§ 12.42 p.m.
§ Lord Triesman
rose to move, That the draft regulations laid before the House on 11 October be approved [30th Report from the Joint Committee]
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 directives—the 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 569 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 570 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 1AS 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 directives—the use of the fair value accounting system—will, under our proposals, be optional for companies. The burden of complying with other amendments should he minimal.
These 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.
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 571 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 enterprise—that must be one of the overriding considerations—and 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.
Moved, That the draft regulations laid before the House on 11 October be approved [30th Report from the Joint Committee.]—(Lord Triesman.)
§ 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 bodies—which we rather grandly called the G8—together 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.
572 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 involvement—that 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 standard—IAS 39, which deals with the recording of financial instruments—in 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 573 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 areas—for example, in relation to share-based payments and revaluations—and 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 accounts—had they applied to the individual accounts—would 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.
§ 1 p.m.
§ 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.
574 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.
§ Lord Triesman
My Lords, I thank noble Lords for a very useful exchange on the regulations. I am pleased 575 that the House has again had an opportunity to devote further attention to company law, even if it is in a somewhat piecemeal way. I understand the point made by the noble Lord, Lord Razzall. I suspect that more comprehensive codification of many of these matters will always have to be undertaken, at least periodically, if they are to be coherent. But I believe that the change before us has the merit of adding a bit of coherence.
Accounting requirements might not be the subject of wide public discussion, but they are vital to our companies and therefore important to the economy as a whole. It is even more important, when people feel that there is turbulence or difficulty in understanding what companies are doing, to be able to see from companies' accountancy practices what they are doing, so that there is security for investment, and so on.
I strongly agree with the noble Lord, Lord Razzall, that the extension of the standard accounting procedures across the European Community—something we would probably have taken as axiomatic in this country—must be of benefit across a trading bloc of that size, even if there may have been some imperfections. I call to mind once again the fact that this process started with 90 jurisdictions. It went well beyond the European Community, but the European Community made sure, in the course of events, that it was carried into the EU to make sure that it happened in the EU as a result of discussions in Lisbon.
Let me turn to the remarks of the noble Baroness, Lady Noakes. On IAS 39, the UK would have unquestionably preferred full endorsement, but it has not proved possible. The key short-term priority was to provide companies with clear guidance on the implications of the partial endorsement decision. We are working with the ASB on this guidance. We encourage all parties to work towards a position in which the full version of IAS 39 can be endorsed as soon as possible. We certainly share the view that it should be.
The European Commission has said that this is an exceptional case. We hope that it will stick to this and that in future, the IASB standard will be endorsed without amendment. That is the clearest way in which I can express the matter.
I was asked whether the existing principles of realised and unrealised profits will continue to apply where profits are determined in accordance with international accounting standards. Dividend planning is one of the factors to be taken into account in deciding whether or not to opt to use IAS in companies' individual accounts. The Government are aware of the problems; the link between accounts and distributions is required by the second company law directive. Encouraging the European Commission to re-examine this in the light of the move to IAS must remain an important factor.
We were also asked to say something about the regulatory impact assessment. We do not believe that it was an underestimate of costs. It was subject to wide consultation. The respondents to those consultations commented on the costs and benefits of the changes. 576 Most comments were used in the preparation of the final regulatory impact assessment. The benefits will unquestionably outweigh the costs.
The costs will vary greatly from company to company, but, overall, it is plain that the benefits will outweigh the costs. One of those benefits goes to the heart of one of the points made by the noble Lord, Lord Razzall. It must be right—and the noble Baroness, Lady Noakes, made the same point—that the complexity of the arrangements would be a huge burden for some small companies and would take them considerable periods of time to implement. That is why they must be left with a choice about when the cost justifies the benefit that will flow before making the change.
On the question of whether the Government's accounts, including accounts like the NHS, will conform to the same standards, I want to say because I believe it to be true that the accounts of the NHS and other government departments and operations under government departments have become more transparent. I do not think they are hard to follow any longer. Indeed, some of the more robust debates that take place across the House flow from the fact that people can see and understand the accounts and argue not about whether the accounts are accurate or transparent, but whether they reflect matters that are of benefit to the United Kingdom. That has tended to be the tenor of most of the major debates.
I want to address a final point with the caveat I expressed for the first regulations, that after a study of Hansard if I have missed things I shall make sure that I come back to them. The point made was that the standard setting process has become politicised in some way. The UK Government believe that the accounting standards are essentially technical matters. They should be independent, set by independent setters following the process, and subject to effective oversight. The UK has a long history of independent standard setting with the ASB. We agree that on occasions there may be evidence of some political interest in those matters in other states, but we do not have that fault-line in our approach to it. It is done without political intervention and by those who should do it. I completely agree that those independent standards are critical to us.
We appreciate that as a result not everybody will be happy with every IAS. The big picture is unquestionably one that noble Lords have reflected on in this debate—that this is by any standards an advance. Regulations build on the framework of company law by providing our companies with the opportunity to use high-quality, globally accepted principles based on financial reporting frameworks. The permissive regime for IAS is flexible, as it should be, it is business friendly and it will be market led. The Government are introducing one of the most flexible systems for the use of IAS in Europe. I applaud that fact.
It will give our companies the opportunity to have consistency of reporting frameworks across groups and across geographical boundaries. The use of global standards by our companies will give them greater 577 access to global markets and global investment. That must benefit UK companies. Managing the accounts of our companies in a more transparent way and encouraging investment into our companies will create stronger financial markets, both at home and, as we have explored the matter, in Europe. It will ease the burdens on multi-nationals and it will keep our companies in the forefront of global investment in global markets, contributing to the UK economy by encouraging innovation, investment and employment.
We have ensured in these regulations that there is a level playing field between companies and also that we will in due course benefit buildings societies, allowing them to continue to contribute to providing for greater choice and diversity in the financial services sector. I recommend these regulations to the House.
§ On Question, Motion agreed to.