Compare the accounting principles in the uk the us and iass

Global Assurance
9557
Global accounting
UK, IAS and US compared
Global accounting UK, IAS and US compared
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UK, IAS and US compared
Global accounting
Contents
1. Executive summary
2. Introduction
3. Regulatory background
3.1 Generally accepted accounting principles
3.2 Legal and listing requirements
4. Financial statement requirements
4.1 Form of the financial statements
4.2 Comparatives
4.3 Audit reports
4.4 Accompanying financial and other information

5. General issues
5.1 Classification and presentation within the financial statements
5.2 Prior period adjustments and other accounting changes
5.3 Statement of cash flows
5.4 Basis of accounting
5.5 Reporting the substance of transactions
5.6 Consolidation
5.7 Business combinations
5.8 Foreign currency translation
5.9 Hedging
5.10 Interim financial reporting
6. Specific balance sheet items
6.1 Intangible assets
6.2 Fixed tangible assets
6.3 Capitalisation of interest
6.4 Impairment of fixed assets other than investments
6.5 Investments in associates and joint ventures
6.6 Other investments and financial instruments
6.7 Stock
6.8 Debt instruments
6.9 Leases
6.10 Product financing arrangements
6.11 Tax provisions
6.12 Other provisions
6.13 Contingencies
6.14 Capital & reserves, or shareholders’ funds
7. Specific profit and loss account items
7.1 Revenue
7.2 Advertising costs
7.3 Non-monetary transactions

7.4 Holiday pay
7.5 Pensions and other post-retirement benefits
7.6 Other post-employment benefits
7.7 Other long-term employee benefits
7.8 Employee share purchase and option schemes
7.9 Exceptional items
7.10 Sale or termination of an operation & discontinued operations
7.11 Sales of property
7.12 Imputation of an interest cost
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This book has been prepared to assist clients and others in understanding the differences of
principle between accounting standards and the accounting requirements of company law in the

United Kingdom, generally accepted accounting principles in the United States and accounting
standards and other pronouncements of the International Accounting Standards Committee.
Whilst care has been taken in its preparation, reference to the standards, statutes and other
authoritative material should be made, and specific advice sought, in respect of any particular
transaction. No responsibility for loss occasioned to any person acting or refraining from action
as a result of any material in this publication can be accepted by any member of KPMG
International.
ISBN 1 85061 2560
© 2000 KPMG International, a Swiss association. All rights reserved. Printed in the
Netherlands.
KPMG and the KPMG logo are trademarks of KPMG International.
No part of this publication may be reproduced, stored in any retrieval system or transmitted in
any form by any means, electronic, mechanical, photocopying, recording or otherwise, without
the prior permission of the publisher.
Designed and produced by Mattmo concept & design, Amsterdam.
Printed by Drukkerij Dombosch, Raamsdonklsveer
1. Executive summary
Introduction
Despite having a great deal of common purpose and common concepts, the accounting
principles in the UK and the US and under International Accounting Standards (IASs) can lead
to markedly different financial statements. This is not merely of academic interest. In the global
market for capital, the differences need to be understood and, eventually, eliminated.
This book examines, but not exhaustively, those areas of UK, IAS and US requirements most
frequently encountered where principles, or their application, differ.
Regulatory background
The overriding requirements for a UK company’s financial statements is that they give a ‘true
and fair’ view. Accounting standards are an authoritative source as to what is and is not a true
and fair view, but do not define it unequivocally. Ad hoc adaptations to specific circumstances
may be required. Moreover, if, rarely, following the requirements of standards would fail to give
a true and fair view, those requirements must be departed from to the extent necessary to give

a true and fair view. Under IAS the situation is very similar. In the US however, financial
statements are more closely tied into the rule-book by the requirement that they be prepared in
accordance with GAAP.
General issues
Substance
The ‘true and fair’ approach is typified by the UK standard that requires transactions to be
accounted for in accordance with their substance. Whilst the real targets of this requirement
were the (now defunct) off balance sheet finance schemes, it is significant that the way in which
this has been achieved is by a highly conceptual standard. Assets and liabilities are defined and
attention is directed toward analysing probable changes in benefits, risks and obligations in
order to determine the substance - the so called risk-and-rewards approach. In contrast, the US
deals with similar issues by detailed prescription for each type of transaction, eg leasing,
product financing, sale of properties or transfers of financial assets and those prescriptions do
not necessarily follow a risks-and-rewards approach, for example transfers of financial assets
are on the so-called financial components basis (see below). As a general principle IASs follow
the risk-and-rewards approach but have rather less guidance as to how this might be carried out;
and in the case of transfers of financial assets they follow the American components approach.
Revaluation
Having established that an asset exists, the IAS and British bases of measurement can be
fundamentally different from that of America. In Britain and under IASs certain classes of
assets, principally but not solely property, may be revalued provided that this is done
consistently and the valuations are kept up to date. In America the historical basis must be
retained (aside from certain financial instruments).
Business combinations
Business combinations are often a source of accounting issues. A few, important differences
remain between the three GAAPs. Both IAS and the UK include a size test in their uniting/
pooling-of-interests (merger) criteria; the US does not. As a result, pooling-of-interests
accounting is comparatively common in the US but not in the UK or under IAS. When
1. Executive summary
1

7.13 Extraordinary items
7.14 Dividends
7.15 Earnings per share (EPS)
8. Specific major disclosure items
8.1 Segmental reporting
8.2 Disclosures about financial instruments
8.3 Related party transactions
Appendices
I Common differences in accounting terminology
II Common accounting abbreviations
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164
Specific balance sheet items
Intangibles
For many years perhaps the most significant differences between the three approaches lay in the
area of intangibles. In the US, the long standing treatment of (positive) goodwill is the same as
for any other acquired intangible. Such assets must be capitalised and subsequently amortised
over their expected useful lives which may not exceed 40 years (although there are some
proposals to modify this). Before 1998 in the UK and before 1995 under IASs, (positive)
goodwill could be written off directly to shareholders’ funds and usually was. This has now
changed and (positive) goodwill must be capitalised in both regimes. However, it should not be
overlooked that both sets of transitional rules permit the old goodwill to remain in shareholders’
funds.

A new set of differences now arises in respect of amortisation of (positive) goodwill and
intangibles. Under IASs the life is usually limited to 20 years but this may be rebutted and a
longer, but finite period may be used. In such a case annual impairment testing of the (positive)
goodwill or intangible is required. The UK approach is very similar save that it is permitted for
the life even to be indefinite.
In addition, the US rules prohibit the carrying of development costs as an asset. In the UK they
may, at the company’s option, be carried as an asset if certain conditions are satisfied. Under
IASs they must be carried as an asset, again if certain conditions are met.
Fixed tangible assets (property, plant and equipment)
As mentioned above, this is the principal category of assets subject to optional revaluation in
Britain and under IASs. However, in Britain one category of asset - investment properties - must
be revalued. Moreover, these investment properties must not be depreciated because of their
special purpose. IASs take a different approach to investment properties. From 2001 they need
not be depreciated, in which case they must instead be stated at market value with changes
therein flowing through the profit and loss account. In the US all property other than land must
be depreciated but not be revalued.
The US also requires interest to be capitalised during the period of an asset’s being made ready
for use. Under IASs and in the UK this is optional.
Impairment
The existence of an impairment is judged differently by the US on the one hand and the UK and
IASs on the other. The US considers that an asset is impaired only if its book value exceeds the
undiscounted cash flows expected to be obtained from its use. If that is the case then it is written
down to its fair value, which may be the present value of those cash flows (if fair value cannot
be determined in other ways). Under both IAS and UK principles recognition and measurement
are consistent: an impairment occurs when and to the extent that the book value exceeds the
higher of the net realisable value and the present value of the cash flows expected to arise from
the continued use of the asset.
The US does not permit any subsequent reversal of the impairment. Both IASs and the UK do
permit reversal but in respect of goodwill (IAS) and goodwill and intangibles (UK). There are
some restrictions on this.

Associates and joint ventures
Under US GAAP there is no accounting distinction between associates and joint ventures: both
are equity accounted. Under IASs certain types of joint venture may, optionally, be
proportionately consolidated. In the UK joint ventures may not be proportionately consolidated,
1. Executive summary
3
acquisition accounting applies the UK requires any restructuring of the acquired entity to be
charged in the post-acquisition profit and loss account. Under IAS and US requirements some
such restructurings may increase the goodwill.
In addition, where the fair value of the acquired assets and liabilities is greater than the price
paid - negative goodwill - the US rules require the non-current asset fair values to be reduced
to eliminate the difference and thereafter a deferred credit arises for any remaining difference
and is amortised over up to 40 years. The UK records negative goodwill as a separately
disclosed deduction from positive goodwill and amortises it in line with depreciation and sale
of the acquired non-monetary assets. Any remainder is taken to the profit and loss account in
the periods expected to benefit. The IAS approach involves a similar presentation but the
release to the profit and loss account is as follows: first, to match any costs that it has been
identified with; then to match and to the extent of the depreciation of acquired non-monetary
assets; and any balance thereafter is taken immediately to income.
Foreign currency translation
The translation of foreign currency financial statements of foreign operations throw up some
important differences. All use the closing rate/ net investment method but in the UK the profit
and loss account may be translated at either the average or the closing rate. Some companies do
choose the latter. Under IASs and in the US the actual, or an average rate, must be used.
Moreover, under IASs it is a matter of choice as to whether to include capitalised goodwill and
fair value adjustments as part of the retranslated net investment, whereas in the UK and US they
are always included.
Lastly, under IASs and US GAAP the cumulative translation adjustment on a net investment is
recycled through the profit and loss account on disposal of the net investment. In the UK there
is no recycling.

Hedging
Both IASs and US GAAP have comprehensive standards on hedging; the UK does not. Some of
the differences in approach here are typified by the case of a hedge of a future transaction, which
can be either a contracted future transaction or a forecast one. In the UK the hedge would usually
be held off balance sheet until the transaction occurs, the transaction then being stated on the
hedged basis. Under IASs the cash flow hedging model is applied to this hedge: the hedge is stated
at fair value with the resulting adjustment, so far as it is an effective hedge, taken directly to equity;
it is held there until the transaction occurs when it is then recycled out to adjust the transaction
(either affecting the profit and loss account immediately or adjusting the cost of the purchased
asset as appropriate). The US uses the cash flow hedging model for hedges of forecast
transactions; however, the gains and losses initially taken to equity are not recycled into the cost
of the hedged purchased asset (if that is the case) but are instead recycled into the profit and loss
account to match the cost of the asset as it flows through, eg as it is depreciated. Where the future
transaction is a contracted one the US uses the fair value model: the hedge is stated at fair value
with the resulting adjustment flowing through the profit and loss account; the hedged item, in this
case the contract, is stated at fair value to the extent hedged with the resulting adjustment flowing
through the profit and loss account. (IASs also use the fair value model for some hedges.)
Cash flow
The statement of cash flows of a British company is markedly different. It is based on pure
cash - cash deposits and overdrafts both of which are repayable on demand. Both the IAS and
US GAAP statements are based not only on cash but also on cash equivalents, ie short-term
highly liquid investments. In addition, the US excludes overdrafts and IASs may in some cases
include them.
1. Executive summary
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gain or loss is required to be treated as an extraordinary item. The IAS guidance is somewhat
more brief, and the UK guidance very much so, but for all practical purposes neither permits
classification as extraordinary.
Deferred tax
Under UK principles deferred tax is provided in respect of timing differences - differences

between the timing of inclusion of items in accounting and in taxable profit. The IAS and US
provisions are in respect of the rather different, wider concept of temporary differences. These
are the differences between the balance sheet carrying amounts of assets and liabilities and
those carried in the tax computation. The purpose is to provide for the tax arising on the
recovery of each asset (or settlement of each liability) at book value whether that recovery is
through use, realisation or whatever.
Furthermore, in the US and under IAS, provision is made in full for all liabilities (and for assets
but subject to a recoverability test). In the UK the provision is only for that element of the full
potential liability that will probably crystallise. In determining this ‘partial provision’, account
is taken of the effect of future transactions (eg, capital expenditure) on the deferral, perhaps
indefinitely, of crystallisation of the tax relating to past timing differences. However, the UK’s
partial provision approach looks set to change towards full provision.
Other provisions
The UK and IASC standards on provisions are virtually identical, as IASC based its standard
on the UK one. They provide comprehensive frameworks for provisions, whereas the US does
not. One of the main UK and IASC principles is that all restructuring costs are provided on the
basis only of a commitment resulting from some form of external action; the same applies in
the US as regards redundancy costs, but other costs are still provided on a decision-basis. On
the other hand, the US prohibits provision for voluntary redundancies until an employee has
accepted the invitation. Under UK and IAS standards provision is made for the expected take
up once the terms have been announced.
Decommissioning costs are another specific area of difference. In the UK and under IAS the
cost of necessary decommissioning of a plant or facility is made, on a discounted basis, when
the plant is constructed and is charged as part of its cost (and then depreciated). In practice in
the US such costs are usually spread over the plant’s life on an undiscounted basis. A further
specific area is repairs and maintenance. The UK and IAS prohibit provision for the
maintenance of own assets, but the US does not.
Purchase of own shares
It is a permitted, and not uncommon practice, for US companies to hold their own shares as
treasury stock. Such shares are shown as a deduction from stockholders’ equity (shareholders’

funds); IASs require the same treatment. Under UK law a company cannot formally hold its
own shares without cancelling them. Nevertheless companies may hold such shares in
substance in connection with employee share option schemes. Such shares are shown as an asset
in the balance sheet (usually a fixed asset).
Specific profit and loss account items
Defined benefit pensions and similar
The current UK standard is quite different from those of the US and IAS. The UK approach
could be termed actuarial: it uses valuation assumptions, for both assets and liabilities, that look
to the long-term outcome. The US and IASs use current market rates for high quality corporate
bonds to discount the obligation and use market values for the assets (although in the US certain
1. Executive summary
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although the equity accounting is expanded somewhat to give a similar effect in the profit and
loss account. It is also worth noting that the US and IASs presume a 20% investee to be an
associate whereas the UK has no such presumption but more closely defines ‘significant
influence’. In addition, IASs distinguish between types of joint venture on the basis of legal
form, whereas the UK uses substance.
Financial instruments
Comprehensive standards in this area are a recent innovation. IASs and US GAAP have them;
the UK does not. The IAS and US standards are very similar. They have three different
treatments for financial instruments (other than hedges, for which see above). One is amortised
cost. This is reserved firstly for a very restricted class of assets for which there is the positive
intention and ability to hold it to maturity. It also applies under IAS to any loan or receivable
originated by the company, or in the US to any non-marketable equity securities and any debts
that are not securities. Next, any financial instrument (IAS) or security (US) held for trading
purposes, and all derivatives other than those held as certain hedges, are stated at fair value with
the resulting adjustments taken to the profit and loss account. Lastly, any asset (US – a security)
not fitting in the other categories is known as ‘available-for-sale’. These are stated at fair value
also. In the US the fair value adjustments are taken to shareholders’ funds (through other
comprehensive income) and are recycled into the profit and loss account when the item is sold.

Under IASs a company may choose to use the US treatment for the fair value adjustments or to
take them immediately to the profit and loss account.
In the UK market-makers, for example, mark their financial instruments to market through the
profit and loss account but otherwise investments are usually held at amortised cost.
Investments may be revalued but the resulting adjustment goes directly to shareholders’ funds
and is not recycled.
The UK does, however, have a standard dealing with transfers of financial assets. An asset is
derecognised on a substance basis, ie only if all significant risks and rewards of the assets are
transferred. If credit risk is retained then the asset remains on the balance sheet. Under the US
and IAS financial components approach, however, a credit risk component would be retained to
portray the credit risk but the rest of the asset would be taken off the balance sheet.
Stock (inventory)
In Britain the LIFO method of establishing the cost of stock would rarely be appropriate; in
America and under IASs it is acceptable.
Debt
Where a company’s own shares contain an obligation, as for example some preference shares
do, IASs classify them as debt. In the UK they would be classed as shareholders’ funds, albeit
the ‘non-equity’ element thereof. Under US GAAP there is ‘mezzanine’ level shown separately
from both debt and shareholders’ funds; preference shares whose redemption is not controlled
by the company are reported at this level.
Where an instrument contains both debt and equity-share characteristics, for example
convertible debt, IASs split the two elements and report them as debt and shareholders’ funds
respectively. In the UK and US this is only done if the equity element is actually separable.
There are also differing treatments for the maturity classification of debt. Under IASs and US
GAAP a short-term debt can be reclassified as long-term on the basis of a post-balance sheet
long-term refinancing. This is not possible in the UK.
The US rules provide copious guidance on the extinguishment of debt and in many cases any
1. Executive summary
4
amounts reported internally irrespective of whether they are on the same basis as the external

financial statements. (A reconciliation must, of course, be included.) Under IASs, broadly
speaking, the management approach is used to identify the segments but the UK approach is used
to report figures for them. In addition, under IAS the amounts disclosed include gross assets and
liabilities, depreciation and cash flow information; none of these is given in the UK; in the US
gross assets are required and other items may be required depending upon the internal reporting.
Financial instruments
All three GAAPs have plentiful disclosure requirements for financial instruments. However, there
are a number of differences between them. First of all, the UK has a wide requirement to make
qualitative disclosure of the objectives, policies and strategies for holding or issuing financial
instruments. The SEC requirement in the US is very similar. Under IASs the equivalent disclosure
is in relation only to instruments held for risk management.
IASs require disclosure for all financial instruments of the terms and conditions, which may include
notional principals, maturities, amount and timing of future cash payments etc. In the UK there are no
general terms and conditions disclosures at all. In the US this sort of disclosure is similar to the
‘tabular’options for dealing with market risk (the other two options are sensitivity analysis and value-
at-risk). Further, the US requires separate disclosure about four components of market risk: interest,
currency, commodity and other market risk, such as equity price risk. The UK has requirements for
interest and currency but only encourages other market price risk disclosures. IAS has specific
requirements only for interest risk and otherwise other market risks are dealt with only by the general
terms and conditions disclosures (which would have some similarities with the US tabular option).
The UK does not require any disclosure of credit risk. On the other hand US GAAP calls for
disclosure of concentrations of credit risk. IASs go further and require all credit risk, as well as
all concentrations thereof, to be disclosed.
Lastly on financial instruments, the UK requires disclosures about unrecognised or deferred
gains and losses on all hedges other than of net investments in foreign entities. Under US GAAP
and IASs the equivalent requirements apply only to cash flow hedges, which are used, for
example, for hedges of future transactions whether contracted or uncontracted in the case of IAS
and, for example, for hedges of forecast (eg, future uncontracted) transactions in the US.
Future developments
In all three GAAPs a number of areas of accounting practice are under review, although having

emerged from a period of intense standard setting there is perhaps less just over the horizon than
is usual. Those that are under review are quite major areas.
In some instances the UK proposals would, if carried through to future standards, narrow but
not eliminate some areas of difference with the US and IASs. First, it is proposed that deferred
tax will remain on the timing differences basis but will move towards full provision. Second,
after drawn out debate it looks as though the measurement principles for pensions will be
aligned with IASs; however there will be no spreading at all - the whole change in value will
go onto the balance sheet immediately but with the other entry split between the profit and loss
account and the statement of total recognised gains and losses (other comprehensive income).
In the US also, some of the proposals would also narrow the differences. At present it is fairly
common for US business combinations to use pooling/ uniting-of-interests (merger)
accounting, whereas it is comparatively rare under UK and IAS principles. The FASB proposes
to prohibit the method entirely. The IASC is monitoring US developments and may re-examine
this area. The FASB has also proposed that the maximum life of goodwill should be reduced to
20 years. However, other intangibles might in some cases have longer lives, even indefinite lives
if there is an observable market price for the intangible.
1. Executive summary
7
de minimis fluctuations may be ignored and some averaging of asset market values is
permitted). Moreover, the US and IAS rules prescribe particular actuarial methods and
assumptions. The UK standard does not. The differences may sound trivial but in the field of
pensions a small change in an assumption can be magnified to a large monetary amount.
In the UK all variations from the regular costs are spread over the remaining working lives of
the employees. In the US there is an option not to account for any variation if it falls within
certain limits known as the ‘corridor’. Under IASs any vested past service costs are booked
immediately; all other variations are either spread forward if they fall outside a similar corridor,
or instead any faster, systematic recognition method may be used.
The cost of employee share schemes
Where an employee is awarded a share option the cost to the company is based, in the UK, on
the intrinsic value (the difference between the option exercise price and the share’s market price)

at the grant date. In the US the cost may be based either on intrinsic value at a measurement
date that may be later than the grant date, or on the fair value of the option itself. (It should be
noted that in both countries, if certain conditions are met, no intrinsic value-based cost at all is
accrued.) IASs have no rules on share-based remuneration.
Sale or termination of an operation and discontinued operations
The US definition of a discontinued operation is more narrowly drawn than that of the UK; that
of IASs is between the two. In addition, a major difference arises in the presentation of
discontinued operations. In the US the post-tax results are presented as a single line item
positioned immediately before extraordinary items. Furthermore, the assets and liabilities of the
operation are presented as a single net amount in the balance sheet. In the UK the revenues,
expenses, assets and liabilities remain in their normal locations in the accounts. The results of
the discontinued operation are separately identified but only by analysis, on the face of the
profit and loss account, of the turnover and operating profit of the whole group into continuing
and discontinued elements. The assets and liabilities are not identified. The IAS requirements
are similar to those of the US insofar as they require all profit and loss account items down to
profit after tax, and assets and liabilities, to be attributed to discontinued operations. However,
it is not clear whether the US single line item presentation is possible under IAS; and, in contrast
to the UK, amounts so attributed may be given in the notes rather than on the face.
So far as provisions for sales or terminations of operations are concerned the US rules require
provision for a discontinued operation to be made on a decision-basis. IAS and the UK require
a commitment basis, whether the sold or terminated operation is a discontinued one or not.
When provision is made the UK and US approaches include certain operating losses in that
provision, but under IAS they may not be included.
Dividends
In the UK a dividend declared after the year end, but in respect of the year just ended, is
accounted for in that previous year. In the US and under IAS such a dividend would be dealt
with in the year of declaration.
Specific major disclosure items
Segmental reporting
Rather different approaches are taken by the three for segmental reporting. In the UK segments

are distinguished from one another by their differing risks and returns and the amounts reported
therefor are analyses of the relevant figures as stated in the financial statements. By contrast, the
US uses the management approach whereby the company is split into segments in line with the
internal reporting structure, whatever that may be. Moreover, the amounts reported are the
1. Executive summary
6
constitutional arrangements for setting IASs have been put in place in order to improve both
that process and the relationship with national standard setters and others. Where these reviews
and new arrangements will in practice leave the balance between IASs and national standards,
such as those of the UK and US, is difficult to predict. If US endorsement is slow in coming
then IASs may be marginalised. But there might then develop a powerful IAS-bloc, perhaps
centred on the European Union, including the UK, to rival the other standard setters’ power-
bases. The European Commission is already proposing, again with some qualification, that
IASs become mandatory for listed European companies. On the other hand, the IAS table might
become the place where national standard setters thrash out agreed treatments to be put into
their own national standards and into IASs. Or IASs might even become the single global super-
code replacing national standards altogether – indeed, this is the only rational long-term
objective.
Notwithstanding this hurly-burly, none of UK, IAS or US standards will disappear overnight.
Important differences between them, and the need to cope with them, will remain for some
years to come.
This book describes the significant differences between accounting principles followed in the
UK, under IASs and in the US. It is not a complete listing; rather it is a summary of those areas
most frequently encountered where the principles differ or where there is a difference in
emphasis between the three. Furthermore, it does not address accounting in specialised
industries, for example banking and insurance. It looks first at the regulatory background and
at general requirements and issues before turning to specific matters affecting the balance sheet,
the profit and loss account and finally major disclosure matters. The comparison is effected by
examining the UK principles in the left-hand column, those of IASs in the middle and those of
the US on the right. As far as possible then, the requirements of the three frameworks dealing

with the same circumstances are set out side-by-side. The narratives use the terminology of the
UK, IASs or the US as appropriate. A table of common differences in terminology is provided
in Appendix I. In addition, the narratives usually refer to the reporting entity, for the sake of
convenience, as being a company. However, the terms ‘entity’, ‘enterprise’ or ‘undertaking’ are
used where the context requires it (eg, where an ‘entity’ is a quasi-subsidiary). References to the
sources of the accounting requirements or practices are included in the headings or sub-
headings as appropriate. The key to these and other abbreviations is set out in Appendix II. US
references which comprise a letter followed by a number (eg, B50 for business combinations)
are to the section of the Current text (a condensed version of the requirements of the standards
ordered by subject and issued by the FASB) with that same reference. The last standards which
were taken into consideration in writing this book were FRS 16 (Current taxation) in the UK,
IAS 40 (Investment property) and the US’s SFAS 138 (Accounting for certain derivative
instruments and certain hedging activities - an amendment of FASB Statement No 133); the text
reflects the latest standards even though some of them are not yet mandatory.
The matters referred to in this book are complex. Legislation, accounting standards and other
authoritative material are, of course, subject to change. Accordingly, professional advice should
be sought before acting on, or refraining from acting on, any material in this book.
2. Introduction
9
2. Introduction
As this book rolls off the presses, the course of international accounting harmonisation has
reached a defining but as yet unclosed chapter in its history. There will soon crystallise into
reality the international relationship between different standards, and their standard setters, for
many years to come. Before looking forward to that, the progress to date should not be
overlooked. The force that drove it, and continues to do so, can be stated in three words: global
capital markets.
Both Britain and America have long histories of exchange traded equity investment by the
public and their accounting has developed to report companies’ activities from this perspective.
As the capital markets become increasingly global other countries that have hitherto used, say,
the perspective of the tax authorities or lenders as their accounting model, have found that to

participate in the market they need to adopt its perspective. At the same time globalisation
demands that the various versions of that perspective come closer together, if not become
replaced by a single version. Here International Accounting Standards, IASs, join the story.
IASs are another version of that Anglo-Saxon model. But with the world as their constituency
they have the potential to achieve more widespread acceptability than other versions. In so
saying, one cannot but recognise that these three are indeed different versions of the same basic
model. The apparently common language of the capital markets has marked differences when
put into effect by these three proponents. Why should this be so?
There are probably many factors at work. On the cultural side, the US puts the emphasis on
consistency between companies and, combined with a traditionally litigious environment, this
tends toward the formulation of accounting rules for almost all conceivable circumstances. In
the UK and under IASs the drive has been towards a few principles (although the detailed rule
approach has made a modest showing of late) and a more pragmatic approach. Moreover, the
British and IAS standard setting processes started only in the 1970s - America had something
like a 30 year head start. The result is that in the US there is very little scope for alternative
treatments, whilst a range of detailed adaptations of the principles to specific cases is often
possible in the UK. On the academic side there are the intractable accounting problems, such as
deferred tax - is it really a liability and if so how much should be recognised? There are various
solutions to the intractables but no one solution is without its drawbacks. The result is that
different nations opt for different drawbacks just as much as they opt for different solutions.
IASs are perhaps mid-Atlantic. In some areas the UK approach is favoured, for example the true
and fair view and, usually, substance; in others the US approach is adopted, for example the
components approach to financial asset transactions.
However, the gap between the GAAPs has narrowed of late. IASs have undergone a period of
overhaul, eliminating many of the optional treatments; the UK has changed to deal with some
of the intractables, for example goodwill, by accepting largely the same drawbacks as others do;
and in the US there has even been recognition that its standards are not the most rigorous when
it comes to the availability of pooling (merger) accounting. Moreover, the standard setters in
different countries have co-operated on issues such as the overhaul of earnings-per-share
standards. So there is cause to hope that there might be less divergence in the use of the

common concepts.
Looking forward, whilst IASs have received endorsement, albeit somewhat qualified, from the
International Organisation of Securities Commissions (IOSCO), significantly they await the
results of a review by the US Securities and Exchange Commission that may bring about a good
degree of endorsement for their use in the US by non-US registrants. And lately, new
2. Introduction
8
3. Regulatory background
10
UK USIAS
3. Regulatory background
3.1 Generally accepted accounting
principles
The term ‘generally accepted accounting principles’
has no formal meaning in the UK. The term
‘generally accepted accounting practices’ (GAAP)
is used informally in the UK to denote the corpus of
practices forming the basis for determining what
constitutes a true and fair view: that is, broadly,
accounting standards and, where relevant, the
accounting requirements of company law and The
Listing Rules of the Financial Services Authority.
Accounting standards are applicable to the accounts
of a reporting entity that are intended to give a true
and fair view (see 3.2 below) of its state of affairs at
the balance sheet date and of its profit or loss for the
financial period ending on that date. The
development of such standards is overseen by the
Financial Reporting Council (FRC), a body
representing a wide constituency of interests. Its

function is primarily to guide the Accounting
Standards Board (ASB), its subsidiary body, on its
work programmes and issues of public concern. The
ASB does the work of developing, issuing and
withdrawing accounting standards. Such standards
developed and issued by the ASB are known as
Financial Reporting Standards (FRSs); the standards
issued by the ASB’s predecessor body, and which
3.1 Generally accepted accounting
principles
(IAS 1, SIC 18)
Under IASs there is no formal term ‘generally
accepted accounting principles’ (or ‘practices’),
although ‘GAAP’ may occasionally be used to
signify the whole body of IASC authoritative
literature.
The sources of such accounting requirements are
the International Accounting Standards (IASs)
themselves and interpretations thereof made by the
IASC’s Standing Interpretations Committee (such
pronouncements being known as ‘SICs’). When
these sources do not cover a particular issue then
the IASC’s conceptual framework, Framework for
the preparation and presentation of financial
statements (the Framework), should be consulted.
If that does not provide guidance then it is
permitted to look to the pronouncements of other
standard setting bodies (eg, the UK’s ASB and the
US’s FASB) and to accepted industry practice,
provided that conflicts with neither IASs, SICs nor

the Framework.
IASs sometimes include optional treatments. One
is designated the Benchmark Treatment and the
other is designated the Allowed Alternative
Treatment. For each such choice a company should
3.1 Generally accepted accounting
principles
The principal sources of generally accepted
accounting principles (GAAP) are Statements of
Financial Accounting Standards (SFASs) issued by
the Financial Accounting Standards Board (FASB)
together with Accounting Research Bulletins
(ARBs) and Accounting Principles Board Opinions
(APBs) which were issued by predecessor bodies of
the FASB. The FASB is the designated organisation
in the private sector for establishing financial
accounting and reporting standards. Its board is
composed entirely of full time members. It also
issues Interpretations (to clarify, explain, or
elaborate on existing SFASs, ARBs or APBs) and
Technical Bulletins (to address issues not directly
covered by existing standards). US pronouncements
are issued sequentially. They are not withdrawn but
may be revised or superseded by subsequent
pronouncements.
The FASB publishes each year the updated
Original pronouncements and the Current text. The
former contains the original text of all FASB
pronouncements, Interpretations and Technical
Bulletins presented in sequential order. The

latter is a reorganised version of the Original
pronouncements categorised by subject. As
UK USIAS
3. Regulatory background
11
have been adopted or amended by the ASB, are
known as Statements of Standard Accounting
Practice (SSAPs). The ASB is composed of two full-
time and eight part-time members.
A committee of the ASB, known as the Urgent
Issues Task Force (UITF), assists the ASB in areas
where an accounting standard (or a Companies Act
provision) exists, but where unsatisfactory or
conflicting interpretations have developed or seem
likely to develop. In these circumstances the UITF
will seek a consensus as to the appropriate
accounting treatment. The ASB publishes abstracts
of the UITF’s consensuses (known informally as
‘UITFs’) which are considered to be part of the
body of practices forming the basis for determining
what constitutes a true and fair view.
3.2 Legal and listing requirements
(CA 85, UITF 7, The Listing Rules)
Significant difference
The overriding requirement is for the financial
statements to give a ‘true and fair view’.
The Companies Act 1985 sets out the accounting
requirements for companies. The overriding
requirement is for the accounts to give a true and
fair view of the company’s (or group’s) state of

affairs as at the balance sheet date and of the profit
or loss for the financial period ending on that date.
apply the Benchmark or Allowed Alternative
consistently.
IASs are developed and issued by the board of the
IASC, which was hitherto composed entirely of
part-time members. The board has now being
reconstituted to become composed of twelve full-
time members and two part-time members, all of
whom will be appointed by the trustees of an IASC,
itself newly constituted as an independent
foundation. SICs are developed by the Standing
Interpretations Committee, a sub-committee of the
IASC, and are approved by that committee and by
the board. SICs are intended to give guidance in
cases when IASs are unclear or silent.
3.2 Legal and listing requirements
(IAS 1)
Significant difference
The overriding requirement is for the financial
statements to give a ‘fair presentation’.
There is no legal framework under which IASC
standards operate. The IASC is an international
foundation representing a wide constituency of
interests. Its objective is to develop, in the public
interest, accounting standards, promote their
world-wide use and rigorous application and to
pronouncements are not withdrawn nor
(necessarily) revised as they are affected by
subsequent publications, it is usually advisable to

consult the Current text rather than the Original
pronouncements. The Original pronouncements do,
however, contain background information and the
basis for the FASB’s conclusions which may be
valuable to a reader unfamiliar with the related
concepts or accounting treatments.
Further accounting guidance is provided by
consensuses of the FASB Emerging Issues Task
Force (EITF) and Statements of Position, Issues
Papers and Industry Audit and Accounting Guides
issued by the American Institute of Certified Public
Accountants (AICPA).
3.2 Legal and listing requirements
(Securities Act 1933, Securities Act 1934)
Significant difference
The main requirement is for (domestic
companies’) financial statements to be
prepared in accordance with US GAAP.
In general, only those companies which are
registered with the Securities and Exchange
Commission (SEC) are under any legal obligation to
publish audited financial statements. Certain other
companies may publish audited financial statements
due to other regulatory requirements (for example
UK USIAS
3. Regulatory background
12
A ‘true and fair view’ is not defined but for a
combination of reasons, including the authorisation
of the ASB to issue accounting standards under the

Act, it is generally accepted as requiring compliance
with applicable accounting standards - indeed the
ASB has received, and published, legal opinion to
this effect. However, since the ‘true and fair’
requirement is an overriding one, companies must
depart from any specific accounting practices
prescribed by law or by standards if those practices
would fail to give a ‘true and fair view’ in the
particular circumstances and to adopt some
alternative that does give such a view. Such
circumstances are expected to occur only rarely and
when they do a company is required to disclose the
particulars of the departure (the prescribed
treatment that would fail to give a true and fair view
and the alternative adopted), the reasons for it (why
the prescribed treatment would so fail) and its
effect.
The Act sets out the detailed requirements for all
companies to prepare accounts, prescribes their
form and content, prescribes the requirements for
audit and requires publication of the accounts to
shareholders and others including their filing on
public record with the Registrar of Companies.
There are some derogations of the rules for
accounting disclosure and for filing by small and
medium sized companies (as defined) and, for
certain very small companies (as defined), there is
an exemption from the requirement for audit.
Significantly, the Act provides for the Secretary of
State (for Trade and Industry) to enquire into

accounts where it appears that the requirements of
the Act - including the ‘true and fair’ requirement
and thus requirements of accounting standards -
might have been breached. Where such accounts do
work to bring about convergence of IASs and
national accounting standards. The IASC itself has
no power to require companies to adopt its
standards, although some countries may permit
their companies to do so (as an alternative to
national standards) or may require it by importing
the standards wholesale. However, any company
claiming compliance with IASC standards must
comply with all IASs and all SICs.
Similarly to the UK, the overriding requirement is
for a fair presentation, which is not defined. Thus
companies must depart from the specific
provisions of standards in order to give such a view
when to do otherwise would not. In these
‘extremely rare’ cases, disclosures similar to those
required in the UK are to be given.
The IASC does not carry out any inquiry or
enforcement role regarding the application of its
standards.
In addition, accounts prepared under IASC
standards often contain supplementary information
required by local statute or listing requirements.
banks). The financial statements of domestic SEC
registrants must be prepared in accordance with US
GAAP and in conformity with other SEC
regulations regarding accounting and disclosures,

and form part of the Annual Report on Form 10-K
filed on public record with the SEC. Foreign
registrants are required to prepare and file their
Annual Report on Form 20-F, in accordance either
with US GAAP or with foreign GAAP including
reconciliations to US GAAP, and which is similar to
Form 10-K. In addition to 10-K and 20-F filings,
SEC registrants must make regular filings of
additional financial information.
Many companies which are not required to register
with the SEC include the additional accounting and
disclosure requirements imposed on SEC
registrants.
In addition to the SEC various other regulatory
organisations, such as the Governmental
Accounting Standards Board and the Office of
Thrift Supervision, issue accounting and reporting
requirements relevant to entities within their
jurisdictions.
Forms 10-K and 20-F are periodically reviewed by
the SEC for compliance with GAAP (including the
local GAAP of a foreign registrant) and other
relevant regulations. The review findings are
communicated by private comment-letters to the
company. Significant inadequacies can lead to re-
issue of prior year financial statements. Lesser
problems may be dealt with by amended current
year filings or improved disclosures in future
financial statements.
UK USIAS

3. Regulatory background
13
appear to be defective he may require the directors
to revise the accounts, applying to the Courts if
necessary to enforce this. The Secretary of State
has, under the Act, authorised the Financial
Reporting Review Panel (FRRP) - a subsidiary body
of the FRC - to carry out this enquiry and
enforcement role in respect of large companies (as
defined). To date the FRRP has not found it
necessary to apply to the Courts in order to enforce
its will.
The Financial Services Authority (a regulatory
body) imposes some additional disclosure
requirements on companies whose securities are
listed. The requirements are contained in its rule
book, The Listing Rules.
4. Financial statement requirements
14
UK USIAS
4. Financial statement requirements
4.1 Form of the financial statements
(CA 85, FRS 1, FRS 3)
The following are normally presented:
balance sheet;
profit and loss account;
statement of total recognised gains and losses,
known informally as the ‘STRGL’ (see 5.1);
note of historical cost profits and losses (see 5.1);
cash flow statement; and

notes to the accounts (including the reconciliation
of movements in shareholders’ funds).
The reconciliation of movements in shareholders’
funds (equivalent to the IAS or US statements of
changes in shareholders’ equity) may also be shown
as a primary statement but may not be combined
with the STRGL.
A parent company must present consolidated
accounts, subject to three exemptions. The first, and
major, exemption is that, broadly speaking, if the
company is itself a wholly owned subsidiary of
another European Union (EU) company in whose
consolidated accounts it is included then it need not
prepare consolidated accounts itself. The second
exemption is similar to this but applies where the
company is only majority owned by another EU
parent (but subject to certain minority protection
procedures). Lastly, certain medium and small sized
4.1 Form of the financial statements
(Framework, IAS 1, IAS 27)
The following are normally presented:
balance sheet;
income statement;
a statement of changes in equity, or a statement
of recognised gains and losses (see 5.1);
cash flow statement; and
notes to the accounts.
A parent company must present consolidated
financial statements unless it is itself a wholly
owned subsidiary or, subject to the minority’s

consent, is virtually wholly owned (usually 90% or
more of the voting power). Usually only
consolidated financial statements are presented as
international standards do not contain a
requirement to present the parent company’s
financial statements. However, if such statements
are prepared, all relevant standards would apply
equally to the individual financial statements.
4.1 Form of the financial statements
(SFAS 130, ARB 43, F43, Regulation S-X)
The following are normally presented:
balance sheet (or statement of financial
position);
income statement (also known as statement of
earnings or statement of operations);
statement of changes in stockholders’ equity
(sometimes combined with the income
statement, occasionally included in the notes);
statement of cash flows; and
notes to the financial statements (including the
statement of comprehensive income - see 5.1).
Usually consolidated financial statements only are
presented.
UK USIAS
15
4. Financial statement requirements
companies (as defined) may opt not to prepare
consolidated accounts.
Where consolidated accounts are required, the
parent company’s balance sheet (but not its other

statements), and related notes, and certain other
disclosures are nevertheless required to be given.
A cash flow statement is not required for a company that
is a 90% or more owned subsidiary of another company
in whose publicly available consolidated accounts it is
included. In addition, a cash flow statement is not
required of a small company (as defined).
4.2 Comparatives
(CA 85)
Financial statements are presented for the current
and the preceding periods only.
4.3 Audit reports
(CA 85, SAS 600)
The audit report refers to the current year only
(although a mis-statement in the comparatives
would probably lead to a qualification since those
comparatives would not have been properly
prepared in accordance with the Companies Act
1985 - see below).
4.2 Comparatives
(Framework, IAS 1)
The financial statements cover the current and
preceding periods only.
4.3 Audit reports
(ISA 700, ISA 710)
The IASC does not issue auditing standards.
Audits of IAS financial statements would usually
be carried out under local standards, or, often,
International Standards on Auditing (ISAs)
issued by the International Auditing Practices

Committee of the International Federation of
4.2 Comparatives
(ARB 43, F43, Regulation S-X)
Except for SEC registrants, financial statements are
usually presented for the current and the preceding
years. SEC registrants are generally required to
present income statements, statements of changes in
stockholders’ equity and statements of cash flows
for each of the most recent three years and balance
sheets for each of the most recent two years.
4.3 Audit reports
(SAS 58, SAS 64)
The audit report refers to all years presented.
Statements on Auditing Standards (issued by the
Auditing Standards Board of the AICPA) prescribe
the form of the report, which usually states that the
audit has been conducted in accordance with
generally accepted auditing standards and whether
UK USIAS
4. Financial statement requirements
16
The Companies Act 1985 requires auditors to report
whether or not the accounts give a true and fair view
and whether they have been properly prepared in
accordance with that Act; Statements of Auditing
Standards (SASs), issued by the Auditing Practices
Board (APB), prescribe the form of that report. The
report distinguishes the respective responsibilities
of company directors and of auditors; describes in
general terms the audit process (confirming that it

has been carried out in accordance with Auditing
Standards) as the basis of the audit opinion; and
states the auditors’ opinion.
The report would be qualified if the scope of the
audit was limited or if the auditor disagreed with an
accounting treatment or disclosure (including the
comparatives). In addition, where proper accounting
records had not been maintained or where all
necessary information and explanation had not been
received by the auditor, this would be stated in the
report. Uncertainties, if properly disclosed in the
accounts, would not result in a qualified audit report
but if ‘fundamental’ would be mentioned in the
report.
4.4 Accompanying financial and
other information
(CA 85, The Listing Rules, SAS 600)
The accounts must be accompanied by a Directors’
Report containing certain information specified by
the Companies Act 1985. That Directors’ Report is
usually rather brief and it must be filed, with the
accounts, on public record with the Registrar of
Companies, except for the case of small companies
(as defined) which need not file the report.
Accountants, a private sector international
professional body.
Under ISAs the audit report refers to the current
year and/ or the prior year depending on whether
the comparatives are seen as a sub-set of the current
year financial statements or as a separate set of

financial statements. (Even if not ordinarily
referred to, a misstatement in the comparatives
would probably lead to a qualification if the
misstatement was considered material in the
current year comparison). The report states whether
the financial statements present fairly in all
material respects (or give a true and fair view of)
the financial position, performance and cash flows.
The format of the report is similar to that of the
UK: respective responsibilities are explained; the
audit process is described; and the opinion is stated.
The report would be qualified if the scope of the
audit was limited, there was a disagreement over an
accounting treatment or information could not be
obtained. In some situations it will be appropriate
to include an emphasis of matter referring to an
uncertainty; such emphasis is not a qualification.
4.4 Accompanying financial and
other information
(IAS 1)
In the UK and US the accompanying information
arises out of legal and listing requirements. Since
IASs do not relate to any particular legal or listing
framework, there are no such requirements,
although, of course, the particular company using
IASs will be subject to its own such requirements.
However, IAS 1 does encourage but does not
or not the financial statements are presented fairly
in conformity with GAAP. Certain situations must
be disclosed in the audit report, such as when the

financial statements are not in accordance with
GAAP, significant uncertainties exist, the scope of
the audit was limited or necessary information
could not be obtained.
SEC regulations (where applicable) are also relevant
to the form of report given. For example, the report
may have to be extended to cover certain schedules
required by the SEC.
4.4 Accompanying financial and
other information
(Regulation S-K, Regulation S-X)
The annual financial statements filed on Form 10-K
or 20-F must be accompanied by a number of
additional SEC disclosures including management’s
discussion and analysis of financial conditions and
results of operations (MD&A), selected financial
data, supplementary financial information and
certain prescribed financial schedules.
UK USIAS
4. Financial statement requirements
17
The accounts will in practice be accompanied by a
statement acknowledging the directors’
responsibilities, principally for the preparation of
the accounts. (The audit report refers readers to this
statement and, if the statement is not present, the
auditors would give the equivalent information in
their report).
The directors of a company often use the annual
report and accounts as an opportunity to include

information for shareholders on selected operating
and financial matters. The ASB has sought to
regularise the completeness and content of such
information. It has issued a non-mandatory
statement setting out its recommendations for a
thorough ‘Operating and Financial Review’.
In addition to this, listed companies are required to
include in their annual report and accounts a
statement as to the extent to which they have
complied with a code of corporate governance best
practice (known as the ‘Combined Code’), a
statement dealing with how the Combined Code’s
principles have been applied and certain details of
directors’ emoluments (over and above that required
by law). The code covers the proceedings and
composition of the board - including the need for
and role of non-executives - directors’remuneration,
relations with shareholders and certain board
responsibilities in connection with financial
reporting and internal controls. Furthermore, the
directors of all listed companies are required in all
cases to make a statement as to whether the business
is a going concern with supporting assumptions and
qualifications as necessary.
require, a financial review by management which
describes and explains the main features of the
company’s financial performance and position and
the principal uncertainties it faces.
5. General issues
18

UK USIAS
5. General issues
5.1 Classification and presentation
within the financial statements
Balance sheet (CA 85, UITF 4, FRS 4)
The Companies Act 1985 prescribes the available
balance sheet formats. The format usually adopted
is one where total assets less liabilities balances
with capital and reserves (shareholders’ funds) plus
minority interests. Assets are generally presented in
ascending order of liquidity (least liquid first) and
liabilities in descending order (most liquid first).
The Act prescribes minimum standards of balance
sheet disclosure, specifying certain balance sheet
captions and the allocation of items between those
captions.
Current assets and current liabilities are separately
presented from other assets and liabilities. Current
assets are those which are not intended for use on a
continuing basis in the company’s activities.
However, an anomaly arises in that current assets
could include amounts receivable after more than
one year. If the amount concerned is sufficiently
material (in the context of total net current assets)
then that amount must be disclosed on the face of
the balance sheet.
Current liabilities comprise creditors falling due
within one year. Short-term obligations are included
5.1 Classification and presentation
within the financial statements

(IAS 1)
Balance sheet
Whilst certain items are, as a minimum, required to
be shown on the face of the balance sheet, there is
no prescribed format in which they should be
presented. However, there is a general requirement
to present the balance sheet either on the basis of
distinguishing current from non-current assets and
liabilities, or broadly in order of liquidity.
Current assets are those assets that are: either
expected to be realised in, or are held for sale or
consumption in, the normal course of the
company’s operating cycle; or are held primarily
for trading purposes or for the short-term and are
expected to be realised within twelve months of the
balance sheet date. Current liabilities are those
liabilities that are expected to be settled in the
normal course of the company’s operating cycle, or
are due to be settled within twelve months of the
balance sheet date.
The current portion of long-term debt (but not short-
term debt itself) should be classified as non-current
if there is an intention and supporting agreement to
refinance on a long-term basis (see 6.8).
5.1 Classification and presentation
within the financial statements
(SFAS 130, ARB 43, B05, C49, Regulation S-X)
Balance sheet
The balance sheet is generally presented as total
assets balancing with total liabilities and

stockholders’ equity. Assets and liabilities are
generally presented in descending order of liquidity
(most liquid first). SEC regulations prescribe the
format and certain minimum balance sheet
disclosures for public companies. Otherwise,
balance sheet detail should generally be sufficient to
enable material components to be identified.
The balance sheet usually presents current assets
and current liabilities separately from other assets
and liabilities (known as a ‘classified balance
sheet’). The ‘current’ classification applies to those
assets which will be realised in cash, sold or
consumed within one year (or within one operating
cycle, if longer), and those liabilities that will be
discharged by the use of current assets or the
creation of other current liabilities within one year
(or operating cycle, if longer).
The current liability classification includes
obligations that, by their terms, are due on demand
or will be due within one year (or operating cycle, if
longer) from the balance sheet date, even though
UK USIAS
5. General issues
19
within current liabilities regardless of anticipated
re-financing subject to one narrow exception.
Where a committed back-up facility is effectively an
integral part of the related debt (according to
narrowly defined conditions), then that debt may be
classified according to the maturity of the back-up

facility (see 6.8).
Shareholders’ funds and minority interests are each
required to be analysed into equity and non-equity
elements (as defined - see 6.14). If the non-equity
element is immaterial then the analysis may be
given in the notes.
Profit and loss account (CA 85, FRS 3)
The Companies Act 1985 specifies four acceptable
formats for the profit and loss account (of which
only two are often used in practice), prescribes
minimum standards of disclosure and specifies how
certain items should be allocated in the profit and
loss account. Both of the commonly used formats
reconcile turnover to the profit for the financial
year, from which dividends are then deducted.
‘Format 1’, the more common of the two, analyses
expenses by function (cost of sales, distribution
costs, administrative expenses) and requires gross
profit to be disclosed. ‘Format 2’ analyses expenses
by type, such as salaries and wages, and does not
show gross profit. FRS 3 supplements the statutory
formats with an operating profit sub-total and three
additional, or supplementary, format items which
appear after operating profit but before interest:
profits or losses on sale or termination of an
operation (paragraph 20(a) FRS 3);
costs of a fundamental restructuring (paragraph
20(b) FRS 3); and
profits or losses on the disposal of fixed assets
(paragraph 20(c) FRS 3).

Income statement
Certain items are required, as a minimum, to be
presented on the face of the income statement.
Appropriate additional line items, headings and
sub-totals must also be given where this is
necessary to achieve a fair presentation.
In addition, an analysis of expenses by either their
type or function should be disclosed on the face of
the income statement or in the notes.
they may not be expected to be discharged within
that period. Short-term obligations expected to be
refinanced on a long-term basis can be excluded
from current liabilities only if the company intends
to refinance the obligation on a long-term basis and
has demonstrated the ability to accomplish that
refinancing (see 6.8).
Income statement
The income statement is usually presented in one of
two formats as follows:
either in a single-step format where all expenses,
classified by function, are deducted from total
income to give a subtotal of income before
income taxes, from which income taxes and
extraordinary items are then deducted; or
in a multiple-step format where the cost of sales
is deducted from sales to show gross profit, then
other income or expenses are added or deducted
to show income from operations and income
before and after income taxes.
SEC regulations also prescribe the format and

certain minimum income statement disclosures for
registrants. Otherwise, income statement
disclosures should generally be sufficient to enable
material components to be identified.
UK USIAS
5. General issues
20
The second of the three items is intended to be used
very rarely (that is, when the restructuring has a
material effect on the nature and focus of the
company’s operations).
The formats do not provide a line for exceptional
items and companies are prevented from including a
separate line for them - they must be subsumed into
the format item to which they relate (see 7.9).
Typically, however, companies manage to isolate
exceptionals on the face of the profit and loss
account by a columnar analysis.
Companies are also required to analyse the format
items, from turnover down to operating profit,
between operations acquired in the year (as a
component of continuing operations), continuing
operations and discontinued operations (as defined
- see 7.10).
As a general principle, the Companies Act 1985
requires that only realised profits be recognised in
the profit and loss account.
Statement of cash flows
See 5.3 for a separate discussion of statements of
cash flows.

STRGL (FRS 3, Statement of Principles)
The components of this statement are the gains and
losses of the period attributable to shareholders, that
is, increases and decreases in net assets other than
contributions from, or distributions to, owners. Thus
it includes, inter alia, the profit for the financial
year, any revaluation of assets or exchange
differences dealt with in reserves.
Statement of cash flows
See section 5.3 for a separate discussion on
statements of cash flows.
Statement of recognised gains and losses
There is a choice of presenting as a primary
statement either a statement of recognised gains
and losses (like the UK) or a statement of changes
in equity (see below).
Statement of cash flows
See 5.3 for a separate discussion of statements of
cash flows.
Other comprehensive income (OCI)
A statement of comprehensive income, on the same
basis as the UK’s STRGL, is required to be
presented either as a separate primary statement or
together with the income statement or statement of
changes in stockholders’ equity. Comprehensive
income other than net income reported in the
income statement is known as other comprehensive
income (OCI) and should be separately reported as
such in the statement. In addition, items reported
UK USIAS

5. General issues
21
Reconciliation of movements in
shareholders’ funds (FRS 3)
This reconciliation deals with the movements in the
total shareholders’ funds and is very often presented
with the primary statements rather than as a note.
Movements on individual items of capital and
reserves are usually dealt with separately in other
notes to the accounts (although the two may be
combined in some suitable format). The
components of the reconciliation are the profit for
the financial year, dividends, other recognised gains
and losses (usually as a single aggregate figure) and
each other movement individually.
Note of historical cost profits and losses
(FRS 3)
The note of historical cost profits and losses, whilst
not strictly a primary statement, is presented
together with the primary statements where there is
a material difference between the result as disclosed
in the profit and loss account and the result as if an
unmodified historical cost basis had been adopted
(ie, if no revaluations had been made - see 5.4). Its
basic format is that of a reconciliation of the
reported profit before tax to that which would have
been shown on the unmodified basis.
Statement of changes in equity
A statement of changes in equity (similar to those
of the UK and US) must be presented either as a

primary statement (if there is no statement of
recognised gains and losses) or as a note (if there is
a statement of recognised gains and losses).
Note of historical cost profits and losses
There is no equivalent of the UK statement.
therein should be accumulated in a separate
‘accumulated OCI’ component of stockholders’
equity and the balance thereon should be analysed
on the face of the balance sheet, in the statement of
changes in stockholders’ equity or in the notes.
Statement of changes in stockholders’
equity
The statement of changes in stockholders’ equity is
usually presented as a separate statement showing,
for each category of equity, the opening and closing
balances and movements during the period.
Alternatively, a separate statement may be omitted if
the information is shown in the notes to the
financial statements or combined with the income
statement.
Note of historical cost profits and losses
There is no equivalent of the UK statement.
UK USIAS
5. General issues
22
5.2 Prior period adjustments and
other accounting changes
Significant difference
Most accounting policy changes are dealt with
by restatement of all periods presented.

Prior period adjustments (FRS 3)
Prior period adjustments, as defined below, are dealt
with by restatement of the opening position and of
the comparatives for prior periods. The cumulative
effect of the change - as at the start of the year in
which the change is made - should be shown as a
separate item in the current year’s STRGL.
Prior period adjustments are defined as material
adjustments applicable to prior periods arising from:
changes in accounting policies (see below); or
the correction of fundamental errors.
They do not include normal recurring adjustments
or corrections of estimates made in prior periods.
In addition, prior periods are restated when using
merger accounting (see 5.7).
Changes in accounting policy and method
(FRS 3, FRS 10, FRS 15, CA 85, SSAP 2, UITF 14)
A change in accounting policy must be justified as
preferable and should be accounted for as a prior
period adjustment, as discussed above. The effect of
the policy changes on the preceding and current
5.2 Prior period adjustments and
other accounting changes
Significant difference
Most accounting policy changes may be dealt
with by restatement
or
by passing the
cumulative adjustment through the current year.
Prior period adjustments (IAS 8)

Where a prior period adjustment is applicable the
opening balance of retained earnings and the
comparatives are restated.
Prior period adjustment is the Benchmark Treatment
for:
certain changes in accounting policy (see
below); and
the correction of fundamental errors.
In both cases the Allowed Alternative Treatment is
to put the adjustment through in the current year
and no restatement occurs. However, in both the
Benchmark and Allowed Alternative Treatments for
a change in accounting policy, if the adjustment to
opening retained earnings cannot be determined
the change should be made prospectively.
In addition, prior periods are restated when
applying uniting-of-interests accounting (see 5.7).
Changes in accounting policy and method
(IAS 8, IAS 16, IAS 38, SIC 8)
A change in accounting policy should be made
where required to adopt a new IAS or in any case
where the change will result in a more appropriate
presentation of events or transactions in the
5.2 Prior period adjustments and
other accounting changes
Significant difference
Many accounting policy changes are dealt with
by passing the cumulative adjustment through
the current year.
Prior period adjustments (APB 9, SFAS 16, A35)

In single period financial statements, prior period
adjustments are reflected as adjustments of the
opening balance of retained earnings. When
comparative statements are presented, corresponding
adjustments are made of the amounts of net income,
its components, the balances of retained earnings,
and other affected balances for all of the periods
presented to reflect the retrospective application of
the prior period adjustments.
Such prior period adjustments may only be made:
to correct errors in prior period financial
statements;
for certain changes in accounting principles (see
below);
for certain adjustments related to prior interim
periods of the current fiscal year; or
to reflect accounting changes that are in effect
the statements of a different reporting entity (eg,
pooling-of-interests - see 5.7).
Changes in accounting principle and method
(APB 20, A06)
A change in accounting principle must be explained
and justified as preferable. The term accounting
principle also includes the methods of applying
principles. In most instances prior periods are not
UK USIAS
5. General issues
23
years should be disclosed where practicable.
Changes resulting from the introduction of new

accounting standards are, in general, not treated
differently from other changes in accounting policy;
prior years are restated, although many recent
standards have had different transitional provisions.
Accounting methods give effect to accounting
policies. Only changes in policy qualify as prior
period adjustments. For example, a change from one
method of computing depreciation/ amortisation to
another is not treated as a change in accounting
policy; the unamortised cost should be written off
over the remaining useful life beginning in the
period in which the change is made. A change in
estimated useful life or residual value should also be
treated in this way.
financial statements. In either case if the company
chooses the current period adjustment method of
effecting the change it should give pro forma
information on the prior year adjustment basis. In
all cases the effect of the change on all periods
presented should be disclosed, together with the
reason for the change.
All new IASs either have their own transitional
rules (many recent IASs fall into this category) or,
failing that, are by default effected as a change of
accounting policy.
A change in depreciation/ amortisation method,
useful life or residual value does not qualify as a
change in accounting policy.
When a company prepares IAS financial
statements for the first time, this is dealt with as a

change in policy, but one that is required to be
effected by the prior period adjustment method
save to the extent that the adjustment relating to
prior periods cannot be reasonably determined.
adjusted. Instead the cumulative effect (net of tax)
of the change should be shown in the income
statement, after extraordinary items and before net
income, in the year in which the change occurs.
Income before extraordinary items and net income
should be shown on a pro forma basis on the face of
the income statement for all periods presented as if
the newly adopted accounting principle had been
applied during all periods presented. The effect of
adopting the new principle on income before
extraordinary items and on net income (and on other
related per share amounts) in the period of the
change should also be disclosed. In the following
cases, however, the financial statements of prior
periods should be restated:
a change from LIFO to another method of
inventory valuation;
a change in the method of accounting for long-
term construction-type contracts (see 7.1); and
a change to or from the ‘full cost’ method of
accounting that is used in the extractive
industries (the details of which are outside the
scope of this book).
These general rules do not apply to a change which
results from the initial adoption of a new accounting
pronouncement. Initial adoption rules are included

in each new pronouncement; restatement may either
be prohibited, required or optional.
A change from one method of computing
depreciation to another (for example, from the sum-
of-the-years’-digits to the straight-line method) is a
change in accounting principle and should be
accounted for accordingly. A change in estimated
useful life or residual value, however, is a change in
an accounting estimate and should be accounted for
prospectively.
UK USIAS
5. General issues
24
Changes in accounting estimate (FRS 3)
Changes in accounting estimates should be
accounted for in the period of the change, and if
material, their nature and size should be disclosed.
5.3 Statement of cash flows
(FRS 1)
Significant differences
The statement is based on cash; there are no
cash equivalents.
Cash includes overdrafts repayable on demand.
Interest, dividends and tax are presented as
separate classes of items.
Cash
A cash flow is an increase or decrease in cash
resulting from a transaction. It therefore excludes
the effect of exchange rate changes on cash.
Cash is defined as cash in hand and deposits with

qualifying financial institutions repayable on
demand, less overdrafts from such institutions
repayable on demand.
There is no concept of cash equivalents. Items that
would fall into that category in the US or under
IASs would probably be regarded as liquid
Changes in accounting estimate (IAS 8)
Changes in accounting estimate are included in the
net profit or loss for the period in which the change
occurs (or the period of the change and future
periods if the change affects both). Where material,
the effect should be disclosed.
5.3 Statement of cash flows
(IAS 7)
Significant differences
The statement is based on cash and cash
equivalents, the latter including short-term
highly liquid investments.
Cash and cash equivalents
may
include
overdrafts repayable on demand in some
cases.
Interest and dividends can be classified as
operating, investing (if received) or financing
(if paid); tax is usually classed as operating.
Cash and cash equivalents
Cash flows are inflows and outflows of cash and
cash equivalents; they therefore exclude the effects
of exchange rate changes on cash and cash

equivalents as this involves no inflow or outflow.
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term highly liquid
investments that are readily convertible to known
amounts of cash and which are subject to an
insignificant risk of changes in value. ‘Short-term’
is not defined but the standard suggests a cut-off of
Changes in accounting estimate (APB 20, A06)
Changes in accounting estimates should be
accounted for in the period of the change as if only
that period is affected by the change, or in the period
of the change and future periods if those periods are
affected. A change in estimate should not be
accounted for by restating prior periods or by
reporting pro forma amounts for prior periods.
5.3 Statement of cash flows
(SFAS 95, C25)
Significant differences
The statement is based on cash and cash
equivalents, the latter including short-term
highly liquid investment.
Cash and cash equivalents do not include any
overdrafts.
Dividends paid are classed within financing;
other dividends, tax and (most) interest are
classed within operating.
Cash and cash equivalents
A cash flow is an increase or decrease in cash and
cash equivalents resulting from a transaction. It
therefore excludes the effect of exchange rate

changes on cash and cash equivalents.
Cash and cash equivalents include currency on
hand, demand deposits, and short-term highly liquid
investments (with original maturities of three
months or less, or with remaining maturities of three
months or less at the time of acquisition).
UK USIAS
5. General issues
25
resources in the UK. Liquid resources are defined as
current asset investments that are disposable
without curtailing or disrupting the business and are
either readily convertible into known amounts of
cash at or close to book value or are traded in an
active market. It should be noted that current asset
investments is wider than the three months’maturity
referred to in the US and IAS. Cash flows in respect
of liquid resources are classified separately.
Classification and presentation of cash
flows
Cash flows are classified and reported under the
following headings:
operating activities;
dividends from joint ventures and associates;
returns on investments and servicing of finance;
taxation;
capital expenditure and financial investment;
acquisitions and disposals;
equity dividends paid;
management of liquid resources; and

financing.
All interest paid, including that capitalised, is
classed as servicing of finance.
The statement should be reconciled to the
movement in net debt, which is the net of debt,
liquid resources and cash.
Cash flows from transactions undertaken to hedge
another transaction should be reported under the
same heading as that other transaction.
Cash flow from operating activities may be reported
on a gross basis (ie, the direct method reporting cash
received from customers, paid to suppliers etc) or as
three months maturity (on acquisition by the
company). Bank overdrafts repayable on demand
are dealt with as cash and cash equivalents where
they form an integral part of the company’s cash
management.
Classification and presentation of cash
flows
The cash flow statement should split cash flows
during the period between operating, investing and
financing activities.
A company should choose its own policy for
classifying each of interest and dividends paid as
operating or financing activities and each of
interest and dividends received as operating or
investing activities. Taxes paid should be classified
as operating activities unless any particular tax cash
flow (not merely the related expense in the income
statement) can be specifically identified with, and

therefore classified as, financing or investing
activities.
Net cash flows from all three categories are totalled
to show the change in cash and cash equivalents
during the period, which is then reconciled to
opening and closing cash and cash equivalents. The
company should disclose the components of cash
and cash equivalents and reconcile these to the
equivalent figures presented in the balance sheet.
When a hedging instrument is accounted for as a
hedge of an identifiable position, the cash flows of
the hedging instrument are classified in the same
Classification and presentation of cash
flows
The statement of cash flows classifies cash receipts
and payments as follows:
operating activities;
investing activities; and
financing activities.
Interest received and paid (net of interest
capitalised, which is classed as investing), dividends
received and all taxes are included under operating
activities. Dividends paid are classed as financing
activities.
Net cash flows from all three activities are totalled
to show the change in cash and cash equivalents
during the period, which is then reconciled to the
opening and closing cash and cash equivalents.
Cash flows resulting from certain contracts that are
hedges of identifiable transactions should be

classified in the same cash flow category as the cash
flows from the hedged items.
While companies are encouraged to report gross
operating cash flows by major classes of operating
cash receipts and payments (the direct method),
presenting such items net (the indirect method) is