CFM16013 - Accounting for financial instruments: IAS 32 and IAS 39: groups

Consistency within groups

The DTI Regulations, which came into force on 12 November 2004, inserted a new provision into the Companies Act 1985 (section 227C), requiring a parent company and all its subsidiaries to use the same financial reporting framework – either IAS or UK GAAP – unless, in the opinion of the directors, there is good reason not to do so.

This is slightly modified where the parent company prepares both consolidated and individual accounts under IAS. It does not have to ensure that all of its subsidiary undertakings use IAS. But they must still all use the same accounting framework, again unless there are good reasons for not doing so.

Guidance notes prepared by the DTI, and available on their web-site, gives examples of "good reasons", such as:

• A group using IAS acquires a subsidiary undertaking that has not been using IAS: in the first year of acquisition, it may not be practical for the newly-acquired company to switch.
• The group contains minor or dormant subsidiaries where the costs of switching accounting framework would outweigh the benefits.

The guidance notes say that the key point is that the directors must be able to justify any inconsistency to shareholders, regulators or other interested parties.

A company which has prepared its accounts (either individual company or consolidated accounts) using IAS for a financial year cannot switch back to UK GAAP in subsequent years. There are three exceptions:

• The company becomes a subsidiary of an undertaking that does not use IAS. This is intended to apply to the sale of a company out of a group generally using IAS and into one using UK GAAP. It is not intended to apply to internal group reorganisations.
• The company ceases to be publicly traded.
• Any parent company of the company ceases to be publicly traded.