The history of financial reporting in Ireland is divided into three separate periods. The first period coincides with the years when Ireland was under British rules. In 1992 the Irish Free State was established and this signifies a convenient start to the second period in the development of financial reporting practices in Ireland. The third period in the development of financial reporting in Ireland commences in the early 1970s and represents the period of accounting standards.
In 1908 parliament consolidated the legislation into the companies (consolidation) Act of 1908. Under the Act of 1908 copies of balance sheet had to be sent to shareholders seven days before the meeting and but the profit and loss account only had to be produce at the meeting. This Act was adopted in 1922 by Government of the Irish Free State.
UK legislature had intervened in developing financial reporting. The 1929 Act contained a provision requiring for the first time that an annual profit and loss account as well as a balance sheet be laid before the company in general meeting. However only the balance sheet was required to be filed with the registrar and profit and loss account remained restricted to avoid unfair advantage to competitors.
In the UK, the 1948 consolidating Act (following the 1947 Act) required the profit and loss accounts should give a ‘true and fair’ view of the profit or loss for the year, and that the balance sheet should also show a ‘true and fair’ view (as distinct from the 1929 Act’s ‘true and correct’ view) of the state of affairs of the company as the end of its financial year.
Companies Act 1963 was the most considerable company law, until recent times in Ireland. The 1963 Act adopted many of the provisions of the UK Act of 1948 which established the primary framework and approach to accounting disclosure which still applies today. The publication of comparative figures for both the profit and loss account and balance sheet was first introduced by this Act.
On the 7th June 2002, The EU Council of Ministers adopted a regulation passed by the European Parliament requiring all EU listed companies to prepare their consolidated financial statements in accordance with international standards by 1st January 2005 at the latest. Consequently, the legal framework under which companies prepare their financial statements changed significantly in 2004/05, with EU Member States being required to use local legislation to implement their options under the EU IAS Regulation 1606/2002. The statutory instruments giving effect to the options available in the Republic of Ireland and Northern Ireland are as follows:
- Republic of Ireland
• European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations 2005, SI No.116 of 2005;
• European Communities (Fair Value Accounting) Regulations 2004, S.I. No.765 of 2004;
• European Communities (Adjustment of Non-Comparable Amounts in Accounts and Distributions by certain Investment companies) Regulations 2005, SI No.840 of 2005.
• The companies (1986 order) (International Accounting Standards and other Accounting Amendments) Regulation (Northern Ireland) 2004- 9 December 2004.
EU IAS Regulation 1606/2002 made it mandatory for all listed entities in the EU to prepare their consolidated financial statements in accordance with IFRS for all accounting periods beginning on or after 1st January 2005. Companies and groups that are not directly impacted by the EU IAS Regulations have a choice as to the financial reporting framework that they apply in preparing their individual and group accounts. AS a result, two financial reporting frameworks are available for accounting periods beginning on or after 1st January 2005. These are:
• Company law based financial statements; and
• IFRS based financial statements.
Company law based financial statements are prepared in accordance with the formats and accounting rules of Republic of Ireland and Northern Ireland Company law and accounting standards. The applicable accounting standards are the Financial Reporting Standards issued by the Accounting Standards Board in the UK.
IFRS based financial statements prepared in accordance with International Financial Reporting Standards issued by the IASB and certain mandatory disclosures carried forward from company law.
The parts of company law that do not deal with the preparation of financial statements still continue to apply to all Republic of Ireland and Northern Ireland companies regardless of which financial reporting framework they adopt. Therefore current requirements regarding the filing and signing of accounts, the rules regarding redemption and purchase of own shares or financial assistance for purchase of own shares and the rules regarding distributions still continue to apply to IFRS based financial statements.
The Professional Accounting Bodies
Institute of Chartered Accountants in England & Wales (ICAEW) and Institute of Chartered Accountants of Scotland (ICAS) are the oldest professional accountancy bodies recognised in Ireland and UK. The companies Act 1963 in Ireland recognised 3 bodies – The Institute of Chartered Accountants in Ireland (ICAI), the Association of Chartered Certified Accountants (ACCA) and The Institute of Certified Public Accountants in Ireland (ICPAI)- as professional accounting bodies. The Institute of Incorporated Public Accountants (IIPA) was founded in 1981 and granted Professional accounting body recognition in april 1996 by the minister of Ireland
The Issue of Accounting Standards
An accounting standard is a set of rules which prescribes the method by which accounts should be prepared and presented. They are issued by a national or international body of the accountancy profession, and they are intended to apply to all financial accounts which are intended to give a true and fair view of the financial position and profit/loss. Standards are detailed working regulations within the framework of government legislation and they cover areas in which the law is silent.
International Accounting Standards (IASs) were issued by the International Accounting Standards Committee (IASC) from 1973 to 2000. The International Accounting Standards Board (IASB) replaced the IASC in 2001. IAS adopted in 2005 by UK listed companies as a result of the EU requirement. , the standards that auditors in the UK have to follow have also changed following the introduction in the UK of new standards based on International Standards on Auditing (ISAs). Those changes will potentially affect preparers, auditors and users of financial statements. Since then, the IASB has amended some IASs, has proposed to amend other IASs, has proposed to replace some IASs with new International Financial Reporting Standards (IFRSs), and has adopted or proposed certain new IFRSs on topics for which there was no previous IAS. The formal objectives of the IASB are to:
• to Develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in the financial statements and other financial reporting to help participants in the world’s capital markets, and other users who make economic decisions;
• to Promote the use and rigorous application of those standards; and
• Bring about convergence of national accounting standards and international accounting standards to high quality solutions.
The Process for the development of a standard Under the International Accounting Standards Committee Foundation (IASCF) Constitution involves the following steps:
• During the early stages of a project, IASB may establish an Advisory Committee to advice on the issues arising in the project. Consultation with this committee and the standards advisory council occurs throughout the project;
• Publish an Exposure Draft on all projects and normally publish a discussion document for public comment on major projects;
• Consider holding public hearings to discuss proposed standards, although there is no requirement to hold public hearings for every project;
• Following receipt and review of comments, IASB develops and publishes and Exposure Draft for Public comment; and
• Following the receipt and reviews of comments, IASB issues a final IFRS.
The preface to IFRSs sets out the IASB’s objectives, the scope of IFRSs, due process, and policies on effective dates, format and language for IFRSs. When the IASB publishes a standard it also publishes a basis of conclusions to explain publicly how it reached its conclusions and to promote background information that may help users apply the standard in practice.
Through committees, both the IASC and the IASB have issued Interpretations of Standards. The IASB also publishes a series of Interpretations of International Accounting Standards (Standings Interpretations Committee (SICs)) developed by the International Financial Reporting Interpretations Committee (IFRIC) and approved by the IASB. The newly expanded role of IFRIC is to both interpret existing IASs/IFRSs in light of the Framework for the Preparation and Presentation of Financial Statements document in order to prevent confusion and additionally to provide authoritative guidance on issues that would otherwise be developed by other parties leading to differing practices. Financial statements may not be described as complying with IFRSs unless they comply with all of the requirements of each applicable standard and each applicable interpretation.
IFRS refers to the new numbered series of pronouncements that the IASB is issuing, as distinct from the IASs issued by its predecessor; and more broadly, IFRSs refers to the entire body of IASB pronouncements, including standards and interpretations approved by the IASB and IASs and SIC interpretations approved by the predecessor IASC.( Alexander & Britton, 11)
The Role of Stock Exchange
UK integrated companies and listed on the London Stock Exchange are required under the Listing Rules to report on how they have applied the Combined Code in their annual report and accounts. Overseas companies listed on the Main Market are required to disclose the significant ways in which their corporate. The securing of a Stock Exchange listing binds a company to the requirements of the Stock Exchange Regulations contained in the Listing Rules or Yellow Book issued by the Council of Stock Exchange. This required a company to observe certain rules and procedures regarding its status as a listed company. Some of these concern its behavior; while others concern the disclosure of accounting information, which is more extensive than the disclosure requirements for listed companies’ legislation. The reason for the additional disclosure requirements for listed companies is that their shares are freely available in the open market place and the Stock Exchange wants to ensure that all potential investors have access to all available information about the company. The US Securities and Exchange Commission recommended in May 2000 that international standards should be accepted for cross-border listings without reconciliation to US GAAP.
Harmonisation of Financial Reporting
The EU has made significant progress in the harmonization of laws and regulations. European Commission establishes standardization and harmonization of corporate and accounting rules through the issuance of Directives. After years of negotiations and investigations by the EU, the IAS Regulation (EC) 1606/2202 concerning the application of International Accounting Standards was adopted on 19 July 2002 by the European Parliament and the Council. By adopting this regulation, The European Union aims to harmonize the financial information presented by public accountable companies in order to ensure a high degree of transparency and comparability of financial statements and hence an efficient functioning of the Community capital market and of the Internal Market.
IFRS and IAS
The IAS Regulation only applies to quoted companies publishing consolidated Financial Statements, however leaves room to its Member States to decide on certain optional matters as to the broader application of the Standards to non quoted companies and/or for non-consolidated financial statements.
As per European law, IASB have published the IFRS to be adopted by the EU. This results at times in significant timing differences between the issuance of a standard by the IASB and its final adoption by the EU. On the 30 November 2005, In the meeting of ARC (Accounting Regulatory Committee), the EU therefore decided that Regulations endorsing IFRSs published in the Official Journal and entering into force after the balance sheet date but before the date the financial statements are signed, can be used by companies (but no obligation) where early application is permitted in the Regulation and the related IFRS.
IFRS can be embedded within a broader process improvement strategy, and the sustainability of financial reporting can, of course, be improved incrementally. The focus should be maintained on immediate deliverables, whilst seizing each opportunity for greater effectiveness, efficiency and control, and also building in the capacity for the future developments.
Some examples of where effective IFRS change can or should be facilitated include:
• Reporting needs to be timely and accurate, with minimum human intervention. Reporting disciplines need to be able to cope with increased data collection analysis and disclosure. Technologies like XBRL may be useful to eliminate communication difficulties and duplication between systems.
• Controls and procedures need to be reviewed to ensure they remain appropriate, with the right policies and procedures in place. These need to be seen to be supported by management. Accounting manuals throughout the organization are needed to help IFRS be understood and implemented in a consistent way. Where appropriate these should also be Sarbanes-Oxley complaint, a process much easier to do whilst the controls are being put in place.
• Certain areas of IFRS, for example effective interest rate calculations, fair valuation of derivatives and hedging, create or change intangible assets and liabilities. Therefore companies need to ensure they have rigorous and robust validation procedures in place to establish balances. In addition, controls over such balances must be developed given that as they do not easily lend themselves to traditional controls, such as reconciliation to third party information. They must also be able to explain their volatility, particularly if they use cash flow hedging. Skilled resources are in short supply in the market – a good training regime is a way to mitigate some of the risk.
• On the people side, specific work needs to be done to motivate personnel to embrace, instead of feel excluded by or from, IFRS. This needs to be built into training, development and reward structures. Critically, resources must be made available for change implementation. Training and updates are the norm, but IFRS needs to be used when and where business is booked, not in a remote central finance function. All of the management, not just those in finance, need to be aware of the requirements of IFRS and their associated implications.
(International financial accounting and reporting, Ciaran Connolly, The institute of chartered Accountants, Dublin, 2008)
(Financial Reporting, David Alexander & Anne Britton, Fifth edition, Thomson business press, London,1996)