Political and regulatory news
Issue 1 - 26 February 2010
The future of UK accounting standards
Moves to adopt international accounting standards in the UK may damage the quality of investment company reporting.
The Accounting Standards Board (ASB), the body responsible for setting accounting standards in the UK, has long been considering the interaction of the financial reporting framework in the UK with the development of international accounting requirements. Currently, both domestic and international accounting rules are applied by companies in the UK. The ASB wants to simplify this situation by ‘converging’ its own accounting rules, known as UK GAAP (or UK Generally Accepted Accounting Practice), with international standards.
This represents a major change for UK investment companies. The vast majority, as single entities with no subsidiaries, elect to report under UK GAAP, rejecting the option to use international accounting rules. Those with subsidiaries have no choice but to use international standards for their group accounts, but most still choose to follow UK accounting rules for the individual entities. The ASB’s proposals mean that UK investment companies will have to prepare their accounts in line with a version of international standards which is being adopted on a European-wide basis.
The ASB believes its approach “provides a consistent basis for preparing financial reporting and also reduces the burden associated with understanding and complying with differences in reporting requirements and interpretations of accounting principles”. It also identifies improvements in the comparability and understandability of financial reports. However, standardisation is unlikely to be a positive development for the investment company sector. In many cases, it will be difficult to apply general accounting standards to its special circumstances. For example, given that the business of an investment company is to issue and invest in financial instruments, the financial instrument accounting rules are highly relevant to the sector. But these standards create considerable difficulties in classifying certain classes of shares as either equity or liabilities, a key distinction within a set of investment company accounts. Resolving these types of problems not only wastes considerable time and resources, but can create inconsistencies and confusing outcomes which do little to help shareholders understand the accounts.
To provide investment trusts with a more harmonised approach to preparing financial statements, the AIC produces industry best practice accounting guidance in the form of a SORP (or Statement of Recommended Practice) which is endorsed by the ASB. The AIC’s SORP, which was first published in 1995, is highly valued by the sector and its investors. Its scope has recently been extended to cover venture capital trusts.
Unfortunately, SORPS do not feature within the international accounting regime and under its new framework, the ASB is proposing that the AIC’s SORP be withdrawn. This would be a significant loss as the SORP is an invaluable tool for dealing with situations where alternative treatments are allowed and areas that are not covered by accounting standards. Specialist sectors are unlikely to ever be addressed in general accounting standards. The SORP provides the industry with a harmonised approach and helps to improve comparability and understandability of the accounts. Ultimately, withdrawal of the AIC’s SORP could lead to a divergence of accounting practices and less useful financial statements.
The AIC is urging the ASB to retain the ability for specialist sectors to produce and maintain their own SORPs within the new framework, as SORPS play an important role in an international accounting framework. They cannot override accounting standards but they can fill a gap where the rules do not address specific industry issues. The AIC also wants the ASB to continue to endorse the AIC SORP, subjecting it to its vetting procedures and ensuring its status.
The ASB’s consultation ended on 1 February 2010 and the changes are expected to come into effect in January 2012.
To view the ASB’s consultation paper on ‘The Future of UK GAAP’, click here.
To view the AIC’s response to the ASB’s consultation on ‘The Future of UK GAAP’, click here.
This is the last article in this edition.
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