The income statement

Current national accounting requirements often differ with the result that like transactions and events are reported differently in different countries. This can have a significant impact on both the balance sheet and the income statement. The differences make it difficult to distinguish changes in the performance from the effects arising from the use of different accounting requirements. The aim of accounting harmonisation is to make the financial statements of companies comparable with the financial statements of companies in other countries.

On the simplest level, harmonisation is the process of bringing international accounting standards into some sort of agreement so that the financial statement from different countries are prepared according to a common set of principles of measurement and disclosure. In the following part of the paper, UK will be taken into as an example to evaluate the influences which brought by international accounting harmonisation and latterly compare UK GAAP to US GAAP.

Developments and Influence of Harmonisation The demand for harmonisation has not passed unnoticed by various institutions with an interest in accounting, and, apart from the efforts made by companies to deal individually with the problem, there have been several initiatives to approach the problem on an international level. The following three promoters will be discussed major in this paper: The continuation of the process of identifying accounting areas not covered by existing standards and, as a consequence, the development of new IASs to achieve a sufficiently complete set of standards.

Considerable progress towards the first of these aims – the reduction of free choices – was achieved in the comparability and improvements project. In 1995, the IASC and IOSCO agreed a list of accounting issues which have to be included in a core set of IASs – core standards (appendix 2), for those standards to be accepted by IOSCO for the purpose of cross border offering and other foreign listings. The IASC completed the core standards at the end of 1999 and IOSCO endorsed those standards (subject to certain conditions) in May 2000.

As part of the continuing process of evolving into the official standard-setter to the world’s stock exchange, the IASC radically changed its structure at the end of 2000. It broke away from its sponsoring professional accounting associations and became an independent non-governmental organisation with a full time board of standard-setters (IASB), many of whom have past experience as standard-setters in different countries.

As IASC was reconstituted to IASB in 2001, which much progress has been made in promoting IASs and in harmonising accounting practice internationally. National rules and accounting pronouncements are generally moving to an international benchmark. In the UK, the ASB indicated in October 2001 that it was unlikely to issue any new standards in the UK, except those required to implement IASs. ASB would instead be monitoring existing standards to facilitate harmonisation with IASs. The potential for IASs to provide a basis for comparable cross-border financial reporting is increasingly discussed.

While IASs have been developed since 1973 by the IASC, now the IASB, in the UK the Accounting Standards Committee (ASC) and the Accounting Standards Board (ASB) were producing independent UK Statements of Standard Accounting Practice (SSAP) and Financial Reporting Standards (FRS) respectively. The changes that will be required to UK regulations, particularly SSAP and FRS to IAS to harmonise the two sets of regulations into a single set of standards, the new International Financial Reporting Standards (IFRS). This is the objective of the ‘convergence project’. Some of the changes will be to bring UK GAAP into line with current IAS, while other changes will be made to the IAS to bring them into line with UK GAAP. It will not be a one-way process.

IASs influence accounts in two ways. First, UK standard setters are increasingly attempting to produce standards that comply as much as possible with IASs. Over recent years, there has been considerable cooperation between standard setters across the world. Consequently, with some exceptions, UK GAAP is consistent with IASs. Second, companies that are quoted on stock exchanges outside UK may adopt IASs to improve their acceptability in other jurisdictions. For example, the London Stock Exchange accepts from its registrants accounts prepared under IAS GAAP.

The European Union

Harmonisation of accounting within the European Union (EU) is very different. The harmonisation programme was pursued with a great deal of enthusiasm in the 1970s, less in the 1980s and more or less came to a standstill at the time of Maastricht agreement in 1992, with a number of directives still in process. The European Commission (EC) demonstrated its awareness of the global implications of the European experiment when it announced in January 1999 that it would join the IASC’s Consultative Group. To date, the EU Council of Ministers has issued two major directives: the Fourth Directive and the Seventh Directive.

The Fourth Directive

The Fourth Directive was adopted by EU in 1978. It has two strategic objectives. First, by coordinating company law in member nations, it seeks to eliminate needless legal and bureaucratic obstacles to economic activity within the EU. Secondly, by establishing basic reporting requirements and acceptable financial statement formats, it attempts to create a minimum level of comparability among financial statements throughout the EU.

The most discussed feature of the Fourth Directive is the True and Fair View. According to the Article 2 of the directive, preparers should ignore any provision therein if compliance with that provision would conflict with presentation of a true and a fair view of a company’s financial position and income. Although more than 20 years have passed since the adoption of the Fourth Directive, its effects are still being debated. The Directive unquestionably has had a major impact on reporting standards around Europe.