It is a requirement of the Companies Acts that the accounts of limited companies must show a

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Question:

It is a requirement of the Companies Acts that the accounts of limited companies must show a true and fair view of the state of affairs at the end of a period and the profit or loss for the period.

Requirement : (i) Explain the role that the Companies Acts have in the preparation and presentation of published accounts;

(ii) explain the relationship between accounting standards, the Companies Acts and European Union Directives; and

(iii) provide two examples of how accounting standards extend the requirements of the Companies Acts and one example of an accounting standard that differs from the Companies Acts. ICAEW, Financial Reporting, September 2002 (15 marks)

3.2 ‘In recent years, there has been growing interest in, and efforts directed towards, the harmonisation of international accounting.’ (Advanced Financial Accounting by Taylor and Underdown (CIMA/Butterworth Heinemann)). You are required to explain this statement. CIMA, Advanced Financial Accounting, November 1993 (15 marks)

3.3 You are the chief accountant of Britain plc. Britain plc has a number of subsidiaries located in various parts of the world. One of these subsidiaries is Faraway Ltd. Faraway Ltd prepares its financial statements in accordance with local Accounting Standards. The accountant of Faraway Ltd has prepared the financial statements for the year ended 30 September 2001 – also the accounting reference date of Britain plc. The profit and loss account for the year Chapter 3 · Sources of authority: the rise of international standards 57 ended 30 September 2001 (together with comparatives) drawn up in loca1 currency (LC) was as shown below.

Year ended 30 September

2001 2000

LC000 LC000

Turnover 56000 53000

Cost of sales (34000) (32000)

________ _________

Gross profit 22000 21000

Other operating expenses (10000) (9800)

––––––– ––––––

Operating profit 12000 11200

Interest payable (4000) (3800)

–––––– ––––––

Profit before tax 8000 7400

Tax (3000) (2800)

–––––– ––––––

Profit after tax 5000 4600

Dividends paid (2500) (2400)

–––––– ––––––

Retained profit 2500 2200

Retained profit 1 October 2000 (1 October 1999) 10000 7800

––––––– –––––––

Retained profit 30 September 2001 (30 September 2000) 12500 10000

––––––– –-------

The local Accounting Standards that are used in preparing the financial statements of Faraway Ltd are the same as UK Accounting Standards with the exception of the following:

1. Faraway Ltd values its stocks using the LIFO basis. This valuation is acceptable for local tax purposes. Relevant stock values are as follows:

Date Stock value under LIFO Stock value under FIFO

LC000 LC000

30 September 2001 9500 10000

30 September 2000 7700 8000

30 September 1999 8600 9000

The stock levels of Faraway Ltd often vary from year to year and prices do not rise evenly. The rate of local corporate taxation is 36%.

2. On 1 October 1993, Faraway Ltd acquired an unincorporated business for 50 million units of local currency. The fair value of the net assets of this business on 1 October 1993 was 30 million units of local currency. The resulting goodwill was written off to the profit and loss reserve as permitted by local Accounting Standards. At the date of acquisition, the directors of Faraway Ltd ascertained that the useful economic life of this goodwill was 10 years.

The accountant of Faraway Ltd has sent the financial statements to you with a suggestion that consolidation would be much easier if all group companies used International Accounting Standards to prepare their individual financial statements.

Required :

(a) Restate the profit and loss account of Faraway Ltd in local currency (both the current year and the comparative) so as to comply with UK Accounting Standards.

(b) Evaluate the practicality of the suggestion that all group companies should use International Accounting Standards.

3.4 ‘Now that the EU has decided to harmonise financial reporting by Regulation rather than by the issue of new Directives, the financial statements of all companies in Europe will be comparable by the year 2005.’ Discuss