Table of Contents

1. Section 1:.....................................................................................................................................2
1.1. Introduction...........................................................................................................................2
1.2. Summary timeline of adapting IFRS standards in the UK...................................................2
1.3. Analysing implementation and endorsement of IFRS standards in the UK.........................3
1.3.1 Accounting practices......................................................................................................3
1.3.2 Cultural factors when implementing IFRS.....................................................................3
1.3.3 Enforcement of standards and efficiency achievements.................................................4
1.4. Conclusion............................................................................................................................5
2. Section 2:.....................................................................................................................................6
2.1. Introduction...........................................................................................................................6
2.2. Evaluation corporate governance, ethics, true and fair view, and creative accounting of
financial reporting........................................................................................................................6
2.2.1 Corporate governance.....................................................................................................6
2.2.2 True and fair view...........................................................................................................7
2.2.3 Ethics..............................................................................................................................8
2.2.4 Creative accounting........................................................................................................8
2.3. Conclusion............................................................................................................................9
References......................................................................................................................................10

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1. Section 1:

1.1. Introduction

Accounting regulation is of importance for companies, stakeholders, investors and

regulation. Authorities of most countries are keeping working on improving accounting
regulations to make information of all companies more integrity and avoid fraud. There are two
major accounting standards, which are IFRS (international Financial Reporting) and GAAP
(Generally Accepted Accounting Principles). IFRS is set by The International Accounting
Standards Board (IASB) while GAAP is set by The Financial Accounting Standards
Board (FASB). Accordig to Peavy and Webster (1990), the born of IFRS is to help all countries
in the world have a same accounting standard. That will enable for the analysis more simple. It
even is more helpful for companies doing business overseas or investors investing oversea. The
establishment of IFRS has supported for standardizing accounting regulations at the international
level (Yip and Young, 2012). In recent decades, most countries in the world have adapted IFRS;
however, there are still some adjustment to make it suitable for current economic level of that
country. This report will analyse the implementation and endorsement of adapting IFRS
standards in United Kingdom.

1.2. Summary timeline of adapting IFRS standards in the UK

For the case of United Kingdom, it should mention two period of adapting IFRS
standards. Before 1 January 2020, the UK is still belong to European Union, so they have
adapted IFRS standards which were adopted by the EU. In 2002, EU adapted IFRS Standards,
which requires for the consolidated financial statements of all companies in EU whose debt or
equity securities trading in the regulated market in the EU (Jurisdictional profile: European
Union). The purpose of EU when implementing IFRS standards is to harmonize the financial
reports of companies listed in regulated market with high level of transparency and
comparability to improve the effectiveness of capital markets of the EU. This adaption was
effective in 2005. During that time, the UK has been adapting EU’s IFRS Standards.

Since 1 January 2020, UK withdraws from EU, they have set transition period to transfer
some of rules and regulations. This transition period will end at the end of 2020. UK
Endorsement Board (UKEB) will endorse and adapt new or amended IFRS. On 1 st January 2021,
UK IFRS will include all of international accounting standards which were adapted in the EU.

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New and amended standards will be added to the set of UK-adopted international accounting
standards.

In UK, IFRS standards are mandatory for domestic public companies. In addition, all
domestic companies in UK which trades securities in a regulated market are required to use IFRS
as adopted by the EU in their consolidated financial statement during the transition period. After
that period, they have to apply IFRS standards adopted by the UK. Besides, IFRS are required or
permitted for listings by foreign companies. If accounting standard at home country of foreign
country is equivalent to IFRS, they might use their home standards. The IFRS for SMEs standard
is required or permitted in UK. Therefore, this report will analyse the implementation and
enforcement of IFRS in the UK during the time the UK is still belong to EU and adapt IFRS
standards which was adopted by EU (Jurisdictional profile: United Kingdom).

1.3. Analysing implementation and endorsement of IFRS standards in the UK

1.3.1 Accounting practices

There are some difference between UK GAAP and IFRS standards, which most
companies in the UK should recognize to evaluate the impact of IFRS on their financial reports.
More importantly, it will affect decisions of shareholders and investors. The major difference
between UK GAAP and IFRS are in terms of Property, plant and equipment, Intangible assets,
Impairment of financial assets, financial instruments, deferred taxation, Leases, Defined benefit
pension schemes, Consolidation of group entities. Therefore, companies in the UK have been
adjusted when recording these factors in financial reports. In fact, companies will take advantage
of recording according to IFRSs, but it also affect revenue and profit of companies. IFRS
requires more when generating financial reports, which have required companies in the UK to
adapt it.

1.3.2 Cultural factors when implementing IFRS

Cultural factors are one of obstacles in implementation IFRS standards. In addition, in

concerning of implementation of IFRS standards in term of cultural factors relate to religion,
language, technical skills and expertise (Dowa et al, 2017). The UK might not have much
difficulty in term of religion and language when original language of IFRS standards is English.
However, they still have some difficulties about technical skills and expertise because before

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adapting IFRS standards, most companies in the UK were adapting UK GAAP. There are some
differences between two accounting standards; there are issues for many UK companies, which
listed in regulated market when adapting IFRSs especially international and complex
organization (Financial reporting faculty, 2008). These differences will require accounting staffs
and auditors to be trained well to adapt new standards smoothly. In addition, most companies in
the UK have been facing the lack of knowledge of IFRSs. In this case, companies might have to
hire consultant or advisors, which will increase cost of implementation (Financial reporting
faculty, 2008). Due to that, a lot of companies in the UK have invested in training their staff to
minimize the risk when implementing IFRS. Therefore, when implementing IFRSs, most
companies in the UK have troubles with technical skills and expertise of their staffs. Training
staffs is necessary to avoid material issues when generating financial reports.

1.3.3 Enforcement of standards and efficiency achievements

The authorities in UK have tried not intervene the interpretations of IFRSs because they
see in the view of it is set by the IASA and it is international standards, so it is not appropriate to
add local variations for companies in the UK. In the UK, the FSA (the financial services
authority), regulating most financial services markets and firms in the UK has cooperated with
FRRP (the financial reporting review panel) to oversee and monitor the enforcement of IFRS of
listed companies in the UK. FRRP published a report about implementation and enforcement of
IFRS in companies in the UK in 2006, after one year of adapting IFRS. According to FRRP, in
term of accounting policies, some of accounting policies disclosure has not been applied.
Additionally, most companies seem to copy description for disclosure of accounting policies
word for word. Disclosures, which were implemented by management, were not informative.
Some companies even do not attach disclosures. In term of good will, many companies did not
attach the reason for the increase of goodwill, which is required under IFRS standards.
Therefore, for the first period of adopting IFRS, most companies in the UK made mistakes.
Companies in the UK have improved to adapt IFRS more effectively and obey standards under
IFRS standards.

As the result, in the evaluation of EU about implementation of IFRS, there are significant
efficiency when adapting IRFS. IFRS has reduced cross-border barriers (European commission,
2015). Moreover, the European commission stated that the IAS regulation has helped to enhance

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the transparency of financial reports via enhancing accounting quality, disclosure, and value-
relevance of reporting. That also helps to improve forecast accurately of analyst about market
expectations. In addition, IFRS standards entailed the greater comparability among financial
reports within industries and nations. However, there are criticisms about the complexity of
IFRSs. To improve the quality of reporting, it cannot avoid that complexity.

The improvement of quality of financial statement leads to the improvement of capital

market. The Commission pointed that there is higher liquidity, lower cost of capital, growth of
cross-border transactions, and easier access to capital. That gives advantage to investors. Thus,
adapting IFRSs has helped to improve capital market, and in turn, it brings benefits for investors.

1.4. Conclusion

Even though at the first time of adapting IFRS standards, most listed companies in the
UK still made mistakes because there are some obstacles such as technical skill and expertise in
preparing financial reports under new standards, they have improved it time by time. As a result,
it has helped to improve financial market when IFRS standards enhance the transparency and
quality of financial report. It makes information in financial report more clear and informative
when IFRS requires attaching more information. Due to that, it helps to enhance the liquidity,
integrity, and easier access capital in capital market. In term of investors, they have more
information to analyse and make decisions when IFRS standards improve accuracy of
forecasting. After 31 December 2020, companies in the UK will adapt IFRS under the adaption
of the UK when the UK finally exits EU. There might be some difference between EU-adoption
IFRS and UK-adoption IFRS. For instance, EU has not endorsed IFRS 17 insurance, but it might
be adapted by the UK (ICAEW, 2020). Thus, listed companies in the UK should prepare for the
amendment might happen in next year.

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2. Section 2:

2.1. Introduction

Accounting standards is the regulation, which will guide the company to record their
transaction of daily operation and then reflect it in financial statements of the company. Financial
statements of a company is important for decision making of many people such as investors,
shareholders, and stakeholders. The high quality of financial statements will contribute
significantly to the liquidity and integrity of financial market and capital market. However, some
failure and collapse of some giant corporations, for example Enron or Tyco, have raised concern
about the quality of financial statement. The development of IFRS standard is for the aim of
improving the quality of financial statements. True and fair are the fundamental of accounting
standards, including IFRS standards. High quality financial statements require the reflection of
fair presentation. Besides, ethics is one of big concerns in generating financial reports. The
company having high ethics standards will avoid doing wrong things. Corporate governance of
the company has significant effects on implementing IFRS as well. All of these factors have
close connection with creative accounting. This section will analyse corporate governance, true
and fair view, ethics and creative accounting in financial reporting.

2.2. Evaluation corporate governance, ethics, true and fair view, and creative accounting of
financial reporting

2.2.1 Corporate governance

Under IFRS standards, there are requirements about disclosing information in financial
statements. That has close connection with corporate governance of companies. When the
company is required to disclose information, they might have to evaluate this information to see
whether this information affect adversely on reputation and operation of the company. If the
information has disadvantage side for companies, they might avoid attaching that information in
financial statements because it might affect capital raising of the company or operation.
Therefore, when deciding publish any information, manager of a company has to evaluate its
effects on the operation and performance of the company.

There are some studies finding the relationship between corporate governance and level
of compliance with IAS 39, which sets principles for recognising and measuring financial assets,

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financial liabilities, financial instrument, and hedge accounting (IFRS.org). Verriest et al studied
the relationship of corporate governance strength and the option of implementing IFRS of
European public companies in the year of 2005, and found that companies which have strong
governance, will disclose more information and more complied with IAS 39 (Krismiaji and
Surifah, 2020). In addition, Krismiaji and Surifah (2020) indicated that “manager of the company
intends to avoid compliance when corporate governance is weak ((Nelson et al., 2010).” In the
study of Agyei-Mensah, B.K. (2017), the author shows that board size of companies have
significant relation with quality of risk disclosure compliance. In addition, Kabir and Rahman
did a research about the role of corporate governance in goodwill impairment decision according
to IFRS standards in Australia in 2015 and indicated that stronger corporate governance
enhances connections between goodwill impairment loss and contracting incentives. However,
Kabir and Rahman showed that strong governance cannot eliminate the caution in decision
regarding to impairment particularly when pre-impairment profit is lower than zero and when the
impairment happens at the first year of the tenure of general director of the company.

2.2.2 True and fair view

True and fair have been fundamental in accounting standard. IAS 8 has required financial
reports need to be neutral or free from bias (Financial reporting council, 2014). In fact, there are
no definition of authority on true and fair concept. In section 393 of the Companies Act 2006, the
managers of a company are required to just approve accounts when they are meet requirements
under true and fair value. True and fair view has been applied and followed in accounting system
of the UK and EU. The adaption of IFRS will not change that view. According to Financial
Reporting Council (2014), fair representation in IFRS standards is equivalent to a true and fair
view. Under IAS 1, fair presentation in financial statements requires the faithful representation of
all transaction, and other events (Charterededucation, 2015).

However, there are one concern about the term of ‘prudence’ in the IFRS standard. In
2010, IASB removed “prudence”. It has been controversial about whether including or not
prudence in IFRS standards. Most investors want IASB put prudence back because it is more
helpful for investors (Investor perspective, 2015). However, IASB has not put this back when
they think it will be a bias when put it back IFRS standards (Bouvier, 2016). Nevertheless,

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according to evaluation of Financial reporting council (2014), the remove of prudence does not
impact the true and fair requirement for financial reporting under IFRS standards.

2.2.3 Ethics

Ethics is one of crucial concepts in doing business, which relates to the integrity of
companies when preparing financial statements. Ethical value is essential to make assessments
about faithfulness of representation in financial reporting to make sure that financial reports
reflect true transactions of operation of companies in a principled-based system (Steven, 2011).
The improvement of accounting standards is also for minimizing failure of corporations. The
born of IFRS is for the purpose of enhancing the integrity and ethics of companies when
conducting financial statements. It is obvious that any misstatement of financial statements can
relate to ethical issues of the companies. IFRS standards have been improving and amending
significantly to minimize fraud in financial statements.

In the study of Youssef and Rachid (2015), the author indicated that IFRS standards are
conducted based on some theories of business ethics which includes stakeholder theories and
stockholder theories. These theories have help to solve partly of ethics in generating financial
statements. In additions, the IFRS standards use ethical values of the capitalist society:
independence, equality, and security […]. This standard also utilize many business ethics values:
caution, respect, transparency and honesty (Youssef and Rachid, 2015). Therefore, IFRS
standards have contained many values of ethics. The collapse of some big giant companies give
us the understanding the necessary of having an accounting standard which solve the ethical
issues.

2.2.4 Creative accounting

Creative accounting comprises of accounting practices, which follow law and regulation,
and it capitalizes on loopholes in the accounting standards to falsely reporting some information
in financial statements (Investopedia, 2020). Even though creative accounting is not illegal, it
should not happen. In other words, companies should not base on that to try to report wrong
information, which will have detrimental effects on decision-making of investors. The definition
of creative accounting in modern world come from the emergence of international accounting
standards (Jawad and Xia, 2015). Creative accounting relates to earnings management, income
smoothing or financial engineering while earnings management is the fraud practice which is

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conducted by management of the company to record higher revenue to meet the plan or target of
the company (Wokukwu, 2015), which might be assigned by shareholders of the companies.
This comes from the interest conflicts between executive managers of companies and
shareholders.

Creative accounting has led some companies to bankrupt. There are so many scandal
relating to creative accounting, which caused these companies a dire consequence. For instance,
in 2008 financial year, Lehman Brothers had to file bankrupt when it failed to disclose Repo 105
transaction to its investors (Akpanuko and Umoren, 2018). Another case is the scandal of Enron
in 2001 when the company had accounting fraud, hiding big debt and toxic assets to its investors
(Investopedia, 2020).

The born of IFRS standards is to provide financial statements more quality and easy to
understand. The main purpose of the establishment of IFRS standards is to improve quality of
financial reporting standards based on articulated principles to support more for investors and
other users of financial statements of the company ((Jawad and Xia, 2015). As mentioned above,
IFRS standards have contained ethical values of business ethics, requirement for disclosure, but
it still has some issues, which might lead to the raise of creative accounting. The greater
flexibility of accounting options under IFRS standards due to covert option or subjective
estimation along with the lack of clear guideline of implementing new standards entailed the
greater earnings smoothing (Capkun et al, 2016). Moreover, Capkun et al (2016) found that
earnings smoothing increased from pre-2005 to post-2005 for companies, which adapt IFRS
standards. Therefore, even with IRFS standards, creative accounting still might happen.

2.3. Conclusion

Financial statements still contain many issues when it connects to the record all
transaction of a company. For the private purpose, the management of the company might did
the wrongdoing when generating financial reporting. That is why there is requirement for an
accounting standard which can cover that issue, making benefits for investors and stakeholders.
True and fair are the fundamental in IFRS standards when companies are required to disclose all
relevant information. Besides, IFRS standards has included ethics in business ethics to try to
enhance the ethical dilemma of companies when creating their financial statements. Corporate
governance has significant impacts on implementing IFRS standards. Companies with high

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corporate governance seem to disclose more information. However, the flexibility of IFRS
standards might raise creative accounting, which should be avoided. Creative accounting might
hurt benefits of investors and stakeholders, in turn, it will affect adversely financial market.

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References

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accounting reports. Journal of Financial Reporting and Accounting,
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