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Baroness Noakes: My Lords, I thank the Minister for introducing these complex regulations. Let me say at the outset that we are enthusiastically in favour of the greater use of International Accounting Standards. We believe that global capital markets will benefit from the removal of the inefficiency of a proliferation of accounting standards and that thereby global trade will be enhanced.
In the late 1990s, when I was active in the Institute of Chartered Accountants, I visited the US for a meeting of the larger accounting bodieswhich we rather grandly called the G8together with the major standard setters of the world. That meeting made amazing progress for the first time and was, I believe, the first step towards realising the desire for a common set of accounting rules for the whole of the global business world and not only the English speaking part, the accounting traditions of which have always been more aligned.
A huge amount happened after that meeting, including a complete overhaul of the International Accounting Standards Board and a massive work programme designed to achieve international accounting convergence. The regulations before us today are a very important step in achieving the goal of common financial statements around the world. I pay tribute to all those who have worked extremely hard to deliver this impressive achievement.
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Unfortunately, the European Union had to get involved and Brussels could not resist the desire to create yet another uniquely European solution to what was essentially a global issue. But one good thing came from the EU's involvementthat is, an early announcement that all European listed companies would have to adopt International Accounting Standards in their consolidated accounts from next year. I believe that that announcement gave great impetus to the convergence programme.
The downside was a filter mechanism in Europe for International Accounting Standards so that it is only those accounting standards that have been adopted by the EU that are to be applied. I always believed that this would cause problems for the creation of global accounting standards, and this has indeed proved to be the case. Last month's decision of the Accounting Regulatory Committee to approve one standardIAS 39, which deals with the recording of financial instrumentsin a castrated form has set back the process of achieving genuine international standards.
We should make no mistake that the really important issue is convergence globally, particularly with the US. EU financial markets and commonality within the EU are sideshows. UK companies need to be able to operate in the US capital markets without the need to re-present their financial statements in accordance with US accounting rules. Mr John Tiner, chief executive of the Financial Services Authority, warned in a speech last week that the SEC would not allow dispensations if there was not full compliance with International Accounting Standards, including IAS 39.
So my first question to the Minister is what are the Government going to do about IAS 39? UK listed companies will be required by the 2002 IAS regulation to adopt something which will conflict with the body of International Accounting Standards. The UK's Accounting Standards Board has already announced that it expects to adopt IAS 39 in its pure form, and it has strongly recommended compliance with IAS 39 until a UK standard is issued. Does the Minister regard this state of affairs as satisfactory and what action do the Government propose to take to sort it out?
I accept that this issue is not at the heart of the regulations before us today because they merely facilitate fair value accounting, but the politicisation of International Accounting Standards is a very real problem. Mr Robert Hertz, the chairman of the US Financial Accounting Standards Board, the FASB, said last week that further political interference could put up serious barriers to convergence between the US and the rest of the world. That would be undesirable. Does the Minister agree? If so, how will the Government work to get politics out of accounting standards?
Wearing my accounting anorak, I could raise many detailed points with the Minister, but I shall spare him and raise only a couple. First, is the Minister satisfied that the interaction between International Accounting Standards and the ascertainment of distributable
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profits is clear and unambiguous? The companies that adopt International Accounting Standards in their consolidated accounts will not of course face this issue, but those that do so in their own accounts will. I believe that there are some complex areasfor example, in relation to share-based payments and revaluationsand I shall be interested in what the Minister has to say about whether the DTI is planning to carry out any further work in this area to help companies or whether it will simply leave it to lawyers and accountants to muddle through.
Secondly, will the Minister say whether the Government are content that a company which prepares consolidated accounts under IAS may keep its holding company accounts in accordance with UK GAAP? At present there are some significant differences between UK GAAP and International Accounting Standards. The UK Accounting Standards Board has a conversion programme but it has not completed its work. So it is possible, I understand, that different accounting in areas such as deferred tax or pensions could result in a company paying dividends because its individual accounts showed that it could, although the IASs applied to its consolidated accountshad they applied to the individual accountswould have prevented it. Are the Government content that the law of unintended consequences will not arise because of the very permissive nature of the implementation of the modernisation directive?
Thirdly, these orders apply only to companies and LLPs. What do the Government intend to do about their own accounts, including those of bodies such as the NHS, which are not covered by the order? I hope that there will not be one rule for the commercial world and one rule for the Government.
Before I sit down, I simply observe that anyone with any understanding of the resources required for implementation of IASs will chuckle at the regulatory impact assessments. The listed companies now grappling with the task of applying IASs talk in terms of man years rather than the couple of days set out in the regulatory impact assessments. The RIA costings for the accounting staff involved are way below market rates, which have shot up significantly for almost anybody who can spell "international accounting standards".
Because these orders are generally permissive, I will not oppose them on the grounds that they impose costs. However, we should be under no illusion that those companies which choose to go down the path of international accounting standards will be paying rather more dearly than the Government have set out.
Lord Razzall: My Lords, I join the noble Baroness in thanking the Minister for the clear way in which he has presented the regulations. I, too, do not think that these Benches will seek to oppose them, but I should like to take the opportunity to make two or three points.
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The Minister quite clearly said that this is not intended to apply to small companies or companies that do not wish to take advantage of the ability to trade on a global scale. That is extremely important. Given the noble Baroness's remarks about the complexity of the regulations and the man years that many companies think would be required to implement them, it would clearly be a disaster for a large number of UK companies were they to be forced to spend the amount of time necessary to implement the full IAS regime. I welcome the Minister's assurance that the Government do not intend to apply the regulations in that way.
I should like to make two general points. The noble Baroness referred in her remarks to the unfortunate interference of the European Union. I thought for one moment that I was listening to the noble Lord, Lord Pearson of Rannoch, although he is not in his place. This short debate represents in microcosm the problem that occurs whenever anything to do with Europe is discussed. The noble Baroness says that it is extremely unfortunate that the European Union became involved. I would say, as I suspect the Minister would, that it is extremely fortunate that the European Union got involved, because how else would our continental European partners have been persuaded to implement IAS? Would the noble Baroness have had to go around demonstrating her expertise to people in Bonn, Frankfurt, Paris and other places in Europe to persuade them that this was an important move?
Of all the major European countries, the UK, traditionally, in practice and in fact, has had the best accounting standards. The mechanisms in the regulations are, to put it crudely, an attempt to drag the rest of continental Europe behind us in complying with better accounting standards. The noble Baroness says it is unfortunate that the European Union got involved but has not quite got it right. I would say, from these Benches, that were it not for the involvement of the European Union, this would not have happened at all in Europe. This debate is, in microcosm, a forerunner of all the debates we shall be having over the next two years when we get the referendum at the top end and all the detailed arguments at the bottom end. It shows the division that will inevitably occur between two different points of view.
Secondly, does the Minister agree that the discussion we have had over the past half hour demonstrates the need for the eventual comprehensive reform of company law that we have been promised? I know it is well above his pay grade to determine what goes into the Queen's Speech. Nevertheless, every time regulations or small Bills are put before us, we are simply providing an accretion to the existing body of company law that demonstrates the necessity to have the codification we have been promised. I am sure that the Minister agrees, although he will not say so. This is yet another example of the difficulty that endless governments will get themselves into if we do not have that reform of company law.
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