UK Accounting: Institutional Framework and Standards

Chapter 33

UK Accounting: Institutional Framework and Standards

Learning objectives

After reading this chapter the student should be able to:

1explain the meaning of the key terms and concepts listed at the end of the chapter;

2describe the current institutional framework relating to the setting and enforcement of UK accounting standards;

3. describe the objectives and role of the Accounting Standards Board;

4. outline the current activities of the ASB;

3.describe the main elements of each of the Statements of Standard Accounting Practice (SSAP) and Financial Reporting Standards (FRSs) that are comparable with the International Accounting Standards (IASs)that are used in this book.

Introduction

This chapter examines the regulatory framework of accounting in the UK. This involves examining the role of the Accounting Standards Board (ASB), the UK equivalent of the International Accounting Standards Board (IASB). This book focuses on accounting using international accounting standards, however, it would be remiss not to make students aware of the fact that the UK has its own regulatory framework, with its own standards, which are still being used by most small, medium and some large sized entities in the UK. As mentioned in the previous chapter, one of the overriding aims of the ASB at the present time is to converge UK accounting standards with those of the IASB. Do not assume that the ASB just accept all standards that are issued by the IASB. This is not the case. Indeed, the UK and America were the first countries to have accounting standard setting bodies and accounting standards. As a result the Financial Accounting Standards Board (FASB) (the American standard setting body) and the ASB have established accounting practices and standards, which are engrained in the accountancy practices in each country. Both countries, and others, work together to create international accounting standards that are perceived to be best accounting practice. However, this is a difficult process as accounting in the UK for some transactions is quite different to that in the US. The UK will only adopt an IAS fully, if the ASB are in agreement with the standard. To date, the ASB has been cherry picking the standards that have been issued by the IASB. Some standards have been fully adopted (for example IAS 37 — Provisions, Contingent liabilities and Contingent assets9 and IAS 10 — Events after the reporting period5 are the exact same as FRS 12 —Provisions, Contingent liabilities and Contingent assets20and IAS 21 —Events after the Balance Sheet Date17) whereas other standards have differences (IAS 7 — Statement of cash flows3 has significant differences to FRS 1 — Statement of cash flows15) and in some instances there is an IAS with no equivalent UK standard (IAS 18 – Revenue7). The differences and similarities between the main standards that are covered in this book are summarised in this chapter.

History of standard setting in the UK

After a string of accounting scandals in the 1960’s the accounting profession decided to take steps to formally regulate itself. Before 1970 the major accounting firms provided much of the guidance on how to account for particular transactions. Problems arose though as differences in opinion as to the treatment of certain transactions between firms were evident. The Institute of Chartered Accountants in England and Wales (ICAEW) decided to do something about this and in 1970, the ICAEW set up the Accounting Standards Steering Committee (ASSC). It was quickly recognised that this did not go far enough as it only covered accounting practices in England and Wales and in 1974 the six major professional bodies came together to form the Consultative Committee of Accounting Bodies (CCAB).

The CCAB comprises six major professional accountancy bodies:

1The Institute of Chartered Accountants in England and Wales (ICAEW).
2The Institute of Chartered Accountants in Scotland (ICAS).
3The Institute of Chartered Accountants in Ireland (ICAI).
4The Association of Chartered Certified Accountants (ACCA).
5The Chartered Institute of Management Accountants (CIMA).
6The Chartered Institute of Public Finance and Accountancy (CIPFA).

CCAB is a limited company with six members — senior members of the six member bodies. The purpose of CCAB is to provide a forum to consider factors that affect the accounting profession as a whole and to provide one voice to represent the accounting profession when it interacts with the government.

All the above named professional bodies also became members of the ASSC, which changed its name in 1975 to the Accounting Standards Committee (ASC). In 1990 the ASC was replaced by the Accounting Standards Board (ASB). The ASC represented the six major professional accountancy bodies on matters relating to the form and content of company final financial statements. It issued 25 accounting standards known as Statements of Standard Accounting Practice (SSAPs). Seven SSAPs still apply. Each SSAPs specifies how a particular item or transaction is to be treated in the final financial statements of companies.

The ASB continues to perform the same function as the ASC, but is more independent of the professional accountancy bodies and has greater power to enforce accounting standards. For example, before the ASC could issue an SSAP, it required the approval of each of the six professional accountancy bodies. In contrast, the ASB can issue a Financial Reporting Standard (FRS) without approval from any other body.The ASB has issued 29 FRSs to date and supports the 7 SSAPs that were issued by the ASC which have not been superseded.

A more detailed description of the UK institutional framework concerned with the setting of accounting standards is shown diagrammatically in Fig. 3.1. It comprises the following bodies.

The Financial Reporting Council (FRC)

The FRC is a company limited by guarantee that is financed in approximately equal proportions by its members, which comprise the government, City institutions (such as the London Stock Exchange, and the clearing banks), industry and the six major professional accountancy bodies. Its chair and deputy chairperson are appointed by the Secretary of State for Business, Enterprise and Regulatory Reform. The FRC is an independent regulator that has a primary objective of promoting confidence in corporate reporting and governance. Its remit has extended to include overseeing and regulating Actuarial Standards. The Council has seven operating bodies and an executive. The operating bodies are the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Professional Oversight Board, the Financial Reporting Review Panel, the Accountancy and Actuarial Discipline Board and Corporate Governance. The bodies which are primarily concerned with the regulation of accounting preparation are portrayed in figure 33.1.

FIGURE 33.1Institutional framework for setting accounting standards and regulating accounts preparation

The FRC has overall responsibility for standard setting in the UK. The functions it exercises includes:

1Promoting high standards of corporate governance.
2Setting, monitoring and enforcing accounting and auditing standards.
3Setting actuarial standards.
4Statutory oversight and regulation of auditors.
5Operating an independent investigation and discipline scheme for public interest cases.
6Overseeing the regulatory activities of the professional accountancy and actuarial bodies.

In addition, in terms of its accounting specific functions, its role also extends to include: (1) guiding the ASB on work programmes, broad policy matters and issues of public concern; (2) ensuring that the work of the standard setting bodies is properly financed and carried out efficiently and effectively; (3) acting as a proactive voice in public debate; and (4) to make representations to government and the accountancy profession to improve the quality of relevant legislation and accounting practice.

The Accounting Standards Board (ASB)

The ASB is also a limited company established as a subsidiary of the FRC with up to ten board members. A subsidiary is a company that is owned and/or controlled by another company. Two members are full-time (the chairperson and technical director), the remaining members are part-time. Board members are appointed by a nominations committee comprising the chairman and fellow directors of the FRC.

The mainrole of the ASB is to develop, issue, revise and withdraw accounting standards. It is recognised for that purpose under the Companies Act. The accounting standards it issues are referred to as Financial Reporting Standards (FRS). When an entity prepares their financial statements using UK GAAP they are expected to comply with SSAPs and FRSs.The ASB also considers that it has a key role to play in the formulation of IAS and it collaborates with standard-setters from other countries and the IASB both to influence the development of the IAS and to ensure that its own standards are developed with regard to international developments.

The ASB is autonomous in its role in issuing accounting standards. It is, however, the practice of the board to consult widely on all its proposals. The process is explained as follows, Before the ASB issues a FRS it publishes a Discussion Paper (DP), which later becomes a Financial Reporting Exposure Draft (FRED). These are essentially proposed standards which are open to public debate and representations to the ASB. After examining public representations on a FRED it is often amended by the ASB before being issued as a FRS.

The ASB has published a Statement of Aims24 which sets out its aims and how it intends to achieve these aims. The more important parts of this are reproduced below:

Aims
The aims of the Accounting Standards Board (the Board) are to establish and improve standards of financial accounting and reporting, for the benefit of users, preparers, and auditors of financial information.
The Board intends to achieve its aims by:
1.Developing principles to guide it in establishing standards and to provide a framework within which others can exercise judgement in resolving accounting issues.
2.Issuing new accounting standards, or amending existing ones, in response to evolving business practices, new economic developments and deficiencies being identified in current practice.
3.Addressing urgent issues promptly.
4. Working with the IASB, with national standards-setters and relevant EU institutions to encourage high quality in the IASB’s standards and their adoption in the EU.

This may be contrasted with the aims of SSAPs formulated by the ASC in their Explanatory Foreword to SSAPs,25 which states that ‘their primary aim is to narrow the areas of difference and variety in the accounting treatment of the matters with which they deal’.

In response to their first aim the ASB developed the ‘Statement of Principles12’ the UK equivalent to the IASB’s ‘Framework for the Preparation and Presentation of Financial Information11’. The statement of principles was first drafted in 1995 and revised again in 1999. It was influenced by the Framework document in issue at the time.

The Financial Reporting Review Panel (FRRP)

The FRRP is also a subsidiary of the FRC. Its function is to investigate complaints about any company’s published financial statements, where these contain an apparent material departure from an accounting standard and/or the Companies Act 2006, including in particular the requirement to show ‘a true and fair view’. If the FRRP decides that the departure results in failure to give a true and fair view, it will in the first instance request the company to revise its financial statements. Where a company’s directors decline the request, the FRRP is empowered by the Companies Act 2006 to apply to the court for a declaration that the financial statements do not comply with the requirements of the Companies Act 2006 and an order requiring the directors of the company to prepare revised financial statements. However, at the time of writing (2008), the panel has not had to bring any company to court, all issues being resolved to their satisfaction.

The Accountancy and Actuarial Discipline Board

The Accountancy and Actuarial Discipline Board (AADB) is an independent, investigative and disciplinary body for accountants and actuaries in the UK. It is concerned with the running of the Accountancy Scheme (independent disciplinary scheme) for the Association of Chartered Certified Accountants, the Institute of Management Accountants, the Chartered Institute of Public Finance and Accountancy, the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants of Ireland and the Institute of Chartered Accountants of Scotland. It has about 11 members, most of which are non-accountants and non-actuaries. Indeed, no officer or employee of any of the accountancy or actuarial bodies, the FRC or any of its subsidiary bodies may be appointed to a tribunal (which investigates cases). The AADB get involved when a case raises or appears to raise important issues affecting the public interest in the UK and which needs to be investigated to determine if there has been any misconduct by an accountant or an accountancy firm. Two high profile cases under investigation by the accountancy part of this board (referred to as the Accountancy Investigation and Discipline Board (AIDB)) are highlighted briefly:

Real world example
The AIDB started an investigation into the conduct of Deloitte and Touch LLP in their role as auditors and advisers to the MG Rover Group. The investigation will initially focus on the audit of the 2003 financial statements of MG Rover Group and parent company and will also consider the provision of other non-audit services to the group.
The AIDB is also investigating the conduct of RSM Robson Rhodes LLP, auditors of the financial statements of iSoft Group plc during the preparation, approval and audit for the years ended 2003, 2004 and 2005. All members who hold an executive or non-executive directorship in the period will also be investigated. It was alleged that revenues had been recognised before they should have been, though the formal investigation will confirm this fact.

The Urgent Issues Task Force (UITF)

The UITF is a committee of the ASB whose members are people of major standing with expertise in financial reporting. It produces what are referred to as consensus pronouncements under the title of Abstracts. The following description of the role of the UITF is taken from the Foreword to UITF Abstracts:26

The UITF’s main role is to assist the ASB with important or significant accounting issues where there exists an accounting standard or a provision of companies legislation (including the requirement to give a true and fair view) and where unsatisfactory or conflicting interpretations have developed or seem likely to develop. In such circumstances it operates by seeking a consensus as to the accounting treatment that should be adopted. Such a consensus is reached against the background of the ASB’s declared aim of relying on principles rather than detailed prescription.

Any set of financial statements wishing to portray a true and fair view are expected to comply with the Abstracts issued by the UITF. Abstracts consequently may be taken into consideration by the FRRP in deciding whether financial statements call for review.

Other bodies (in brief)

Auditing Practices Board

The Auditing Practices Board (APB), a subsidiary of the FRC, was established in 2002. It replaces a previous APB which had been in existence since 1991. The APB has adopted in full, International Standards of Auditing (ISA). The previous APB had their own Auditing Standards. The APB is committed to developing auditing practices in the UK and in the ROI. It is their aim to 1) establish high standards of auditing, 2) meet the developing needs of users of financial information; and 3) ensure public confidence in the auditing process.

Board for Actuarial Standards (BAS)

In March 2005 HM Treasury approached the FRC to provide a regulatory service for the actuarial profession. In May 2006 the FRC and the Actuarial profession agreed a ‘Memorandum of Understanding’ setting out their respective responsibilities for the regulation of the actuarial profession. As part of this role the FRC is to set actuarial technical standards. This is now performed by the BAS. An underlying aim of the FRC is to promote high quality actuarial practice. In addition, they aim to promote the integrity, competence and transparency of the actuarial profession, to the benefit of those who rely on actuarial advice. The work of the BAS is overseen by the Professional Oversight Board (POB).

Professional Oversight Board (POB)

The Professional Oversight Board (POB) acts on behalf of the FRC as an overseer of the auditing, accounting and actuarial professional bodies. In general, the board reviews how the professional bodies discharge their responsibilities to their members in respect of training, education, continuing professional development, ethical standards, professional conduct and discipline, practising certificates and monitoring, including making recommendations on how these can be improved.

Scope of UKAccounting Standards

In the Forward to Accounting Standards25 the scope of accounting standards is explained as being applicable to the financial statements of a reporting entity that are intended to give a true and fair view of the financial position of the entity at the reporting date and of its financial performance in the period being reported on. Accounting standards are not applicable to immaterial items. Accounting standards provide guidance, they are not meant to contain rules. The spirit and reasoning behind a standard are contained in the standard and even though examples may be provided in the standard, the underlying defining influence should be the spirit of what the standard is trying to achieve. Common themes underlie each accounting standard and these common themes come from a conceptual framework for accounting which includes the ASB’s Statement of Principles for Financial Reporting11.

The UKconceptual framework

There are some important similarities and differences between the IASBFramework for the Preparation and Presentation of Financial Statements11 and the ASB Statement of Principles for Financial Reporting.12

The chapters of the Statement of Principles are as follows:

1. The objective of financial statements
2. The reporting entity
3. The qualitative characteristics of financial instruments
4. The elements of financial statements
5. Recognition in financial statements
6. Measurement in financial statements
7. Presentation of financial information
8. Accounting for interests in other entities.

The objective of financial statements in the IASBFramework makes no explicit reference to the stewardship function. There was considerable pressure to have this included in the ASB Statement of Principles. However, the IASBFramework acknowledges that financial statements are used for assessing the stewardship or accountability of management but regards this as being included within its reference to economic decisions. This difference in the definition of the objective of financial statements may thus be a hurdle to convergence but is probably not insurmountable.