4 Increasingly the accounting standards adopted in the United Kingdom are not being developed by the Accounting
Standards Board (ASB) but are developed by the International Accounting Standards Board (IASB) and incorporated
into UK Generally Accepted Accounting Practice (UK GAAP). Accounting Standards published recently have been
closely aligned to International Financial Reporting Standards (IFRSs). The role of the ASB has changed from
developing UK GAAP to implementing IFRSs.
Required:
(a) Explain whether consistency between UK GAAP and IFRS is important. (7 marks)
(b) Discuss whether the alignment of recent Financial Reporting Standards (FRSs) to IFRS has led to greater
inconsistency between financial statements. (10 marks)
(c) Discuss how management judgement and the regulatory framework can have a significant impact on the
confidence placed in financial statements. (6 marks)
Appropriateness and quality of discussion (2 marks)
(25 marks) 4 (a) Consistency between UK standards and IFRS is important for the following reasons:
– it enhances the credibility and clarity of financial reporting in the UK.
– there are companies who continue to prepare financial statements under UK standards and wish to ensure that they are
consistent with IFRS so as to avoid a two tier system of reporting.
– it will facilitate the movement of accountants between organisations using either UK GAAP or IFRS and lower barriers
to the free-movement of accountants in business across jurisdictions.
– it helps to ensure the comparability of financial statements whatever the size of the company.
– it allows companies to enjoy a lower cost of capital as a result of their financial statements being more readily
understood.
The development of IFRS has led to a change in the role of the ASB in terms of its importance in the development of UK
accounting standards. UK GAAP mostly applies to private companies, subsidiaries of listed companies and Small and Medium
Entities (SMEs). Consistency with IFRS is important as long as the standards are not over engineered and too complex. If this
occurs then they will not be fit for purpose for the UK entities that they are aimed at.
(b) The implementation of International Financial Reporting Standards (IFRS) in the UK involves major change for companies as
IFRS introduces significant changes in accounting practices that often were not formerly required by UK GAAP. For example
financial instruments in many instances have appeared on the balance sheets of companies for the first time. As a result,
financial statements are often significantly more complex than financial statements which were based on UK GAAP. This
complexity is caused by the more extensive recognition and measurement rules and a greater number of disclosure
requirements. Because of this complexity, it can be difficult for users of financial statements to understand and interpret them,
and thus can lead to inconsistency of interpretation of those financial statements.
For example the implementation of the financial instruments standards (FRS25 ‘Financial Instruments – disclosure and
presentation’, and FRS26 ‘Financial Instruments: recognition and measurement’) has led to many changes in UK accounting.
The reclassification as liabilities of minority interests holding put options, split accounting for convertible bonds, revaluation
of ‘available-for-sale’ investments at fair value recognised directly in equity and revaluation at fair value of all derivatives,
including embedded derivatives, with the impact of the change recognised directly in equity for cash flow hedges are some
of the changes and complexities that IFRSs incorporated into UK GAAP have introduced.
Often IFRSs introduced into UK GAAP are silent on certain issues and involve significant estimation. For example FRS20,
‘Share based payment’, does not require any specific disclosures as to the choice of the appropriate valuation model or how
the number of equity settled awards, which will vest, have been estimated. FRS20 does require ‘information that enables
users to understand how the fair value of the equity instruments granted was determined’ but the level of detail is left up to
the company. The most popular model used by companies under this standard is the Black–Scholes–Merton method but this
model does not allow for the possibility of exercise before the end of the option’s life. However irrespective of this, many companies use it.
It is possible to interpret some of the IFRS introduced in different ways and in some standards, there is insufficient guidance.
The identification of the functional currency under FRS23, ‘The effects of changes in foreign exchange rates’, can be
subjective. For example the functional currency can be determined by the currency in which the commodities a company
produces are commonly traded, or the currency which influences its operating costs, and both can be different.
Another potential problem surrounds the adoption of standards. Some of the new IFRSs have an adoption date of 1 January
2009 and if these are adopted in the UK, there could be inconsistency if companies adopt the standards early. The application
of FRS25 and FRS26 was quite complex in terms of which entities were required to adopt the standards and when adoption
should take place. Some companies adopted the standards early and some companies did not. The main changes brought
about by the gradual adoption of IFRS, will relate to recognition and measurement rather than the form and presentation of
financial statements.
(c) Management judgement may have a significant impact under UK GAAP. FRS utilises fair values extensively. Management
have to use their judgement in selecting valuation methods and formulating assumptions when dealing with such areas as
onerous contracts, share-based payments, pensions, intangible assets acquired in business combinations and impairment of
assets. Differences in methods or assumptions can have a major impact on amounts recognised in financial statements.
In addition to the FRS, a sound financial reporting infrastructure is required. This implies effective corporate governance
practices, high quality auditing standards and practices, and an effective enforcement or oversight mechanism. Therefore,
consistency and comparability of financial statements will also depend on the robust nature of the other elements of the
financial reporting infrastructure.
The Financial Reporting Council has developed a ‘Strategic Framework’ in the UK which is designed to provide confidence in
corporate reporting in the UK. The aim is to facilitate co-operation between stakeholders in order to promote confidence in
corporate reporting. Confidence is gained where there is
(a) an effective legislative and regulatory framework which defines high standards in corporate governance and reporting,
including standards and guidance from the Government, the FRC, and professional bodies
(b) implementation of the framework by those responsible for governance which includes boards, auditors and the
profession
(c) effective monitoring of the quality and integrity of reporting and governance by shareholders, audit committees,
regulatory authorities, and professional bodies
A poor regulatory framework would undermine confidence in corporate reporting and governance. | 
发表于 2008-10-11 16:40
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