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The noble Lord said: My Lords, I am pleased to be able to introduce the draft Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004, perhaps not least because I thought that I would never get through their title, let alone a description of them. These regulations are concerned with the introduction of International Accounting Standards pursuant to an EC regulation and the implementation of accounting changes as a result of two EC directivesthe fair value and the 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. In May 1999, the Commission published a communication containing a financial services action plan, which was endorsed by the Lisbon European Council in March 2000. The financial services action
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plan is designed to facilitate a single market across the European Union. It consists of a set of measures intended by 2005 to fill gaps and remove remaining barriers so as to provide a legal and regulatory environment that supports the integration of European Union financial markets.
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, 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. These three measures together are the subject of the draft regulations before the House today.
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 to 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. The term "company", as defined for the purposes of the IAS regulation, includes building societies. The IAS regulation, fair value and accounts modernisation directives will be implemented for building societies shortly by a separate statutory instrument amending the relevant regulations.
Today's global capital markets require consistent, reliable and high quality information if they are to operate effectively and everyone is to understand what is happening in them. IAS provides a high quality, principles-based financial reporting framework that will, by 2005, be used in approximately 90 jurisdictions around the world. I make that point because of course the regulation goes much wider than the European Community. The IAS regulation will ensure that all European publicly traded companies use the same accounting standards in their consolidated returns. This will ease the burden on multinationals that currently must follow different rules in different countries. It will contribute to stronger financial markets in Europe, allow comparability of the accounts of companies across the EU and beyond, and will thereby encourage cross-border investment. International standards should also help to promote financial stability through enhanced transparency.
When the Government consulted on the exercise of the member state options in the IAS regulation, there was general support for IAS. It was seen as the future for accounting standards. The Government decided to extend the application of the IAS regulation on a permissive basis. Companies not covered directly by the regulation would be able to choose whether or not to switch to IAS. We decided against mandatory extension for the time being, mainly because to do so
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would have imposed burdens. IAS are in a state of transition with many standards being revised. They do not yet offer a simplified regime for smaller companies comparable to those provided by the UK system and well understood by accountants and accountancy firms.
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. We believe that this is a business-friendly, market-led approach to the issue. However, we have included sensible restrictions on this option, such that in most cases companies will not be able to switch back out of IAS once the choice has been made. Companies within a group should make a consistent choice.
Allowing choice will create some lack of comparability in the short term as many companies wait and consider whether to switch. But we believe that take-up of IAS will gather pace as more and more companies recognise the benefits. In the interim period, the work of our Accounting Standards Board in aligning domestic standards with IAS will ensure that lack of comparability is kept to a minimum.
In the UK, accounting standards issued by the Accounting Standards Board apply to all UK companies. They are also used by a variety of other entities. The ASB's standards and IAS are in many cases very similar, although there are a number of differences. The ASB's standards will continue to apply to all UK companies that do not report under the IAS regulation, whether directly or by extension. However, the ASB's aim is to bring UK standards into line with IAS. The ASB has been working towards this for some time.
The fair value and modernisation directives are not directly applicable but must be implemented through national law. The fair value directive requires member states to enable companies to follow modern, more transparent accounting practices in the area of financial instruments that are consistent with IAS.
The modernisation directive contains a number of other amendments which are 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 of the provision in these directivesthe use of the fair value accounting systemwill, under our proposals, be optional for companies. The burden of complying with other amendments should be minimal.
We have also taken the opportunity in these regulations to include five other amendments to the disclosure, reporting and filing requirements for companies. These continue our aims of modernising company law and achieving consistency and comparability. The proposed amendments will, first, reduce burdens on some companies by
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extending the circumstances in which Great Britain parent companies are exempted from the requirement to prepare consolidated accounts.
Secondly, they will amend the provisions in the Companies Act on the information to be disclosed regarding dividends, and the location of the disclosures, making the disclosure consistent with IAS. Thirdly, they will expressly permit companies voluntarily to revise their summary financial statements, thereby clarifying the current position. Fourthly, they will 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. Finally, they will remove the right for a three-month filing extension for companies with overseas interests, a right that is now hard to justify in an era of rapid global communications.
Good company law needs to provide a framework for successful enterprisethat must be one of the overriding considerationsand these proposals 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 IAS. We believe on balance that these are all considerable advantages. In that light, I commend the regulations to the House.
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