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US and UK GAAP: Important Differences for Financial Statement Preparers and Users
by Alan Reinstein, CPA, D.B.A., George R. Husband Professor of Accounting, School of Business Administration, Wayne State University, Detroit, Michigan 48202 and Thomas R. Weirich, CPA, Ph.D., Professor of Accounting, College of Business Administration, Central Michigan University, Mt. Pleasant, Michigan 48859 Abstract Generally Accepted Accounting Principles (GAAP) differ significantly in the United States and the United Kingdom, primarily because of deep-seated differences in the size of the economies, in their legal and cultural systems (particularly their educational systems), in the stringency of their monitoring and enforcement, and in their differing abilities to tolerate ambiguity. The technical differences, detailed at length in this article, mean that financial statements produced under each kind of GAAP are not easily comparable. Understanding the differences, however, can protect financial statement preparers and users from mistakes in decision-making based on simplistic assumptions about the statements. Knowledge of these important differences can aid the investor, security analyst, or money manager in making important decisions related to valuation effects, accuracy and timeliness of disclosures as well as potential effects on mergers and acquisitions. In addition, financial statement preparers and users can take heart from indications that the gulf between the GAAPs is closing. US AND UK GAAP: Important Differences For Financial Statement Preparers and Users The means to monitor business performance has changed over time, now placing more emphasis on risk assessment and non-financial performance measures. But in any financial performance measurement system, the reliability of the information reported is the crucial element, especially in todays global market of varying worldwide accounting standards; hence the movement towards establishing a single set of internationally accepted accounting standards. Harmonization of worldwide standards is emergingprimarily due to competitive global capital markets and the recently reorganized International Accounting Standards Committee (IASC), which has long sought to harmonize such standards. As of January 1, 2001 the IASC had issued 40 International Accounting Standards, with those still in effect listed in Figure I. While the differences between US Generally Accepted Accounting Principles (GAAP) and UK GAAP have narrowed, important differences remain. The purpose of this article is to provide an overview of the UK and US standard setting processes, and to highlight key differences between their GAAP, so that financial statement preparers and users can better understand the differences between financial statements produced and otherwise compare both countries GAAP. Knowledge of these important differences in accounting can aid the investor, security analyst and money manager in making important

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decisions when it comes to valuation of businesses, determining the accuracy, timeliness and depth of disclosure, and the potential effects on mergers and acquisitions. This article is based upon a review of the literature, including an analysis of BDO Seidmans (1999), Ernst & Youngs (1996) and KPMGs (2000) discussions of these issues. While UK and US accounting principles have common purposes, existing principles can produce markedly different financial statements. The US emphasizes consistency among companies accounting principles (e.g., to facilitate the comparison of such results); its litigious environment tends to foster creating accounting rules to fit all conceivable circumstances, rather than merely to provide general implementation principles that allow great degrees of professional judgment. However, UK standards, which began to appear about 30 years after those of the U.S., focus on fewer principles. The US seeks to minimize the use of alternative treatments, while the UK allows a range of detailed adaptations of the principles to specific cases. Yet, the gap between the GAAPs has narrowed recently, as evinced by the UK now dealing with such intangibles as goodwill, and the US addressing the pooling (merger) accounting area. Brief History of the Accountancy Profession The UK accounting profession has a long and distinguished history. The Society of Accountants in Edinburgh received a Royal Charter in 1854, making it the first accounting society that the Crown recognized; not surprisingly, the independent auditors role is said to have originated here. The British approach emphasizes stewardship in financial reporting and a well-defined role for independent auditors; the UK set the yet imprecise accounting goal of a true and fair view. In 1942, the Institute of Chartered Accountants in England and Wales (ICAEW) was among the first in the world to issue professional accounting pronouncements. In 1970, the ICAEW established the Accounting Standards Committee (ASC) to work closely with various recognized accounting groups and other interested groups such as stock exchange representatives and the Confederation of British Industry, to develop a set of financial standards for accounting practice. The ASC soon issued new accounting standards, subject to the approval of the councils of the six sponsoring bodies, a process that delayed adoption. Dissatisfaction with granting each of these six groups such delaying, compromising and veto power led to the Dearing Report (1988) recommending a new structure and enhanced authoritative support for setting accounting standards, which, as discussed further in this paper, led to the 1989 Companies Acts creating the Financial Reporting Council (FRC). Whittington (1989) also claims that the ASCs lack of authority and direction also led to the issuance of the Dearing Report. Additionally, since the UK is part of the European Economic Community (EEC), some EEC accounting Directives will affect UK accounting practice. The Department of Trade recognizes five bodies of UK accountants engaged in public practice as qualified for appointment as auditors under the Companies Act. The largest body, the ICAEW, is responsible for forming policy on and controlling professional ethics, rules and accounting standards. The ICAEW also controls accountants training, states who may hire staff under training contracts and sets examinations. The other four bodies are the Instituted of Chartered Accountants in Scotland, the Institute of Chartered Accountants in Ireland, the Association of Chartered Certified Ac-

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countants, which has members employed in industry and commerce, and the Chartered Institute of Public Finance and Accountancy, which specializes in local government finance. Companies Acts The Companies Acts broadly govern UK company activities. The UK Acts requirements, unlike those of the US Securities and Exchange Commission (SEC), affect all British limited companies, except those incorporated by Royal Charter or Special Act of Parliament. While Companies Acts disclosure rules have been since 1981 greatly expanded, especially relating to presentation and measurement; additional work remains to be done. Although the Acts deal mainly with financial issues such as firm incorporations, its management, administration, and dissolution, they also contain provisions concerning the issuance of financial statements and disclosing financial information. For example, the Acts require firms to keep proper accounting records, its directors to present annually an income statement and balance sheet to its shareholders, and its auditors to opine on the financial statements. The Companies Acts provide general, rather than specific, detailed accounting rules and regulations regarding the form and content of the annual reports. The 1980 Act lists the rules to form public and private firms. A public company is a limited liability corporation, whose name includes public limited company or P.L.C. and which must comply with the requirements of relevant Companies Acts. The 1981 Companies Act consolidated several separate acts into one comprehensive piece of legislation and contains detailed requirements concerning what accounting records to keep, i.e., to sufficiently explain a firms financial position so that true and fair accounts can be presented. The Companies Act of 1985 contains detailed provisions governing the accounting and auditing of companies. First, all companies must keep accounting records sufficient to: Show and explain the companys transactions; Disclose the companys financial position with reasonable accuracy; and Enable directors to ensure that annual accounts comply with the Companies Acts mandates.

Records must contain entries of daily receipts and payments, records of assets and liabilities and, for businesses dealing in goods, inventory records and details of goods bought and sold. Directors must prepare annual accounts to present at annual shareholders meetings. The directors report addresses principal business activities, review of operations and likely developments, important post-balance sheet events, recommended dividends, names of the directors and their shareholdings, and political and charitable contributions. Accounting Regulation and Enforcement Two major sources of UK financial accounting standards are the Companies law and the accounting profession. The 1981 Act sets out five basic accounting principles: (1) match

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revenues and expenses on an accrual basis; (2) value separately individual asset and liability items within each class of assets and liabilities; (3) apply the principle of conservatism (prudence), especially in recognizing realized income and all known liabilities and losses; (4) use consistent application of accounting policies from year to year; and (5) recognize the going concern principle for the reporting entity. The Act contains broad valuation rules allowing accounts to be based on either historical or current costs. The Companies Act of 1985 consolidated and extended earlier legislation and was amended in 1989 to recognize the EU Seventh Directive. The Act requires the consolidation of financial statements, but leaves specific techniques to private sector accounting standards. UK and US Standard-Setting and General Accounting Requirements Large UK firms (including all listed companies) must file full sets of audited financial statements with the Registrar of Companies, but listed ones (other than those with only debt securities) can send summary financial statements (derived from the full accounts and directors report) to shareholders who did not request the full accounts. Mediumsized companies can file and send shareholders a balance sheet and abbreviated profit and loss accounts, whereas small companies can file an abbreviated balance sheet and need not file profit and loss accounts. The three Institutes of Chartered Accountants and the Association have members engaged in all principal accounting areas in the private and public sectors. Two further major bodies have non-audit members. The Chartered Institute of Management Accountants (CIMA) caters to accountants engaged in management accounting in commerce and industry. Members of the Chartered Institute of Public Finance and Accountancy (CIPFA) predominantly work in local and central government. Unlike the British system, in the US the USs Financial Accounting Foundation selects board members and oversees the affairs of the USs financial accounting authoritative rule-making body, the Financial Accounting Standards Board (FASB). The FASB consists of seven full-time members appointed for five-year terms, which may be renewed once, and typically contain members from academia, government, private industry, the financial analysis community and public accounting. A staff and a director of research and technical activities support the Board. The Board follows its own due process procedures when issuing new accounting standards: (1) a task force of experts on a given topic is assembled; (2) research on the issue is conducted, and the literature is reviewed; (3) a Discussion Memo is published that comprehensively discusses the major issues and alternatives, also serving as a basis for public comment; (4) open public meetings are held; (5) an Exposure Draft of proposed standards is distributed for public comment; and (6) finally issuing the new standard. Business entities Companies and unincorporated entities (e.g., sole proprietorships and partnerships) are the two principal types of UK business organizations. Members of limited-liability companies subscribe share capital and face liability up to the nominal value of their fully paid shares. Shares normally denominated in pounds () must have a nominal or par value.

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They may use such different classes as ordinary shares (which carry no preferential rights to dividends), ordinary and participating preference shares, and redeemable shares. Entities can conduct transactions as unincorporated entities (with no general, separate legal standing), sole proprietorships (where owners face potential, unlimited personal liability) or two types of partnerships. General partners face joint and several unlimited liability for the firms financial obligations. In a limited partnership, at least one general partner faces unlimited liability, but limited partners who do not participate in management decisions are liable only to the extent of their capital contributions. Regardless of size, partnerships and sole proprietorships are not subject to any statutory audits, but must file accounts for tax purposes. Accounting and auditing requirements Financial statements must follow UK GAAP in a format prescribed by the Companies Act of 1985. Small and medium-sized entities may file less detailed accounts. All businesses should maintain accounts and timely transaction records to meet tax authorities accounting requirements, e.g., for Value Added Tax (VAT) purposes. Their directors should ensure that the accounts (financial statements) comply with UK GAAP. Only registered auditors belonging to a recognized professional body may perform statutory audits, which follow a uniform set of auditing standards that these professional bodies jointly establish. Rather than check all transactions and records, auditors seek to minimize the risk of undetected errors and report if the financial statements give a true and fair view of the companys results, assets and liabilities. Sources of UK Accounting Principles In 1988 the six major accounting bodies established the Dearing Committee, which recommended that UK GAAP emulate the USs FASB and its accounting standards. The Companies Act of 1989 enacted the Dearing Reports recommendations and created a new FRC to oversee its three offshoots: the Accounting Standards Board (ASB), which replaced the ASC in 1990; an Urgent Issues Task Force (UITF); and a Financial Reporting Panel. The ASB issues Financial Reporting Standards (FRSs) and adopted all 19 existing ASC Statements of Standard Accounting Practice (SAAPs), which remain in force until replaced by a FRS. SSAPs and FRSs contain both disclosure rules (e.g., FRS 1 on cash flow statements) and measurement rules (e.g. SSAP 4 on government grants). Some standards combine both sets of rules (e.g. SSAP 3 contains both disclosure and calculation rules for earnings per share). Most standards currently apply to all companies (except for SSAP 3, which applies only to listed companies) that present a true and fair view of their accounts. Unlike the ASC, the ASB could issue enforceable accounting standards. It currently consists of a full-time paid chairman, a full-time paid technical director and seven part-time paid members. A Financial Reporting Council independent of the profession supervises the ASB. The UITF is akin to the US Emerging Issues Task Force, and responds quickly to new problems; it issues clarifications of the accounting standards and other regulations. The Review Panel ascertains if the analyzed non-mandatory information constitutes a true and fair view. It can even ask the courts to declare that a companys accounts do not comply with the Acts requirements.

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The six major professional accounting bodies remain responsible for adopting and enforcing their own provisions. Its members must adhere to FRSs and SSAPs, which the Companies Act of 1995 formally recognized as accounting standards, unless such compliance would cause accounts to reflect a view that is not true and fair. Auditors reports should also disclose any departures from the standards. The ASC issued Statements of Recommended Practice (SORPs) to provide non-mandatory guidance applicable primarily to certain industries on the best method to treat certain matters. The IASC issues non-mandatory standards to promote worldwide harmonization of accounting standards. While many FRS and SSAP standards have been revised since first issue, their numbers have been retained, thus causing far fewer FRSs and SSAPs than US SFASs. Specific Differences in UK and US GAAP The following discussion highlights some of the major differences between UK and US GAAP. A potential investor must be cognizant of these differences when evaluating the performance of a US global entity in comparison to one using UK GAAP. Table I summarizes these main differences in GAAP. Intangibles US GAAP treats (positive) goodwill like other acquired intangible assets, i.e., capitalized and subsequently amortized over their expected useful lives, up to 40 years. However, the FASB has issued a new standard that eliminates the amortization of goodwill and subject it to an impairment test. Before 1998 in the UK (positive) goodwill could be written off directly to shareholders funds and usually was; however, firms must now capitalize (positive) goodwill, with transitional rules permitting the old goodwill to remain in shareholders funds. While US rules prohibit carrying development costs as an asset, UK firms may carry it as an asset under certain conditions. Fixed tangible assets (property, plant and equipment) The UK allows revaluating fixed, tangible assets to market values and mandates revaluing investment properties. The US mandates carrying fixed tangible assets at depreciated, historical costs. The US also requires capitalizing interest during the period of an assets construction period (i.e., made ready for use), which is optional in the UK. Impairment The UK and US judge differently the existence of impaired assets. The US calls assets whose book value exceeds the undiscounted, expected net cash flows impaired, which firms should write down to their fair value, e.g., present values of such cash flows. Under UK GAAP, recognition and measurement are consistent: an impairment occurs when and to the extent that the book value exceeds the higher of the new realizable value and the present value of the cash flows expected to arise from the assets continued use. US GAAP permits no subsequent reversal of impaired assets, while the UK permits reversals for goodwill and intangibles. Associates and joint ventures US GAAP has no accounting distinction between associates and joint ventures. UK joint ventures may not be proportionally consolidated. The US presumes a 20% investee to be

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an associate; the UK has no such presumption but more closely defines significant influence. Financial instruments Unlike the UK, US GAAP has developed recent comprehensive standards in this area that use three different treatments for financial instruments (besides hedges). First, amortized cost is reserved for financial instruments (e.g., loans and marketable securities) when the positive intention and ability to hold them to maturity exists. Next, any financial instrument or security held for trading purposes, and all derivatives other than those held as certain hedges, are also stated at fair value, with fair value adjustments becoming part of profits and losses. Assets or securities not fitting in the other categories are called available-for-sale, which also are stated at fair value. Such adjustments become part of stockholders equity (through other comprehensive income) and are recycled into the profit and loss account when the item is sold. UK firms need not disclose general terms and conditions of such instruments, but report qualitatively their objectives, policies and strategies to hold or issue such instruments, similar to the USs SEC requirements. US GAAP requires tabular disclosure options to deal with market risk (or sensitivity analysis or value-at-risk), plus separate disclosure of the four components of market risk: interest, currency, commodity and other market risk, e.g., equity price risk. UK interest and currency disclosure requirements encourage other market risk, such as equity price risk, and unlike US GAAP, requires no disclosures of credit risk. The UK also requires disclosures of unrecognized or deferred gains and losses on all hedges other than net investments in foreign currencies. Under US GAAP equivalent requirements apply only to cash flow hedges. Inventories In the UK, inventories (stock) should be carried at the lower of cost or net realizable value. Unless specific identification is practicable, cost is generally determined on the first-in, first-out (FIFO) or average-cost method. The most popular method of determining the cost of inventories is FIFO. The base stock method and last in, first out (LIFO) are not permitted. However, LIFO is an acceptable basis for cost in the US. UK GAAP requires writing back any provision for a reduction in inventory valuation that is no longer needed. US GAAP states the amounts of written down inventory cannot be subsequently restored. Capital Instruments Such UK capital instruments as shares, debentures, loans, options and warrants, must be included in certain balance sheet liabilities or shareholders funds, and reported as liabilities if they contain obligations to transfer economic benefits. Debt instruments must be recorded at the amount of proceeds net of certain direct-issue costs. Its costs may be spread over the instruments term since the finance costs are the difference between the total payments (including the interest charged on the instrument) and the initial carrying value. Similar rules apply to the finance costs of non-equity share capital, i.e., share capital with some characteristics of debt, such as a fixed return. Debt must be categorized as current or non-current according to the earliest date on which the lender can demand repayment. US GAAP requires presenting separately preferred stock redeemable at the

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holders option in a mezzanine level that is separate from stockholders funds and from debt. US GAAP allow deducting acquisitions of an entitys own shares (i.e., treasury stock) from stockholders equity. UK GAAP prohibits firms from holding such shares relative to employee share option plans, and records such purchases of shares as balance sheet fixed assets. Research and Development Costs US GAAP expenses both research and development costs. However, UK GAAP expenses research costs and allows deferring and amortizing development costs if grounds exist to expect future revenues to cover such costs . Debt The UK and US treat the maturity classification of debt differently. Unlike in the UK, US GAAP can reclassify short-term debt as long-term debt on the basis of a post-balance sheet long-term refinancing. US rules provide copious guidance on the extinguishment of debt and often require treating all gains or losses as extraordinary items. UK guidance is much briefer, generally prohibiting such classifications as extraordinary. Deferred Tax UK companies use a system of partial deferred tax provision, providing for deferred taxes resulting from timing differences to the extent that the timing differences will probably reverse and not be replaced by new timing differences. UK deferred tax principles provide for timing differences between the timing of inclusion of items in accounting and in taxable profit. US provisions use wider concepts of temporary differences between balance sheet carrying amounts of assets and liabilities, and those carried in the tax computation to provide for the tax arising on the recovery of each asset (or settlement of each liability) at book value whether that recovery is through use, realization or trade-in. Defined benefit pensions Unlike UK standards, US GAAP use an actuarial approach to focus on long-term valuation assumptions for assets and liabilities. It generally uses current market rates for high quality corporate bonds to discount the obligations and the market values for the assets and focuses on variations falling within certain limits, called a corridor. In the UK all variations from regular costs are allocated over the employees remaining working lives. Segment reporting Their differing risks and returns distinguish UK segments from one another, and the amounts reported, therefore, are the relevant figures as stated in the financial statements. By contrast, the US uses the management approach whereby the company is split into segments in line with the internal reporting structure. Moreover, firms report such inter-

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nal balances regardless of whether they use the same basis as the external financial statements. Business Combinations In the UK, FRS 6 (Acquisitions and Mergers), FRS 7 (Fair Values in Acquisition Accounting) and SSAP 22 (Accounting for Goodwill) cover business combinations. They restrict merger accounting to genuine poolings of interest and group reconstructions. Acquired businesses record assets and liabilities at their fair values (based upon arms length transactions) to reflect conditions at the acquisition date, which restrict the acquirers ability to make provisions for losses and integration costs. UK GAAP requires writing off immediately goodwill (i.e., the difference between the value of the business as a whole and its aggregated fair values of separate net assets) to reserves or set up as an asset and amortized over its useful life. While the UK allows both the acquisition and merger methods of accounting for business combinations, the conditions to use the merger method (pooling-of-interests in the US) are so narrow that it is now virtually nonexistent. Under the acquisition method, goodwill equals the difference between the fair value of the consideration given and the fair value of the net acquired assets. FRS 7 specifies assigning fair values to identifiable assets and liabilities existing at the acquisition date. Future operating losses and reorganization costs cannot be considered in calculating goodwill. Goodwill may be written off immediately against shareholders equity reserves or capitalized and amortized to income over its economic useful life. Unlike UK GAAP, US GAAP had allowed business combinations to use the pooling-of-interests accounting up to June 30, 2001. However, now with the issuance of FASB No. 171, Business Combination the pooling method has been eliminated and goodwill is no longer amortized but subject to an impairment test. Foreign Currency Translation Under UK GAAP, SSAP 20 defines accounting procedures for foreign currency translations using the closing rate (current rate) method for independent subsidiaries and the temporal method for integrated subsidiaries. The former includes translation differences in shareholders equity reserves, and the latter includes them in the profit and loss account. Companies translate transactions using the exchange rate on the transaction date; at the balance-sheet date, monetary balances are translated at the closing rate (or the contracted rate). Exchange differences are charged to the current years profit and loss account. Companies using foreign-currency borrowings to finance a foreign equity investment can offset exchange gains and losses resulting from the borrowings against their reserves. Companies can use either the closing-rate or temporal method to translate the accounts of subsidiaries, depending on the relationships between the companies in the group. Financial statements of subsidiaries operating in hyperinflationary countries must be adjusted to reflect current price levels before translation.

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UK annual accounts contain the profit and loss account, the balance sheet including explanatory notes, a statement of cash flows, group accounts, the directors report, and auditors reports. The Companies Act of 1985 provides precise rules concerning the format and content of company account headings and the order that they appear. Companies may use one of four profit and loss account formats in subsequent years unless underlying conditions change, and report applicable amounts for the immediately preceding year. Notes to the accounts should present much more information than found in the balance sheet and profit and loss accounts, including relevant accounting policies. The balance sheet must give a true and fair view of the companys state of affairs, and the profit and loss account must give a true and fair view of its profit or loss. This true and fair test overrides any specific requirements in the Companies Act for preparing the financial statements, and the statements must explain departures from a specific requirement because of the true and fair test. Reporting Requirements Audited UK annual accounts must be presented to the shareholders at a general meeting. Private companies can dispense with presenting such accounts with the members unanimous consent. A company with subsidiaries must generally prepare group accounts, usually comprised of the groups consolidated balance sheet and profit and loss account, and the parent companys balance sheet and directors report. A Company with a parent company incorporated in the European Union (EU) need not prepare group accounts if the parent files group accounts. Reasons for the Differences What accounts for the differences between US and UK GAAP? First, Frost and Pownall (1994) found that both mandatory and voluntary accounting disclosures are substantially more frequent in the US than in the UK. This variation reflects both differences in disclosure rules and significant differences in the frequency and timing of voluntary disclosures in the two jurisdictions. US firms generally made more voluntary disclosures than did firms from the UK, regardless of domicile. Frost and Pownall found that this greater compliance with US disclosure rules is consistent with both greater SEC monitoring and enforcement stringency, which led to greater investor assurance of the financial statements reliability than in the UK. Second, Gorelik, (1994) found that the main environmental differences affecting accounting lie in the size of economies and legal and cultural systems. The American economy is much larger and its legal environment is much more litigious than that in the UK. US institutions are also more open to public input and debate than in the UK. Third, Markell (1980) claims that differences arise primarily from differences in these countries educational systems. Specifically, US education at the university level for the accounting profession dates back to the late nineteenth and early twentieth century, while not generally being available in the UK until around 1965-1970. UK accounting education normally takes about three years to complete and focuses mainly on accounting theory. UK accounting students are not exposed to much of the business

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core or liberal arts. (US students typically take about 40 - 50% of their 4-year program invested outside of the business area). Fourth, Rutherford (1985) shows that since the British true and fair doctrine is based on a philosophical concept, not subject to a clearly definable, comprehensive set of rules, its accounting profession lacks a technical framework, preferring to rely on the legal profession or on ordinary meanings. A key reason for this evolutionary framework is that UK governments rely on a long history of precedents (e.g., Magna Carta), unlike the US constitution, which contains its provisions in a single document (subject to periodic amendments). Moreover, while the USs civil, legal system is primarily plaintiff attorney-driven, the UKs legal system has loser pay and other impediments from filing frivolous lawsuits. Finally, Zeff (1998) stresses that The SEC is truly a control agency, and it has little tolerance for ambiguity. Despite these differences, there is a growing world-wide acceptance of the FASBs conceptual framework for financial accounting and reporting and a realization that accounting information is subsumed in the decision-usefulness context; these perceptions have recently influenced standard-setting agencies in the UK to move closer the American position. Moreover, the FASBs replacing the Accounting Principles Board (APB) and the UKs ASB replacing the ASC have led to more independent and competent standard-setting bodies and a more compact organizational structures, i.e. smaller, more full-time membership and staffs, quicker response to emerging issues, and thus greater plasticity of the agencies. Thus, both countries have seen the elimination of accounting alternatives with greater specificity. Summary While international harmonization of accounting is an increasingly important issue, financial statement preparers and users must be able to reconcile differences between US and UK GAAP-based reports. Having knowledge of these differences, investors, security analysts and money managers are better able to make intelligent decisions concerning possible valuation effects, accuracy and timeliness of disclosures, and potential effects on mergers and acquisitions. Fortunately, the IASC and others are narrowing this gulffor example, with US GAAP disallowing the pooling method to account for mergers, and UK GAAP now requiring the capitalization of purchased goodwill. Until complete harmonization occurs, financial statement preparers and users must continue to understand both countries GAAP, as well as their relevant accounting standards and national laws

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FIGURE I International Accounting Standards Effective 1/1/2001 IAS 1 IAS 2 IAS 4 IAS 7 IAS 8 IAS 10 IAS 11 IAS 12 IAS 14 IAS 15 IAS 16 IAS 17 IAS 18 IAS 19 IAS 20 IAS 21 IAS 22 IAS 23 IAS 24 IAS 26 IAS 27 IAS 28 IAS 29 IAS 30 IAS 31 IAS 32 IAS 33 IAS 34 IAS 35 IAS 36 IAS 37 IAS 38 IAS 39 IAS 40 Presentation of Financial Statements Inventories Depreciation Accounting Cash Flow Statements Net Profit or Loss for the Period, Fundamental Errors, and Changes in Accounting Policies Events After the Balance Sheet Date Construction Contracts Income Taxes Segment Reporting Information Reflecting the Effects of Changing Prices Property, Plant, and Equipment Leases Revenue Employee Benefits Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Business Combinations Borrowing Costs Related Party Disclosures Accounting and Reporting by Retirement Benefit Plans Consolidated Financial Statement and Accounting for Investments in Subsidiaries Accounting for Investments in Associates Financial Reporting in Hyperinflationary Economies Disclosures in the Financial Statements of Banks and Similar Financial Institutions Financial Reporting of Interests in Joint Ventures Financial Instruments: Disclosure and Presentation Earnings Per Share Interim Financial Reporting Discontinuing Operations Impairment of Assets Provisions, Contingent Liabilities, and Contingent Assets Intangible Assets Financial Instruments: Recognition and Measurement Investment Property

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TABLE I Some Major Differences in UK and US GAAP Issue Goodwill U.K. GAAP Capitalize and amortize over useful life presumed to be 20 years. If rebutted with indefinite life, no amortization. Fixed tangible assets may be revalued and depreciation based on revalued amount. The amortized cost basis is not restricted as in the U.S. LIFO is rarely an appropriate cost basis. Restoration of write-downs. Allows the deferral and amortization if expectation that future revenue to cover costs. Instruments classified as either liabilities or shareholders funds. U.S. GAAP

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Capitalize and subject to impairment test.

Property, Plant & Equipment Financial Instruments Inventories R & D Costs

Fixed tangible assets must be carried at depreciated cost. Only defined categories of financial instruments may be held at amortized cost. LIFO is an acceptable cost basis. No restoration of write-downs. R & D costs expensed when incurred.

Capital Instruments

Preferred stock redeemable at holders option is presented in a mezzanine level separate from debt or equity. Short-term debt to be refinanced maybe classified as long-term debt. Gains or losses are treated as extraordinary items. Use of a wider concept of temporary differences. U.S. uses a management approach that parallels the internal reporting structure. An actuarial approach is used to calculate pension costs. Pooling-of-interests accounting has been widely accepted. However, FASB has now eliminated this method of accounting. Either the actual, or an average rate, must be used for the profit and loss account. The cumulative translation adjustment is taken into the income statement as part of the gain or loss.

Debt

Debt due within one year is classified as current debt. Gains or losses on extinguishment of debt are not extraordinary items.

Deferred Taxes Use of a partial deferred tax provision in handling timing differences. Segment reporting U.K. distinguishes segments by risks and returns.

Defined benefit Various approaches utilized to calculate pensions pension costs. Business combinations Foreign currency translation Pooling-of-interests accounting very restricted. Either the closing or an average rate may be used for the profit and loss account. On a sale or termination of a foreign entity, the cumulative exchange adjustment is not taken into account.

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References BDO Seidman, Doing Business in the UK, (London, England, 1999), 44 pp.

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Ernst & Young, Doing Business in the United Kingdom, (London, England: 1996), 130 pp. Sir Ron Dearing (The Dearing Report) The Making of Accounting Standards, Report of the Review Committee, presented to the Consultative Committee of Accountancy Bodies, 1988. Frost, Carol A. and Grace Pownall, Accounting disclosure practices in the United States and the United Kingdom. Journal of Accounting Research, 1994, v32 (1), 75-102. Gorelik, George, The setting of accounting standards: Canada, the United Kingdom, and the United States, International Journal of Accounting, 1994, v29 (2), 95-122. Gottlieb, Max, Where are You Going, Pacioloi: Will Accounting Standards Be Harmonized? National Public Accountant, November 1996, pp. 35-39. KPMG, Global Accounting, (the Netherlands, 2000), 166 pp. Markell, William, A comparison of preparation for the accounting profession among New Zealand, the United Kingdom, and the United States, International Journal of Accounting, 1980, v15 (2), 101-114. Rutherford, B.A., The True and Fair Doctrine: A Search for Explicitation, Journal of Business Finance & Accounting, (12) 4, Winter 1985, pp. 484-94. Whittington, Gerald, Accounting Standard-Setting in the United Kingdom after 20 years: A Critique of the Dearing and Solomons Reports Accounting and Business Research, Summer 1989, 195-205. Zeff, Stephen A., The IASCs Core Standards: What will the SEC Do? Journal of Financial Statement Analysis, Fall 1998, pp. 67-78.