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When EU moved towards a single market across Europe, it faced the potential of different financial reporting regimes across EU associates. To accomplish a genuine standard of financial segregation, it has become essential to follow common financial reporting standards.
As of June 2002, the European Commission adopted a rule requiring all listed EU companies in regulated markets to prepare their financial statements according to IAS (International Accounting Standard) or IFRS (International Financial Reporting Standards). The regulation is applicable only on consolidated accounts and companies are allowed to choose their domestic GAAPs for subsidiaries and associate companies. This regulation went forward in January 2005. Companies Act 1985 governs the use of UK GAAP by UK based companies. Similar to the UK other EU companies have their own laws. The EU members have now altered their own laws to consider the IFRS regulation to offer a common financial reporting standard. In the last quarter of past century, the global economic systems have moved towards globalisation. International companies are manufacturing and selling across the world, many of these businesses are listed on foreign stock exchanges. The Globalisation of markets and the establishment of multinationals led to enhanced inclination and awareness about international markets.
This was closely followed by the globalisation of financial markets which brought up the value of understanding the international financial results and the reporting data format. Quick improvements to the communication and technological areas and the simple access that the internet has provided, has given International investors the chance to further spread their profiles. Present day international investors are not constricted to certain portfolio managers in large banks. They are now as diverse as a sophisticated equity manager is to a small investor in a remote town. Investors also have varied their portfolios by using international equities. The speed at which globalisation is growing has fuelled the need to have common international standards that could be easily understood and followed internationally. The fast growing network of investors has opened new financing sources to other countries as well as put extreme amounts of pressure on the financial regulatory heads to create and improve their reporting systems so that it may be easily understood by wider audiences. Regulatory authorities have evolved the financial reporting system to match the ever increasing needs of global investors, also to make sure that companies in their countries are not confronted with sudden increases in time, resources and knowledge needed to contend with new regulations. In 1973, 9 countries including the UK formed the IASC (International Accounting Standards Committee) with the purpose of developing common accounting standards. The body has now grown to more than a hundred countries with each country, especially the bigger economies, bringing in their own views on the accounting standards. The IASC had to deal with accounting afflictions when coming up with acceptable accounting standards. One would immediately wonder whether IASC has been successful with regards to resolving all the conflicts with the other members, the answer is no. To satisfy more than one hundred accounting bodies from across the globe is almost an impossible project. However IASC did a laudable job and from the 1st January 2005, International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) would be applicable to more than 90 nations.
In the EU, IFRS has only been compulsory for listed companies. The standards that the UK listed companies have had to follow are not the ones issued directly by the International Accounting Standards Board, but the standards that have been supported by the European Commission. The EU supported IFRS, but not IFRS 6 and some of the IFRIC interpretations, and some changes in IAS 39 linking to the fair worth of financial instruments (PwC, 2005a). While the EU regulation can only be forced on listed companies, it also states that a member state has the choice to increase the use of IFRS to unlisted companies inside their own district. The DTI (Department of Trade and Industry), the government trade body accountable for the company regulation in the UK, has said that while there were no mandatory change to IFRS for unlisted companies, the unlisted companies would then still be allowed to select IFRS over UK GAAP from 2005 onwards. The overall aim of the newly formed financial reporting standards are generally the same as that of existing standards, this is to provide data about the financial performance and position of a company to assorted stakeholders. Internal stakeholders such as management usually have a good grasp on what's going on within the company. It is external stakeholders such as investors, auditors, suppliers and creditors who need to be informed in a concise and clear-cut style about the financial implications of business decisions. The IFRS should aim to provide a more absolute picture of a business by making its operating income a more extensive number. As an example, the financial implications of certain stock options were kept out of their income statements. Companies simply mentioned the number of stock options that were granted. But from now on, companies will have to integrate the fair costs of approving stock options in their income statements. This would give investors the opportunity to assess the true costs of executive remuneration. Even though the basic aim is same, there are still a few differences with regards to the implementation and financial reporting that do occur due to the social, economic and political aspects of different countries.
Would it really be a good idea to allow two different accounting standards in the UK, one for listed companies and the other for unlisted companies. The UK's Accounting Standard Board distinctly sees that there would be no merit in having two detached standards. In March 2004 ASB issued a Discussion highlighting their plan to converge with IAS and says that the convergence of UK accounting standards to IAS is a past conclusion. It has already presented many alterations in recent years to bring the UK's GAAP in line with IFRS. Smaller companies, even listed companies, will find it hard to contend with the extra work due to IFRS. Alternative Investment Market (AIM) realises that most of its companies won't be in a position to meet IFRS requirements so soon. So in October 2004 they changed their regulatory position and is now an "exchange regulated market" and out of range of the European Commission regulation on regulated markets. At that time all companies listed on AIM had until January 2007 to implement IFRS.