AC506 lecture 18

1
AC506 lecture 18

• International standards
• Considerations for group accounts
• Source Pierce/Brennan, chapters 13 and 14

2
International environment

• UK, Germany, USA, Australia frameworks
• International standards
• IASC 1973
• Independent private sector body
• International accounting standards
• No formal authority, flexible
• Suited to developing economies

3
Emergence of IASB

• Agreement with IOSCO International Organisation
  of Securities Commissions
• Core set of standards by 1999 which would be
  regarded as appropriate in global marketplace for
  finance (accepted by IOSCO in 2000)
• IASC restructured to become the IASB

4
Emergence of IAS

• Several EU countries permit large companies to
  use IAS for local filing purposes (1998)
• SEC considers possibilities of international
  companies using IAS for cross-border offerings
  (February 2000)
• European directives (June 2000)
• All listed companies in the EU to prepare
  accounts in accordance with international
  standards by 2005
• IASs/IFRSs not mandatory unless individual entity
  or country chooses to adopt (Ireland)

5
Status of IASB

• IASB structure and responsibilities
• Geographically diverse membership
• Issues IFRS, formerly IASs
• IFRIC, formerly SIC deals with urgent issues
• Paul Volcker and David Tweedie
• IASB now a key mover in establishing global
  harmonisation of accounting
• ASB unlikely to issue any more standards and will
  monitor existing standards to facilitate
  harmonisation with IAS

6
Group accounts standards

• Table 13.1 Pierce/Brennan
• FRS 2/IAS 27 (Parent/subsidiary)
• FRS 9/IAS 28, IAS 31 (Parent/associate or JV)
• FRS 7, FRS 10, FRS 11/SIC 22, SIC 28 (Fair value
  and goodwill)
• FRS 1/IAS 7 (Cash flow statements)

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FRS 2 - Accounting for subsidiary undertakings

• Parent/subsidiary relationship exists if any of
  the following apply (Para 14)
• Parent holds a majority of the voting rights
• Parent is a member of the undertaking and has the
  right to appoint or remove directors holding a
  majority of the voting rights at meetings of the
  Board on all, or substantially all, matters
• Parent has the right to exercise dominant
  influence (influence to control operating and
  financial policies, notwithstanding rights or
  influences of other parties)

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FRS 2 - Accounting for subsidiary undertakings

• Examples of dominant influence
• provisions contained in memorandum or articles of
  association
• control contract authorised by memorandum or
  articles of association
• Parent is a member of the undertaking and
  controls it alone pursuant to agreement with
  other shareholders
• Parent has a participating influence and (i)
  actually exercises dominant influence or (ii)
  both are managed on a unified basis
• Parent of a subsidiary is also the parent of any
  sub-subsidiaries
• A participating influence is an interest held on
  a long term basis with a view to securing a
  contribution to its own activities. Twenty
  percent or more is presumed to be a participating
  influence.

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IAS 27 equivalent

• More than half the voting rights
• Can appoint or remove the majority of the members
  of the board of directors or equivalent governing
  authority (membership not required)
• Power to govern the financial and operating
  policies (no mention or articles or memo of
  association)
• Power over more than half the voting rights by
  virtue of an agreement with other investors
  (membership not required)

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Exemptions

• Group is classified as small. Two of following
  criteria must be met for two successive years
• balance sheet totallt IR6 million
• annual turnoverltIR12 million
• average number of employeeslt250
• Parent undertaking is not a company limited by
  shares or by guarantee
• Intermediate parent undertaking
• Irish parent is itself a 90 or greater
  subsidiary of an undertaking established under EU
  law and any minority have approved an exemption
  for Irish company from preparing group accounts
• Above exemptions do not apply to banks, insurance
  companies or public limited companies

11
IAS exemption equivalent

• Intermediate parents do not have to prepare group
  accounts where they themselves are gt90 owned by
  a parent
• Where gt90 owned but lt100 owned, permission of
  the minority interest must be obtained
• Intermediate parent may be listed or may not have
  an EU parent differs from FRS 2
• Exempted parent must disclose why group accounts
  not prepared, how subsidiaries have been
  accounted for, name of ultimate parent and
  registered office of ultimate parent

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Excluding subsidiaries

• FRS2 requires exclusion of subsidiaries in
  following circumstances
• severe long term restrictions substantially
  hinder the rights of the parent to the assets or
  management of the company
• interest in the subsidiary is held exclusively
  for resale and has not previously been
  consolidated
• activities of the subsidiary are so different
  from those of other undertakings to be included
  in the consolidation that to consolidate would be
  incompatible with the obligation to present a
  true and fair view
• FRS2 does not allow exclusion on the basis of
  undue expense or delay required to acquire the
  information

13
IAS equivalent

• IAS 27 requires exclusion of subsidiaries in
  following circumstances
• severe long term restrictions substantially
  hinder the rights of the parent to the assets or
  management of the company gt include as financial
  asset investment at fair value (IAS 39)
• interest in the subsidiary is held exclusively
  for resale and has not previously been
  consolidated gt include as current asset at fair
  value (IAS 39)
• Subsidiaries with dissimilar activities should be
  consolidated

14
Uniform accounting policies

• FRS 2 requires that uniform accounting policies
  be used when consolidating parent and
  subsidiaries undertakings - rationale
• Policies will normally be those of the parent
• Single entity policies can and often differ
• True and fair justification for departure from
  uniform policies
• IAS reiterates that where policies differ,
  adjustments would normally be appropriate. If
  not practicable, that fact should be disclosed.

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Coterminus accounting periods

• FRS 2 and legislative general principle - Parent,
  subsidiaries and associates dealt with in the
  group accounts should have co-terminus financial
  year-ends
• Non-coterminus year ends gt choice of the
  following
• Include subsidiary interim statements to the
  parents year end
• Subsidiary financial statements provided that
  year end of subsidiary not more than three months
  before the parent year end (must check for any
  material event between subsidiary year end and
  parent year end - accounting treatment in
  accordance with SSAP 17)
• IAS 27 does not differ from these requirements