be expected to be discharged within

that period. Short-term obligations expected to be

refinanced on a long-term basis can be excluded

from current liabilities only if the company intends

to refinance the obligation on a long-term basis and

has demonstrated the ability to accomplish that

refinancing (see 6.8).

Income statement

The income statement is usually presented in one of

two formats as follows:

either in a single-step format where all expenses,

classified by function, are deducted from total

income to give a subtotal of income beforeincome taxes, from which income taxes and

extraordinary items are then deducted; or

in a multiple-step format where the cost of sales

is deducted from sales to show gross profit, then

other income or expenses are added or deducted

to show income from operations and income

before and after income taxes.

SEC regulations also prescribe the format and

certain minimum income statement disclosures for

registrants. Otherwise, income statement

disclosures should generally be sufficient to enable

material components to be identified.

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The second of the three items is intended to be used

very rarely (that is, when the restructuring has a

material effect on the nature and focus of the

companys operations).

The formats do not provide a line for exceptional

items and companies are prevented from including a

separate line for them - they must be subsumed intothe format item to which they relate (see 7.9).

Typically, however, companies manage to isolate

exceptionals on the face of the profit and loss

account by a columnar analysis.

Companies are also required to analyse the format

items, from turnover down to operating profit,

between operations acquired in the year (as a

component of continuing operations), continuing

operations and discontinued operations (as defined

- see 7.10).

As a general principle, the Companies Act 1985

requires that only realised profits be recognised in

the profit and loss account.

Statement of cash flows

See 5.3 for a separate discussion of statements of

cash flows.

STRGL (FRS 3, Statement of Principles)

The components of this statement are the gains and

losses of the period attributable to shareholders, that

is, increases and decreases in net assets other than

contributions from, or distributions to, owners. Thus

it includes, inter alia, the profit for the financial

year, any revaluation of assets or exchange

differences dealt with in reserves.


See section 5.3 for a separate discussion on

statements of cash flows.

Statem ent of recognised gains and losses

There is a choice of presenting as a primary

statement either a statement of recognised gains

and losses (like the UK) or a statement of changes

in equity (see below).


See 5.3 for a separate discussion of statements of

cash flows.

Other comprehensive income (OCI)

A statement of comprehensive income, on the same

basis as the UKs STRGL, is required to be

presented either as a separate primary statement or

together with the income statement or statement of

changes in stockholders equity. Comprehensive

income other than net income reported in the

income statement is known as other comprehensive

income (OCI) and should be separately reported as

such in the statement. In addition, items reported


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Reconciliation of movements in

shareholders funds (FRS 3)

This reconciliation deals with the movements in thetotal shareholders funds and is very often presented

with the primary statements rather than as a note.

Movements on individual items of capital and

reserves are usually dealt with separately in other

notes to the accounts (although the two may be

combined in some suitable format). The

components of the reconciliation are the profit for

the financial year, dividends, other recognised gains

and losses (usually as a single aggregate figure) and

each other movement individually.

Note of historical cost profits and losses

(FRS 3)

The note of historical cost profits and losses, whilst

not strictly a primary statement, is presented

together with the primary statements where there is

a material difference between the result as disclosed

in the profit and loss account and the result as if an

unmodified historical cost basis had been adopted

(ie, if no revaluations had been made - see 5.4). Its

basic format is that of a reconciliation of the

reported profit before tax to that which would have

been shown on the unmodified basis.

Statement of changes in equity

A statement of changes in equity (similar to those

of the UK and US) must be presented either as aprimary statement (if there is no statement of

recognised gains and losses) or as a note (if there is

a statement of recognised gains and losses).


There is no equivalent of the UK statement.

therein should be accumulated in a separate

accumulated OCI component of stockholders

equity and the balance thereon should be analysed

on the face of the balance sheet, in the statement of

changes in stockholders equity or in the notes.

Statem ent of changes in stockholders

equity

The statement of changes in stockholders equity isusually presented as a separate statement showing,

for each category of equity, the opening and closing

balances and movements during the period.

Alternatively, a separa te statement may be omitted if

the information is shown in the notes to the

financial statements or combined with the income

statement.


There is no equivalent of the UK statement.

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5.2 Prior period adjustments andother accounting changes


Most accounting policy changes are dealt with

by restatement of all periods presented.

Prior period adjustments (FRS 3)

Prior period adjustments, as def ined below, are dealt

with by restatement of the opening position and of

the comparatives for prior periods. The cumulative

effect of the change - as at the start of the year in

which the change is made - should be shown as a

separate item in the current years STRGL.

Prior period adjustments are defined as materialadjustments applicable to prior periods arising from:

changes in accounting policies (see below); or

the correction of fundamental errors.

They do not include normal recurring adjustments

or corrections of estimates made in prior periods.

In addition, prior periods are restated when using

merger accounting (see 5.7).

Changes in accounting policy and method

(FRS 3, FRS 10, FRS 15, CA 85, SSAP 2, UITF 14)

A change in accounting policy must be justified as

preferable and should be accounted for as a prior

period adjustment, as discussed above. The effect of

the policy changes on the preceding and current



M ost accounting policy changes may be dealt

w ith by restatement or by passing the

cumulative a djustment through the current year.

Prior period adjustments (IAS 8)

Where a prior period adjustment is applicable the

opening balance of retained earnings and the

comparatives are restated.

Prior period adjustment is the Benchmark Treatment

for:

certain changes in accounting policy (see

below); andthe correction of fundamental errors.

In both cases the Allowed Alternative Treatment is

to put the adjustment through in the current year

and no restatement occurs. However, in both the

Benchmark and Allowed Alternative Treatments for

a change in accounting policy, if the adjustment to

opening retained earnings cannot be determined

the change should be made prospectively.

In addition, prior periods are restated when

applying uniting-of-interests accounting (see 5.7).

Changes in accounting policy and met hod

(IAS 8, IAS 16, IAS 38, SIC 8)

A change in accounting policy should be made

where required to adopt a new IAS or in any case

where the change will result in a more appropriate

presentation of events or transactions in the



M any accounting policy changes are dealt wi th

by passing the cumulative adjustment through

the current year.

Prior period adjustments (APB 9, SFAS 16,A35)

In single period financial statements, prior period

adjustments are reflected as adjustments of the

opening balance of retained earnings. When

comparative statements are presented, corresponding

adjustments are made of the amounts of net income,

its components, the balances of retained earnings,

and other affected balances for all of the periods

presented to reflect the retrospective application ofthe prior period adjustments.

Such prior period adjustments may only be made:

to correct errors in prior period financial

statements;

for certain changes in accounting principles (see

below);

for certain adjustments related to prior interim

periods of the current fiscal year; or

to reflect accounting changes that are in effect

the statements of a different repor ting entity (eg,

pooling-of-interests - see 5.7).

Changes in accounting principle and m ethod

(APB 20,A06)

A change in accounting principle must be explained

and justified as preferable. The term accounting

principle also includes the methods of applying

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