Current UK and IAS GAAP relevant to group accounts are quite similar in terms of disclosure, though some substantial differences do exist. For example, both sets of standards require that the incorporation of subsidiaries should be based on voting control, (FRS 2, IAS 2741), that significant influence must be exercised if associates are to be recognised, (FRS 9, IAS 2842), that group accounts should have coterminous year-ends, apply uniform accounting policies and recognise net assets attributable to the minority interest as a separate item in the balance sheet43, (FRS 2, IAS 27), etc.
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However, grounds for the exclusion of subsidiaries from the consolidated accounts do differ, with dissimilar activities not recognised as a basis for non-consolidation under IAS 27. 44 Definitions of control vary slightly45 and, under IAS 27, minority interests may be calculated on the pre-acquisition carrying amounts of the net assets of the subsidiary46 and in certain circumstances debit balances attributable to the minority are not charged47, though consolidation adjustments for intra-group transactions and balances are comparable with FRS 2.
The equity method is advocated by both FRS 9 and IAS 28 when dealing with associates, though FRS 9 criteria on associates are much more restrictive. 48 One particularly important difference between UK and IAS GAAP becomes evident when accounting for joint ventures. While FRS 9 advocates use of the gross equity method, IAS 3149 sets proportionate consolidation as the benchmark method, with the equity method as an alternative.
Indeed, FRS 9 rejects proportionate consolidation in this instance on the grounds that it is “misleading”. 50 Possibly one of the more significant changes that will impact on companies will be the elimination of the pooling of interests or merger method under IFRS 351. Under UK GAAP, (FRS 6), this method was permitted but seldom applied in practice. Indeed, IAS 2252, the forerunner to IFRS 3, had also provided scope for its use.
Undoubtedly, the greatest impact of IFRS 3 concerns goodwill. The standard eliminates the expensing of goodwill through the income statement, except in the event of impairment. The amortisation process is replaced with annual testing for impairment, in line with US GAAP. Furthermore, the new standard will bring IAS 22 into line with FRS 7 in that all assets and liabilities acquired by the investor will be measured at fair value. 53 Conclusion: Convergence and Improvement
Even a brief analysis of the history of accounting standards related to group accounts illustrates how requirements have repeatedly proved insufficient and why continuous improvement is necessary to ensure that a true and fair view of the holding company’s financial situation is recorded. Whilst the purveyors of UK GAAP have eventually succeeded in providing quality standards with regard to numerous sub-sections of this significant issue, ambiguities exist in areas such as goodwill and merger accounting.
While IAS GAAP is predominately consistent with UK GAAP, it will, over time, hopefully encompass the best standards from all over the world. Indeed, the evolution of legislation and professional standards concerning consolidation, group accounting, subsidiaries, associates and other entities in these islands has largely strengthened the financial reporting framework.