CFM20040 - Accounting standards and groups of companies

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 its own individual accounts under IAS. It does not have to ensure that all of its subsidiary undertakings use IAS. But the subsidiaries must still all use the same accounting framework, again unless there are good reasons for not doing so.

Guidance notes prepared by BERR (formerly the DTI), and available on its web-site, give 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 to IAS straight away.
• The group contains subsidiary undertakings that are themselves publicly traded, in which case market pressures or regulatory requirements to use IAS might come into play, without necessarily justifying a switch to IAS by the non-publicly traded subsidiaries.
• A subsidiary undertaking or the parent was planning to apply for a listing, so might wish to convert to IAS in advance, whereas the rest of the group was not planning to apply for a listing.
• 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.
• In the case of individual accounts, a company ceases to be a subsidiary.