A History of Accounting Standards in the UK

Introduction

Accounting criterions were introduced to supply consistence in fiscal coverage. In the UK, the Accounting Standards Committee, ab initio, and later, the Accounting Standards Board has been puting criterions for over 30 old ages.

There is now a displacement towards non merely harmonizing accounting criterions between different companies of the same state but making the same for all states due to the increasing planetary environment companies now operate in.

This paper will supply a history of the development of accounting criterions in the UK, discuss the appetency for a globally accepted conceptual model, peculiarly foregrounding the challenges faced by standard compositors for successful execution.

The paper will stop by sing whether such a model is in the best involvements of users of fiscal information like investors and loaners.

History of Accounting Standards in the United kingdom

Prior to the 1970s, there were really few fiscal coverage demands for companies in the UK relating to the rating of assets and liabilities. Consequently, small countenances existed for members of the Institute of Chartered Accountants in England and Wales ( ICAEW ) who failed to adhere to its recommendations on such ratings.

This kind of attack, hence, encouraged what is widely regarded as originative accounting as comptrollers stand foring different companies would show these companies in a more favorable visible radiation than was really the instance, when fixing their fiscal consequences.

Obviously, the hazard of wrong ratings had a negative impact on investors of these companies, both bing and possible, who had no alternate but to establish their investing determinations on these inaccurate information. For illustration, when the Associated Electrical Industries Ltd ( AEI ) was taken over by the General Electric Company ( GEC ) in 1967, the AEI’s forecasted net income of ?10m turned into an existent loss of ?4.5m. The grounds AEI provided for this monolithic difference highlighted the different accounting interventions AEI’s hearers used when compared to GEC’s ( Black, 2000 ) .

It should come as no surprise, hence, that the accounting profession was capable to unfavorable judgment runing from accusals of shirking to downright dishonesty.

The Accounting Standards Committee ( ASC ) was formed in 1970 chiefly to standardize accounting rules and patterns in the UK and therefore turn to the negative promotion the profession faced.

The chief aim of the commission was ‘to define accounting constructs, to contract differences in fiscal accounting and coverage intervention and to codify by and large accepted best pattern in the public’s interest’ ( www.accaglobal.com ) .

The ASC published 25 Statements of Standard Accounting Practice ( SSAP ) between 1970 and 1990, through the Consultative Committee of Accountancy Bodies ( CCAB ) . The CCAB were besides expected to implement the SSAPs. Some illustrations of SSAPs which are still in usage are:

• Disclosure of accounting policies ( SSAP2 )
• Accounting for station balance sheet events ( SSAP17 )
• Accounting for investing belongingss ( SSAP19 )
• Foreign currency interlingual rendition ( SSAP20 )

The ASC was replaced by the Accounting Standards Board ( ASB ) in 1990. At this clip, 22 out of the 25 SSAPs were in operation. The ASC ‘s replacing was attributed, among other things, to their failure to implement the SSAPs, incompatibilities in the fiscal coverage demands of the SSAPs, limited audience and a deficiency of independency that they displayed.

The ASB publishes Financial Reporting Standards ( FRS ) . The purposes of the ASB are ‘to set up and better criterions of fiscal accounting and coverage for the benefit of users, preparers and hearers of fiscal information’ ( www.accaglobal.com ) . Consequently, the ASB was set up to turn to the failures of the ASC.

From 1990 to 2000, the ASB published 15 FRS.The ASB is a subordinate of the Financial Reporting Council ( FRC ) which secures finance for the ASB and its other subordinate – the Review Panel. The Review Panel is tasked with look intoing companies whose histories it is deemed have non been prepared harmonizing to the relevant FRS. Under the Companies Act 1989, the Review Panel has the authorization to bespeak an order from the tribunal for the ‘offending’ company to revise its histories based on the relevant criterions, as a last resort. For illustration, in 1998, 37 companies were investigated by the Review Panel and a via media reached with managers ( out of tribunal ) where the likeliness existed that their histories did non demo a true and just position.

One of the tools used by the ASB to accomplish its aims is the Statement of Principles ( SP ) , which was published in 1999. The SP is ‘a description of the cardinal attack that the ASB believes should, in rule, underpin the fiscal statements of profit-oriented entities’ ( www.asb.org.uk ) . The SP is in consequence a UK conceptual model that is consistent, up-to-date and mirrors the International Accounting Standards Committee model ( i.e. The Model for the Preparation and Presentation of Financial Statements, issued in 1989 ) and the fiscal coverage demands in states such as USA, France, Canada and Australia.

Some SSAPs have now been superseded by the relevant FRS. For illustration, one important reappraisal of SSAP 10 resulted in FRS1 ( The Cash Flow Statement ) . SSAP10 ( Source and Application of Funds Statement ) was developed due to a demand to supply extra information to addendum accumulations based information provided by the Net income and Loss Account ( P & A ; L ) and the Balance Sheet. SSAP10 merely provided a elaborate nexus between P & A ; L and the Balance Sheet, with undistinguished excess information. FRS1 was developed accordingly and now supersedes SSAP10. It concentrates on the analysis of existent hard currency flows, with headers that are easy to understand. The Statement is critical to companies as the hard currency place of companies makes a great trade of difference to its success or failure.

Other illustrations of FRS which have superseded SSAPs between 1990 and 2000 are:

• FRS3 ( Reporting and Financial Performance ) replacing SSAP6
• FRS15 ( Tangible Fixed Assets ) replacing SSAP12

Global Conceptual Framework

The International Accounting Standards Committee ( IASC ) was formed in 1973, tasked with harmonizing accounting criterions across the Earth. Presently, these criterions are set by the International Accounting Standards Board ( IASB ) .

The members of the IASC/IASB hail from more than 70 states and they aim to harmonize their several criterions and conformity of these criterions to those of the IASC. The International Accounting Standards ( IAS ) have now runing alongside International Financial Reporting Standards ( IFRS ) .

This procedure is regarded as a measure towards developing a globally accepted conceptual model. Many states have either adopted the IASB’s model in its entireness or have developed their several criterions based on the model. The Hong Kong Stock Exchange, for illustration, asked foreign companies to show studies based on IASB’s criterions ( Black, 2000 ) . There are presently eight standard puting states working towards full convergence and acceptance of IAS and IFRS.

The IASB’s model sets out the constructs that form the readying and subsequent presentation of fiscal statements for users. It is non a criterion in itself but assists the IASB to develop future IFRS and reexamine bing IAS ; and to advance harmonization of accounting criterions and processs among other things.

The model is made up of seven subdivisions:

• The aim of fiscal statements – gives information on fiscal place, public presentation and alterations in fiscal place
• Underliing premises – accumulations footing ( i.e. minutess are recognised at point of happening and matched to the fiscal period they relate to ; traveling concern in the foreseeable hereafter
• Qualitative features of fiscal information – histories are easy to understand, relevant, dependable and comparable
• The elements of fiscal statements – these are assets, liabilities and equity. An plus is controlled by the company as a consequence of past events and future economic benefits are received by the coverage company. A liability is a present duty of the coverage company as a consequence of past events and from which future economic benefits are expected to be derived. An equity is what’s left after liabilities have been deducted from assets
• Recognition of the elements of fiscal statements – an point has a cost or value that can be faithfully measured. The coverage company should anticipate to have or predate economic benefit
• Measurement of the elements of fiscal statements – i.e. historical cost, current cost, realisable value and present value
• Concepts of capital care – two constructs, i.e. physical and fiscal constructs. The former is linked to the operating capableness of the coverage company while the latter focal points on investings

While a globally accepted conceptual model will better consistence and advance better determination devising by users of fiscal information in an progressively planetary market place, the challenges that stand in the manner of successful execution are rather considerable and in some instances formidable.

Some of these challenges are as follows:

• Compromises to guarantee criterions run into the demands of the assorted states
• It might be unrealistic to implement in some emerging markets without important alteration which will thin its effectivity – these criterions were produced in the developed universe and will turn out unrealistic to implement in emerging markets
• Its hard to construe fiscal statements in some states due to them being out-of day of the month and therefore irrelevant
• Converting local currency could supply inaccurate information
• Year ends differ between states
• Different intervention of accounting and auditing criterions – for illustration, depreciation and the rating of fixed income and equity securities are treated otherwise in different states
• IASB rivals developing a reciprocally good conceptual model – for illustration, the US, UK, Australia, Canada and France set abouting joint undertakings to reexamine and invent criterions, therefore short-circuiting the IASB

These difference will necessitate to be identified, prioritised and either eliminated ( sooner ) or retained ( if deemed insignificant or manageable )

To set into position the graduated table of the challenges it is utile to see the differences between the model of one state – in this instance the UK- and the IASB’s model.

One such difference relates to the definition of elements that should be reflected in fiscal statements. While the SP ( UK model ) lists seven elements, the IASB’s lists five:

Table 1

The SP defines an plus as the ‘rights or other entree to future economic benefits controlled by an entity as a consequence of past minutess or events’ while the corresponding definition for the IASB is ‘a resource controlled by the entity as a consequence of past events and from which future economic benefits are expected to flux to the enterprise’ ( www.accaglobal.com/publications/student accountant/568644 )

The SP definition indicates that ownership is non required to hold entree to future benefits. A cardinal difference such as this should be given top precedence and resolved for convergence to be successful.

The move to convergence though is go oning. From 2005 onwards, for illustration, all listed EU companies are required to fix their histories in conformity with International Accounting Standards ( ww.dcode.co.uk ) .

The Global Framework and its Impact on Users of Financial Information

To see whether a globally accepted conceptual model is in the best involvements of users of fiscal statements, it is utile to place these users, the information demands of the primary users and the features of fiscal information.

The users of fiscal information are:

• Investors ( present and possible )
• Lenders
• Employees
• Suppliers
• Government bureaus – need fiscal information to measure revenue enhancement liabilities
• Other trade creditors
• Customers
• The public – this includes force per unit area groups and will be concerned with the ethical and environmental activities of companies

Investors and loaners are regarded as primary users and the fiscal information is utile for them as follows:

• Investors
  • To do buy/hold/sell determinations associating to portion public presentation, tendencies and profitableness
  • Stewardship – to measure direction public presentation and answerability

• Lenders and creditors need fiscal information to do loaning and recognition determinations

Addressing these demands will measure the demands of the other users.

The globally accepted conceptual model will be extremely good to non merely the standard compositors and hearers who apply them but besides these primary users due to the fact that more and more companies are runing on a planetary graduated table and accordingly, competing for capital and loans from these investors, loaners and creditors spread across the Earth.

It could besides be argued that, for successful companies at least, it is in their best involvements to hold this model as this would supply competitory advantage for them.

As companies become planetary, it is critical that consistence is maintained in describing. Users of fiscal information will be able to do effectual determinations if fiscal information is:

• Easy to understand
• Relevant – so users are able to do economic and investing determinations
• Reliable – free from mistake or prejudice
• Comparable – for different clip periods in one company and between different companies

The purposes of the globally accepted conceptual model are geared to accomplish these features and therefore are in the best involvements of users.

The sticking point is bridging the differences between states which is the challenge that standard compositors across the universe and the IASB face. In Europe, for illustration, the issue of comparison has been made easier as a consequence of the debut of the Euro in many states.

Decision

In the UK, the development of accounting criterions has spanned over 30 old ages to undertake issues of consistence that are still prevailing today. However, the ASC and now the ASB have achieved a great trade of success in cut downing the hazards associated with originative accounting and harmonizing accounting criterions in the UK.

The IASC/IASB was formed to harmonize accounting criterions across the Earth. It has made important paces as states have either adopted their model and criterions or have based their criterions on those of the IASB’s. There are still challenges to be overcome for full harmonization and convergence to be achieved, particularly in emerging markets. These challenges or differences will necessitate to be identified, prioritised and overcome.

For convergence to work, accounting criterions need to be harmonised. This will take clip. For one, emerging markets have a batch of catching up to make. However, this should non deter motion towards a convergent model. Great paces have been made to acquire to the point where the developed universe is runing to similar accounting criterions and this should function as the motive to accomplish convergence.

After all, a globally accepted conceptual model is in the best involvements of users, standard compositors and hearers runing in an progressively planetary market place as they would hold entree to fiscal information that provides assurance due to their consistence, relevancy, easiness of construing and understanding, dependability and comparison.

Mentions AND BIBLIOGRAPHY

• Abdel-Khalik, R 1998, ‘Blackwell Encyclopaedic Dictionary of Accounting’ , Blackwell Publishing, Oxford
• Black, G 2000, ‘Student’s Guide to Accounting and Financial Reporting Standards’ 7^Thursdayedition, Pearson Education Ltd. , London
• Hepwood, A et Al 2004, ‘The Economicss and Politicss of Accounting: International Perspectives on Trends, Policy and Practice’ , Oxford University Press, Oxford
• McLeay, S & A ; Riccaboni, A 2002, ‘Contemporary Issues in Accounting Regulation’ , Blackwell Publishing, Massachusettes
• Nobes, C. W. et Al 1997, ‘The Development of Accounting in an International Context’ , Routledge UK, London
• www.accaglobal.com
• www.accountingresearchmanager.com
• www.asb.org.uk
• www.dcode.co.uk
• www.ingentaconnect.co.uk
• www.icaew.co.uk