First Standing Committee on Delegated Legislation
Monday 8 November 2004
[Mr. Kevin Hughes in the Chair]
Draft Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004
4.30 pm
The Minister for Industry and the Regions (Jacqui Smith): I beg to move,
That the Committee has considered the draft Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004.
May I start by saying what a pleasure it is to serve on a Committee under your chairmanship, Mr. Hughes? This is the first time that I have had the opportunity to do so, but I certainly hope that it will not be the last.
The regulations are concerned with the introduction of international accounting standards under a European regulation and with the implementation of accounting changes as a result of two EC directives—the fair value and accounts modernisation directives.
In June 1998, the European Council of Ministers invited the European Commission to table a framework for action to develop the single market in financial services. One of the aims of the financial services action plan is to harmonise financial reporting across the European Union on the basis of globally agreed accounting standards. A key measure is the regulation on the application of international accounting standards, which are known as IAS, adopted by Europe in July 2002. Other key measures are the 2001 European directive on the use of fair value accounting and the accounts modernisation directive of 2003. Those three measures are the subject of the draft regulations that are before the Committee.
The IAS regulation is directly applicable to publicly traded companies governed by the laws of EU member states. It requires such companies whose securities are admitted for trading on a regulated market in any member state to prepare their consolidated accounts in accordance with IAS as adopted by the European Commission for financial years beginning on or after 1 January 2005. The IAS regulation also contains options allowing member states to permit or require publicly traded companies to prepare their individual accounts and other companies to prepare their individual or consolidated accounts in accordance with adopted IAS.
Today's global markets require consistent, reliable and high quality information to operate effectively. IAS provide a high quality, principles-based financial reporting framework that will be used in approximately 90 jurisdictions around the world by 2005. The IAS regulation will ensure that all European publicly traded companies use the same accounting standards in their consolidated accounts. It will ease
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the burden on multinationals, which must currently follow different rules in different countries; contribute to stronger financial markets in Europe; allow comparability of the accounts of companies across the EU and beyond; and thereby encourage cross-border investment. International standards should also help to promote financial stability through enhanced transparency.
My Department has consulted widely on the IAS regulation and the two directives. We consulted on whether to extend the IAS regulation in September 2002, and there was general support from the majority of consultees. Some 64 out of a total of 67 respondents were in favour of some form of extension. It was seen as the future for accounting standards. The Government therefore decided to extend the application of the IAS regulation on a permissive basis. Companies not covered directly by the regulation will be able to choose whether or not to switch to IAS. We decided against mandatory extension for the time being, mainly because it would impose burdens and, in particular, because IAS do not yet offer a simplified regime for smaller companies comparable to that provided by the UK system.
Under our proposals, companies can choose to switch to IAS when the time is right for them and when the benefits of doing so will outweigh the costs. This is a business friendly, market-led approach. We believe that take-up of IAS will gather pace as more and more companies recognise their benefits. In the interim period, the work of our domestic Accounting Standards Board in aligning domestic standards with IAS will ensure that lack of comparability is kept to a minimum.
Other parts of the regulations relate to the fair value and modernisation directives. Those directives are not directly applicable to companies, but they must be implemented through national law. As I stated, we consulted widely on proposals to implement the directives through changes to company law. The fair value directive requires member states to enable companies that do not prepare their accounts using IAS to follow modern, more transparent accounting practices in the area of financial instruments that are consistent with IAS. Of the 27 responses received, 24 were in favour of our proposals to implement fair value accounting on a permissive basis.
The modernisation directive contains a number of other amendments designed to bring European accounting requirements into line with modern accounting practices. It requires member states to make certain changes to national law and gives them options in other areas. The most significant provision in the directives—the use of fair value accounting—will be optional for companies under our proposals, and the burden of complying with the other amendments should be minimal. Those changes will benefit companies by allowing those not using IAS none the less to follow accounting practices that are very much in line with IAS, increasing comparability of accounts. Of the 38 responses received to our consultation on implementing the modernisation directive, the majority were in favour.
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We have also taken the opportunity to include in the regulations five other amendments to the disclosure, reporting and filing requirements for companies. They continue our aims of modernising company law and achieving consistency and comparability. The proposed amendments will reduce burdens on some companies by extending the circumstances in which British parent companies are exempted from the requirement to prepare consolidated accounts; amend the provisions in the Companies Act 1985 on the information to be disclosed regarding dividends and the location of the disclosures, making the disclosure consistent with IAS; expressly permit companies to voluntarily revise their summary financial statements, thereby clarifying the current position; extend the Secretary of State's regulation-making power on summary financial statements, so that she has the option to permit all companies to distribute summary financial statements, rather than only listed companies; and remove the automatic right for a three-month filing extension for companies with overseas interests—a right that is now difficult to justify in an era of rapid global communications.
The cost impact on companies of the amendments and the new requirements in the accounts modernisation and fair value directives is minimal. Where there would be a greater cost impact, such as in the use of fair value accounting, companies are once again being given a choice. They will take up the option when the benefit to them outweighs the cost of doing so.
The thrust of the regulations is the move to international accounting standards. As I have already said, the permissive extension of IAS to other companies was first consulted on in August 2002 and the Government's announcement to extend the use of IAS was made in July 2003. The accountancy world, this Government and others have been working since 2002 to raise awareness of the need for business to prepare for the transition.
As I stated during debate on the Companies (Audit, Investigations and Community Enterprise) Bill, good company law needs to provide the framework for successful enterprise. The regulations will build upon that framework by allowing companies to use the same accounting standards across groups, providing more consistency and greater comparability, and reducing barriers to growth. They will enable companies to follow modern, more transparent accounting practices that are consistent with adopted international accounting standards. On that basis, I recommend them to the Committee.
4.39 pm
Mr. Henry Bellingham (North-West Norfolk) (Con): It is a pleasure to serve under your chairmanship, Mr. Hughes.
I thank the Minister for her cogent and lucid explanation of the regulations. I support her welcome for measures that will make it easier for companies to compete and put in place the framework for successful enterprise. There is a resonance on the Opposition
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Benches in respect of anything that allows our companies better to compete in Europe and enables a more level playing field there for business.
Generally, we welcome the measures, but I should like to ask the Minister one or two questions. I note that the review date is 2008. Perhaps she could give further details about how that review will be conducted. Furthermore, there will certainly be an impact on small businesses, which is why I welcome what she said about the permissive approach. Will she confirm that there is no intention of moving over to a mandatory approach, even at some future stage? Obviously, such a move would have a very serious impact on many small and medium-sized businesses.
As far as small businesses are concerned, the current UK GAAP—generally accepted accounting practice—standards represent a simpler regime than IAS for small companies and subsidiaries, so the transition to IAS must be carefully managed to minimise any disruption or difficulties that small firms might encounter. Perhaps the Minister could give some reassurance on the approach that the Government will adopt to achieve convergence.
The Minister talked about consultation on the regulations and said that there was widespread support and general consensus among all the bodies involved that they were exactly the right way to go. Has she looked at the evidence submitted by the Society of Professional Accountants, which claims to represent some 90,000 incorporated businesses, many of which are small businesses? She will be aware that it is against any compulsory extension of IAS to small companies. Will she let the Committee know what representations she received from the SPA, whether she would regard its comments, which were by no means as supportive as those of some of the other organisations, as exceptional, and whether she has taken on board what it said?
The Minister mentioned that the costs would be minimal. That is all very well, but she will know only too well that while minimal costs taken in isolation may not cause serious problems, adding them to other minimal costs, which in turn are added to other minimal costs, results in a growing burden of regulation on business that can be costly and ultimately pernicious. I would like her to restate her determination and that of her Department to be ever vigilant with regard to imposing extra costs on business and the need to consider ways of minimising burdens on business.
The Minister will probably claim, in some ways quite rightly, that the economy is currently running ahead almost on the projected growth path that the Chancellor laid down, but there are worrying signs to do with the added burdens that are being imposed on smaller businesses in particular. It is always the very small businesses that find dealing with those extra burdens most difficult and most intensive in terms of management time. Will she stress once again to the Committee her Department's commitment and determination to prevent any unnecessary extra costs and regulations being imposed on small businesses?
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Apart from those questions, which I hope the Minister will be able to answer, we support what she has said, which is why we support the regulations.
4.44 pm
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