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International Accounting Standards: UK Financial Reporting


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The development of international activities has been rapid as time passes. These activities include areas of international trade, international investment, international bond and equity offerings, capital actions between countries and the number of multinational organizations. Countries, entities and systems who carry out these activities continuously seek to attain progress and higher results at less expensive of financing. This implies that there is usually the need to consider international alternatively than countrywide or internal alternatives of bringing up finance. The dissimilarities in accounting systems and guidelines that exist in different countries are a hurdle to towards comparability of financial information that is shared by companies using different models of accounting requirements (Alexander, 2007).

This led to 'the pressure for international harmonization to modify, put together and use financial assertions which can be reliable, comparable and translucent (Nobes and Parker, 2000). This may only be achieved if countries employ the same accounting criteria through the harmonization of accounting guidelines. International harmonization may be thought as a political process aimed at reducing the dissimilarities in accounting tactics across the world in order to attain comparability and compatibility (Hoarau, 1996). To achieve this feat, accounting regulators like the IASB have attempted to advance harmonization jobs in an attempt to minimize variations between different nationwide accounting expectations (O'Regan, 2006).

As argued by Choi et al (2002), harmonization can make it more likely for users of financial statements to interpret the information correctly and make smarter decisions predicated on that information. It will reduce drastically the info asymmetry between stakeholders and companies and hence save manpower, money and resources.

The International Accounting Expectations Plank (IASB), issuers of International Accounting Benchmarks (IASs) was proven in 2001 and is the impartial standard-setting body of the International Financial Reporting Criteria (IFRSs) Foundation, an independent, private sector whose principal objectives are to develop in the public interest, a couple of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) predicated on clearly articulated accounting principles. IFRSs are a set of high quality, understandable, enforceable and globally accepted Standards based on plainly articulated accounting concepts.

The dependence on International Accounting Standards

The international investor

The information get older and the advancement of high-tech pcs makes possible the availability of massive amounts of international financial information. Institutional and those who are interested in making international investment funds can therefore take advantage of the global harmonization of accounting specifications.

  • International Accounting firms

The role of international accounting organizations include providing auditing and consulting services in many countries. The absence of international accounting ideas implies that they need to gain competence in regions of home financial accounting principles and related laws and regulations. Gaining this experience can greatly increase their operational costs.

  • International intergovernmental organisations

International intergovernmental organizations like the United Country (UN), the European Union (European union) and the Organization for Economic Co-operation and Development (OECD) prolong credits for projects to other countries. They may be therefore interested in obtaining comparable financial information in order to evaluate the tasks they perform in the various countries. as the business. This can be achieved only when there may be harmonization of international accounting concepts.

  • Developing countries

Developing countries often seek international funding sources for their development. It's important for their governments and accounting regulating physiques to look at international accounting standards in order to make it easier to allow them to access international financing sources.

  • Stock exchanges

The use of international accounting rules can permit the internationalization of Stock exchanges which can subsequently increase international financing activity.

This essay can make particular reference to the UK equivalent of accounting requirements i. e. , the Financial Reporting Benchmarks (FRSs) to examine the different accounting treatments in the average person accounting standards of interest in this assignment.

IAS 38 - Accounting for intangible assets

Definition: An intangible advantage is an identifiable monetary property without physical substance. An asset is a tool that that is controlled by the enterprise because of this of past incidents and that future monetary benefits are anticipated [IAS 38. 8].

The target of IAS 38 is to prescribe the accounting treatment for intangible belongings that aren't dealt with specifically in another IAS. The standard deals with:

  • the standards to be fulfilled before an business can recognise an intangible advantage;
  • how to gauge the taking amount of intangible investments and the disclosures that needs to be made.

Examples of possessions that may meet the criteria as intangible investments under IAS 38 are:

computer software, copyrights, customer and company romantic relationships, franchises, licenses, privileges patents.

The three critical features of intangible investments are:

  • Identifiability: For an intangible asset to be identifiable, it must be separable and it arises from contractual or other legal rights, whether or not those rights are transferable or separable from the entity or from other protection under the law and obligations. (IAS 38. 12)
  • Control (power to obtain advantages from the advantage)

An intangible asset must be under the control of the organization for it to have the capacity to obtain future economic benefits from the asset. Control will most likely but not always emanate from lawfully enforceable rights, in the lack of which it is more challenging to prove the life of a secured asset. For example, control over technical know-how is deemed to exist only if it is covered by legal right like a copyright or patent.

  • Recognition and way of measuring: IAS 38 stipulates that an intangible advantage should be recognised only if both of the next occur:
  • It is possible that the near future economic benefits that are attributable to the property will flow to the entity, and
  • The cost can be reliably assessed.

The cost of a secured asset must be reliably assessed if the property is obtained in a standard transaction. Also, the actual fact a price has been paid for the advantage, is a reflection of the expectation that future monetary benefits will stream to the entity.

Goodwill and brand image

In order for goodwill and brand image to be categorized as intangible investments and included as property of the organization, they have to be identified separately. If goodwill and brands have been received externally, then their cost and lifestyle can be discovered and capitalised. In regards to internally made goodwill, it can't be recognised as an asset because:

  • it is not separable from the business
  • it has not arisen form contractual or other legal rights, and
  • its cost can't be reliably assessed (IAS 38).
  • A reconciliation of the transporting amount at the beginning and the end of the period.

FRS10, accounting for goodwill and intangible belongings is the same UK Financial Accounting standard to the IAS 38.

The standard views goodwill arising on acquisition as not constituting a secured asset or an immediate reduction in value. Nonetheless it relates to the cost of an investment in the financial claims of the acquirer, hence the worth are attributed to the acquired property and liabilities in the consolidated financial assertions. The standard is of the view that even though purchased goodwill is not alone a secured asset, including it in the assets of the confirming entity rather than deducting it from shareholder's collateral recognises that goodwill is part of a more substantial advantage whose investment the entity's management remains accountable. Thus, the objective of the FRS10 is that it ensures that purchased goodwill and intangible possessions are charged to the income declaration in the durations they may be depleted.

A comparability of the different accounting treatment of intangible possessions by the IFRS and UK GAAP is seen in Appendix 1.


The IAS definition for intangible belongings has its limitations as much intangibles such as patents and related drawings do have a physical substance (Tiffin, 2005 p. 67). Nevertheless the real concern with intangible investments is the fact that intangibles are difficult to value and therefore, attempting to measure their impairment is plagued with problems Godfrey & Koh, 2001). The uncertainty about asset principles and their impairment makes them vunerable to creative accounting.

Intangible possessions can be produced internally by businesses. But it is difficult to accurately identify and cost such resources. IAS38 state governments that 'internally produced goodwill shall not be recognized as an advantage'. Research and development are therefore regarded as various areas of creating an internally generated intangible asset. The research phase is described by IAS 38 as 'original and designed investigation carried out with the prospect of gaining new technological or specialized knowledge and understanding'. This implies that research costs incurred are expensed when they take place. There is steadiness in classifying what constitutes an intangible asset by the standard. Obviously, this treatment of research is pleasing as there is a probability an initial research may well not actually lead to any monetary benefit.

Accounting for leases (IAS 17)

Definition: A rent is an agreement whereby the lessor conveys to the lessee in substitution for a payment or group of payments the right to use a secured asset for an agreed time frame.

A lease comes under two main categories; a funding lease and an operating rent.

A rent is classified as a funding lease if it exchanges substantially all the potential risks and rewards incident to ownership. All other leases are classified as operating leases. Classification is manufactured at the inception of the rent. [IAS 17.

Thus, in order to effectively classify the sort of lease, it is important to determine if the dangers and rewards associated with owing the property are with the lessee or the lessor. An asset will be classified as a as a finance rent if the if the risks and rewards lay with the lessee. However, it'll be categorized as an operating rent if the risk and rewards rest with the lessor.

As respect a finance lease, the concept of material over form is applied. The element is the fact that even though the legal owner of the asset is not the lessee, the commercial the truth is that the lessee has attained a secured asset by obtaining funding from the lessor, this implies the recognition of an asset and responsibility.

Other distinguishing factors of the finance rent include:

  • The present value (PV) of the minimum amount lease payments at the beginning of the rent amounts to considerably all of the good value of the property.
  • By the end of the rent, the lease agreement transfers possession of the advantage to the lessee.
  • The option rests with the lessee to purchase the asset at a cost expected to be substantially lower than the fair value when the option becomes exercisable.
  • The leases asset must be of a specialised aspect.

A assessment of the several accounting treatment of intangible assets by the IFRS and UK GAAP can be seen in Appendix 2.


Operating leases seem to be more popular as both leased asset and liabilities can be effectively placed off the balance sheet with future rent obligations disclosed as footnotes. However, a money lease, often cared for as an 'in chemical' purchase by the lessee and a sales by the lessor, is less popular as it needs both leased investments and liabilities to be accepted on the total amount sheet. But the finance lease does produce a taxes benefit due to a larger price, interest plus depreciation, compared to an operating lease which only accounts the lease repayments as a cost. IAS 17 (IASB, 2008) allows professionals to structure a lease in such a way as to avoid the reporting of lease assets and liabilities.

In order to ensure a whole and transparent identification of investments and liabilities due to lease contracts on financial assertions, the IASB made a decision to make no difference between money leases and functioning leases and make use of the 'right-to-use property' and its own lease responsibilities that is dependant on the present ideals of future lease repayments using the incremental borrowing rate of the lessee at the inception of your lease.

Capitalization of lease can impact adversely on earnings due to increased cost due to the depreciation of the asset and interest charge. This will subsequently affect expected profit margin, return on profits (ROE) and go back on resources (ROA) (Bradbury, 2003).

IAS 37 - Accounting for procedures, contingent liabilities, and contingent assets

Definition - A provision is a liability of uncertain timing or amount.

IAS 37 means that a provision should be accepted only when there's a responsibility i. e. a present obligation resulting from past situations.

Contingent liabilities:

  • Definition: A contingent responsibility is: a possible obligation that arises from past situations and whose presence will be proved only by the incident of occasions not wholly within the control of the entity; or
  • A present obligation that comes from past events but is not accepted since it is not possible that an outflow of economic benefits will be required to settle the obligation; or
  • A present obligation that comes from past incidents but is not recognised because the quantity of the obligation can't be measured with sufficient reliability.


An entity should disclose a contingent liability in an email, unless the opportunity of any outflow of monetary benefits is distant.

Contingent assets

A contingent asset is a possible advantage that comes from past happenings and whose lifetime will be affirmed only by the event or non-occurrence of 1 or more uncertain future happenings not wholly within the control of the entity.

An entity shall not recognise a contingent asset. Once the realisation of income is practically certain, then the related advantage is not really a contingent asset and its recognition as earnings is appropriate.

A assessment of the several accounting treatment of intangible belongings by the IFRS and UK GAAP is seen in Appendix 3.


IAS 137 aims at making certain only genuine obligations are dealt with in the financial assertions i. e. planned future expenditure even though authorised by the mother board of directors or equal regulating body, is excluded from acceptance. Appropriate recognition requirements and

measurement bases are put on provision, contingent liabilities and contingent assets and that sufficient information is disclosed in the records to permit users to comprehend their characteristics, timing and amount.

The standard seeks to ensure that for example belongings are not overvalued. Accounts receivables may be overvalued if affordable provision for debt is not made. This has the inclination to inflate earnings and in such instances the provision for debt will prove to be inadequate in future, whilst for a while accounts receivables and revenue receive a non permanent boost.

Also, contingent liabilities that happen to be responsibilities that are dependent on future situations for the verification of the lifestyle of an obligation. If companies fail to record a contingent responsibility that may very well be incurred and subjected to reasonable estimation, it has the effect of understating their liabilities and overstating their net income or shareholders equity.

The above cases are indications of how companies use creative accounting to control their financial statements especially their balance bedding.


Accounting for intangible property, accounting for leases and accounting for provisions, contingent liabilities, and contingent resources are all sophisticated areas which are inclined to manipulation in the form of creative accounting which is described as

" the change of financial accounting figures from what they are actually from what preparer desires by firmly taking advantage of the prevailing rules and/or disregarding some or all of them" (Kamal Naser, 1992).

Creative accounting in whatever form it takes is usually meant to overstate assets or understate liabilities.

The collapse of a number of corporate giants such as Enron Organization, Tyco International, World Com, Global Crossing, Arthur Anderson, Parlmalat etc. have not only destroyed buyer self confidence and shareholder ideals but it has additionally harmed the accounting vocation. The situation is even made worse when there are different accounting requirements that are used in planning financial claims.

This is manufactured even worse whenever there are different accounting specifications used in planning financial assertions.

The adoption of one set of global financial reporting standard including the international financial reporting standard (IFRS) that confers with buyers, stock markets, accounting pros and accounting benchmarks setters goes quite a distance to lessen the practice.

Arguably, accounting standards whether in the US, UK, Australia or the IAS will not have all the answers to accounting and financial reporting problems but it is hoped that it will largely reduce its incident.


APPENDIX 1 - Assessment of IFRSs with UK GAAP treatment of intangible assets




Relevant UK




IAS 38

Intangible Assets

FRS 10

Goodwill and



IAS 38 recognises a wider range of intangible investments than the FRS 10. For example, software certificate is treated as an intangible advantage whereas it is undoubtedly a tangible preset advantage under FRS 10 (UK requirements)

Under FRS 10, identifiability of a secured asset depends on its capacity for being sold separately from the entity. Whilst IAS 38 includes this meaning, it also recognizes intangible assets due to contractual or other rights.

Under FRS 10, there's a presumption that the useful monetary life associated with an intangible property is twenty years or less. IAS 38 allows an intangible property to acquire indefinite life, in which case you don't have for amortisation.

FRS 10 requires the useful monetary life of intangible possessions should be researched at the end of the 20-yr useful life period. IAS 38 requires impairment review only if there can be an sign of impairment.

Research costs must be written off as incurred, whereas development costs should be capitalised under IAS 38 in the same way FRS 10.

Appendix 2: Comparison of IFRSs with UK GAAP treatment of Lease

International standard


Relevant UK




IAS 17




Accounting for leases and employ the service of purchase contracts

Reporting the chemical of transactions

For the classification of land and buildings, IAS 17 requires the parting of the land and building elements. Lease of land is usually considered to be an operating lease.

IAS 17 requires more considerable disclosures than SSAP 21. Whilst IAS 17 requires lessees to reveal the full total of future minimum amount lease payments, SSAP 21 requires disclosure only of information on the payments that the lessee is focused on make in the next year.

APPENDIX 3 - Comparability of IFRSs with UK GAAP treatment of provisions, contingent liabilities, and contingent assets

International Standard


Relevant UK Standard



IAS 37

Provisions, contingent liabilities and contingent assets

FRS 12

Provisions, contingent liabilities and contingent assets

No significant dissimilarities. FRS 12 has more advice than IAS 37 on the discount rate to be used in determining today's value of an provision.

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