Guidance for British Companies

GUIDANCE FOR BRITISH COMPANIES ON CHANGES TO THE ACCOUNTING AND REPORTING PROVISIONS OF THE COMPANIES ACT 1985

16 August 2005

This guidance was originally published in October 2004. It has been revised to take into account recent changes to company law including extending the option to use summary financial statements. Topics that are new to this version of the guidance are shown in italics.

URN 05/1218 TABLE OF CONTENTS

SECTION LOCATION

1. Summary of changes Page 3

2. Abbreviations and definitions Page 5

3. Introduction Page 6

4. International Accounting Standards (IAS) Page 9

A Background Paragraphs 4.1-4.6

B Companies obliged to use IAS Paragraphs 4.7-4.8

C The option to use IAS Page 11 . Use of IAS in both individual and consolidated accounts Paragraphs 4.10-4.12 . Consistency within a group Paragraphs 4.13-4.16 . One way choice? Paragraph 4.17

D Parts of the 1985 Act that still apply and parts Page 13 that don’t . General outline Paragraphs 4.18-4.20 . List of sections Paragraph 4.21 . Publication exemptions Paragraphs 4.22-4.24 . Special considerations for small companies Paragraphs 4.25-4.31

5. Changes to consolidation requirements Page 17

. Participating interest Paragraph 5.2 . Exemption for parent company included in non-EEA group accounts Paragraphs 5.3-5.6 . Exclusion from consolidation if held for resale Paragraph 5.7 . Exclusions from consolidation on the basis of incompatible activities Paragraph 5.8

6. Changes to accounting provisions for non-IAS Page 19 accounts

. Dividends Paragraph 6.2 . Presentation of items Paragraphs 6.3-6.6 . Fair Value options Paragraphs 6.7-6.14 . Derivatives Paragraph 6.15 . Adjustment of corresponding amounts Paragraphs 6.16-6.17 7. Clarification of distribution rules for investment Page 22 companies

1 8. Financial instrument disclosures in the Directors’ Page 23 Report, including exemption for small companies that are part of a group

9. Changes to audit provisions Page 24

. Audit report requirements Paragraphs 9.1-9.5 . Audit exemption for certain financial intermediary companies Paragraphs 9.6-9.7

10. Summary financial statements Page 26

. Extension of summary financial statements option Paragraphs 10.1-10.6 . Summary financial statements for companies using IAS Paragraphs 10.7-10.9 . Summary directors’ report Paragraph 10.10

11. Other changes to reporting requirements Page 28

. Automatic three month extension for companies with overseas interests Paragraph 11.1 . Voluntary revision of summary financial statements, Operating and Financial Review Financial Review and Directors’ Remuneration Report . Disclosure of staff particulars by small companies Paragraph 11.2-11.4 Paragraph 11.5 Annex A – Decision tree – Are you required to use IAS? Page 29

Annex B – Corresponding changes in UK Financial Reporting Page 30 Standards

Annex C – List of regulated markets Page 34

2 1. SUMMARY OF CHANGES

Recent changes to the accounting and auditing requirements in the Companies Act 1985 will affect all companies in some way. However, not all the changes are relevant for every company. This brief summary of the changes is intended to help companies see which changes may be relevant to them, and to point them to where those changes are discussed in these Guidance Notes.

In this summary, changes made by the Companies Act 1985 (International Accounting Standards and other Accounting Amendments) Regulations 2004 are listed separately from those made by the three sets of regulations made in August 2005 (see paragraph 3.5 in the Introduction). In the body of this guidance, the two sets of changes are not discussed separately. However, the changes made by the August 2005 regulations are shown in italics.

Companies Act 1985 (International Accounting Standards and other Accounting Amendments) Regulations 2004

All companies will have the option to prepare their individual accounts using International Accounting Standards rather than UK GAAP, and non-publicly traded companies will also have the option to prepare their consolidated accounts using International Accounting Standards (section 4).

All companies that continue to prepare their accounts using UK GAAP will have a new accounting option to use fair value accounting for financial instruments, investment property and/or living plants and animals (paragraphs 6.7 - 6.14).

For all companies that continue to prepare their accounts using UK GAAP there are changes to the requirements in these areas:

 how and where proposed dividends are disclosed in the accounts (paragraph 6.2);  how items must be presented in the balance sheet and profit and loss account (paragraphs 6.3 - 6.6);  disclosure of information on derivatives (paragraph 6.15).

For parent companies, there are changes to the requirements and options on consolidation (section 5).

For all companies except small companies, there is a new requirement to disclose information about financial instruments in the directors’ report (section 8).

For companies that have their accounts audited, there are new requirements concerning the audit report (paragraphs 9.1 – 9.5).

For companies that have overseas interests, the current automatic three month extension for laying and delivering accounts is repealed (paragraph 11.1).

3 August 2005 Regulations

All companies that use International Accounting Standards will be able to issue summary financial statements that are compatible with International Accounting Standards compatible (paragraphs 10.7 – 10.9).

For all companies, there is now a discretion rather than an obligation to adjust prior- year comparative figures in their accounts where such amounts are not comparable with current year figures; the obligation for comparatives to be given in the notes to the accounts has also been removed (paragraphs 6.16 – 6.17).

For unlisted companies that have their accounts audited, there is now an option to send summary financial statements rather than full financial statements to shareholders (paragraphs 10.1 – 10.6).

For companies that produce summary financial statements, a directors’ remuneration report or an Operating and Financial Review, these can now be revised voluntarily in the same way as annual accounts and directors’ reports (paragraphs 11.2 – 11.4). The summary financial statement no longer needs to include a summary directors’ report (paragraph 10.10).

For investment companies, the requirements of the assets adequacy test for distributions have been clarified by replacing references to “liabilities” with “liabilities to creditors” (section 7).

For small companies (in particular financial intermediaries and members of groups), there are increased opportunities to take advantage of certain disclosure and audit exemptions (paragraphs 8.2, 9.6 – 9.7 and 11.5).

UK Financial Reporting Standards

In addition to changes in the Companies Act 1985, parallel changes are being made to UK Financial Reporting Standards that will affect all companies that continue to use domestic standards. These changes are outlined in Annex B.

4 2. ABBREVIATIONS AND DEFINITIONS

AIM Alternative Investment Market

ASB Accounting Standards Board

EC European Commission

EEA European Economic Area (EU members plus Norway, Iceland and Liechtenstein)

EU European Union

FRS Financial Reporting Standards (issued by the Accounting Standards Board)

IAS International Accounting Standards (standards inherited by the IASB from its predecessor body, including those subsequently modified by the IASB). For the purposes of these Guidance Notes, “IAS” means IAS as adopted by the EC (see paragraph 4.2)

IASB International Accounting Standards Board

IFRS International Financial Reporting Standards (completely new standards issued by the IASB)

LLPs Limited Liability Partnerships

Non-publicly traded Those who do not have any securities that are admitted to companies trading on a regulated market in any Member State in the European Union

OJ Official Journal (official publication of the European Union)

Publicly traded Those whose securities are admitted to trading on a companies regulated market in any Member State in the European Union

SFS Summary Financial Statement

UK GAAP UK Generally Accepted Accounting Practice

1985 Act Companies Act 1985

5 3. INTRODUCTION

3.1 Three pieces of legislation passed by the EU in recent years have made a number of changes to EU accounting requirements for companies. These are:

 Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of International Accounting Standards1 (the “IAS Regulation”);

 Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Council Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings2 (the “Modernisation Directive”); and

 Directive 2001/65/EC of the European Parliament and of the Council of 27 September 2001 amending Directives 78/660/EEC, 83/349/EEC and 86/635/EEC as regards the valuation rules for the annual and consolidated accounts of certain types of companies as well as of banks and other financial institutions3 (the “Fair Value Directive”).

These can be downloaded from the Official Journal section of the EC’s website www.europa.eu.int/eur-lex/en/search/search_oj.html.

3.2 Some of the changes are minor, and are designed to clarify or bring EU accounting requirements into line with modern best practice. But others, in particular those contained in the IAS Regulation, are more fundamental and far-reaching.

3.3 The Secretary of State for Trade and Industry has made the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004, SI 2004 No. 2947, to implement these changes for British companies through amendments to the 1985 Act. These Regulations came into force on 12 November and will apply to financial years beginning on or after 1 January 2005.

3.4 These changes automatically apply to LLPs, certain banking and insurance undertakings, partnerships and unlimited companies to which Part VII of the 1985 Act is specifically applied. However, Regulations have been made to ensure that the amendments work properly for these entities, and to disapply any that are not relevant. These Regulations come into force on 1 October 2005. They are:

 The Bank Accounts Directive (Miscellaneous Banks) (Amendment) Regulations 2005, SI 2005/1984;

 The Insurance Accounts Directive (Miscellaneous Insurance Undertakings) (Amendment) Regulations 2005, SI 2005/1985;

1 OJ L243/1 of 11 September 2002. 2 OJ L178/16 of 17 July 2003. 3 OJ L283/28 of 27 October 2001.

6  The Partnerships and Unlimited Companies (Accounts) (Amendment) Regulations 2005, SI 2005/1987; and

 The Limited Liability Partnerships (Amendment) Regulations 2005, SI 2005/1989.

3.5 The Secretary of State has also made three other sets of Regulations that are in part consequential on the introduction of IAS. These extend the use of summary financial statements and make other minor amendments to accounting and reporting requirements. These Regulations are:

. the Companies (Summary Financial Statement) (Amendment) Regulations 2005, SI 2005/2281;

. the Companies (Revision of Defective Accounts and Report) (Amendment) Regulations 2005, SI 2005/2282; and

. the Companies Act 1985 (Investment Companies and Accounting and Audit Amendments) Regulations 2005, SI 2005/2280.

3.6 Generally, these Regulations will come into force on 1 October 2005. However, one part of the Companies Act 1985 (Investment Companies and Accounting and Audit Amendments) Regulations 2005, concerning audit requirements for small financial intermediaries, will come into force on 5 September 2005 (see paragraphs 9.6 – 9.7).

3.7 This guidance outlines the main changes contained in these Regulations, and the effect of the changes. In particular, it explains how the IAS Regulation and the option to choose IAS will work. It also indicates those parts of the 1985 Act that still apply to companies using IAS. It is not intended to be a comprehensive statement of the law or the recent changes. Companies should not consider it a substitute for familiarising themselves with the legislation itself. In particular, any organisation that wishes to clarify its own position under the law should take its own legal advice.

3.8 Legislation has or will also be passed to bring similar changes into effect for companies and building societies (where appropriate) in Northern Ireland.

3.9 In many cases, changes are being made to UK FRS in parallel with the changes to the accounting requirements in the 1985 Act arising from the Modernisation and Fair Value Directives. For those companies continuing to prepare accounts under UK GAAP, the changes are outlined in Annex B. 3.10 Separate guidance has been issued for the Companies Act 1985 (Operating and Financial Review and Directors’ Report etc) Regulations 2005 (SI 2005 No. 1011), which contain new requirements for an Operating and Financial Review and new requirements from the Modernisation Directive for the directors’ report. This is available on the DTI website at http://www.dti.gov.uk/cld/facts/financialreview.htm.

3.11 Guidance from the EC on the interaction between the IAS Regulation and the Accounting Directives can be found at

7 http://www.europa.eu.int/comm/internal_market/accounting/docs/ias/200311- comments/ias-200311-comments_en.pdf.

8 4. INTERNATIONAL ACCOUNTING STANDARDS

A Background

4.1 The IAS Regulation introduces important changes that will directly affect the way in which certain companies across the EU prepare their financial statements.

4.2 Under Article 4 of the IAS Regulation, companies governed by the law of a Member State, whose securities are admitted to trading on a regulated market in any Member State in the European Union (“publicly traded companies”), are required to prepare their consolidated accounts on the basis of accounting standards issued by the IASB that are adopted by the EC. This applies to financial years commencing on or after 1 January 2005.

4.3 The list of regulated markets at 17 February 2004 is set out at Annex C. AIM ceased to be a regulated market from 12 October 2004. However, the London Stock Exchange has announced that it intends to mandate use of IAS by companies listed on AIM for financial periods beginning on or after 1 January 2007.

4.4 At 11 October 2004, all IAS have been adopted with the exception of IAS 32 (although IAS 39 has only been partially adopted). In addition, IFRS 1 has also been adopted. However, some of these standards have since been amended, and the EC will need to consider the revised versions for adoption in due course. They will also need to consider other new IFRS for adoption. For the current list of adopted standards, see the EC website (www.europa.eu.int/comm/internal_market/accounting/ias_en.htm#adopted- commission).

4.5 Under Article 5 of the IAS Regulation, Member States have the option to extend use of adopted IAS on a permissive or mandatory basis. In Britain, the application of the Regulation is to be extended so that:

 publicly traded companies are permitted to use IAS in their individual accounts; and

 non-publicly traded companies are permitted to use IAS in both their individual and consolidated accounts.

However, charities are not to be permitted to use IAS (nor would they fall within Article 4 of the IAS Regulation, as non-profit-making bodies are excluded – see paragraph 4.8(i)).

4.6 For the purposes of the extension to the application of the IAS Regulation under Article 5, to be effected by the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004, “company” means companies required to prepare accounts by the 1985 Act. Separately, the application of the IAS Regulation is to be extended to building societies formed

9 under the Building Societies Act 1986 and will apply to LLPs, certain banking and insurance undertakings, partnerships and unlimited companies to which Part VII of the 1985 Act is specifically applied.

B Companies obliged to use IAS

4.7 Publicly traded companies governed by the law of a Member State are required by the IAS Regulation to prepare their consolidated accounts using adopted IAS. Certain other companies may be required to prepare accounts using IAS for different reasons, for example by a regulator; this section does not cover such situations.

4.8 To work out whether a particular body comes within the requirement in the IAS Regulation, there are four points to consider.

(i) Does the body come within the relevant definition of company? For the purposes of Article 4 of the IAS Regulation, “company” has the same meaning as in Article 48 (old Article 58) of the Treaty of Rome:

“Companies or firms” means companies or firms constituted under civil or commercial law, including co-operative societies, and other legal persons governed by public or private law, save for those which are non-profit-making”.

If the answer is no, the body is not required to use IAS. If the answer is yes, move on to the next step.

(ii) Is the company governed by the law of a Member State? In other words, has the company been incorporated in a Member State? If the answer is no, the company is not required to use IAS. If the answer is yes, move on to the next step.

(iii) Are any securities of the company admitted to trading on a market listed at Annex C? “Securities” means debt securities as well as shares. If the answer is no, the company is not required to use IAS. If the answer is yes, move on to the next step.

(iv) Does the company have to prepare consolidated accounts? The requirement to prepare consolidated accounts is set out in the EC 7th Directive as implemented in section 227 of the 1985 Act for ordinary companies, and section 255A for banking and insurance groups. Certain exemptions from the requirement are also conferred, in particular by section 228, new section 228A to be inserted by the regulations and section 229(5). If the company is not required by the 1985 Act to prepare consolidated accounts, it is not required to use IAS. If the company is required to prepare consolidated accounts, and does so on the basis of IAS, it will look to the requirements of IAS to determine its subsidiary undertakings to be included in the consolidation.

This is represented in diagrammatic form at Annex A.

C The option to use IAS

10 4.9 Beyond the requirements in Article 4 of the IAS Regulation, new sections 226(2) and 227(3) of the 1985 Act permit a company required by the 1985 Act to prepare accounts to choose whether to prepare its individual and/or consolidated accounts in accordance with IAS or in accordance with the accounting requirements of the 1985 Act. If a company elects to use IAS (or is required to do so by the IAS Regulation), it must state in the notes to its accounts that they have been prepared in accordance with IAS (new sections 226B for individual accounts and 227B for consolidated accounts). The company should also ensure that it is clear which parts of the 1985 Act it must still comply with (see section 4D, in particular paragraph 4.21).

Use of IAS in both individual and consolidated accounts

4.10 Where companies prepare both individual and consolidated accounts, the choice between IAS and the accounting requirements of the 1985 Act operates separately for each.

4.11 If a company comes within Article 4 of the IAS Regulation, it must use IAS for its consolidated accounts. However, it still has the choice of using IAS or UK GAAP for its individual accounts. If a company has chosen to use IAS for its individual accounts under new section 226(2), it does not have to use IAS for its consolidated accounts. And if it has chosen to use IAS for its consolidated accounts under new section 227(3), it does not have to use IAS for its individual accounts.

4.12 The 1985 Act requires that consolidated and individual accounts (where required) are published together (section 240(2)). This will continue to apply where the consolidated and individual accounts are prepared using different frameworks. In such circumstances, the 1985 Act does not specify whether the accounts should be presented as separate sections of the report or combined into a single set of primary statements and notes. However, in practice it is expected that the statements will be clearer if the separate sections approach is taken.

Consistency within a group

4.13 A parent company must ensure that its individual accounts and the individual accounts of all its subsidiary undertakings are prepared using the same financial reporting framework, be it IAS or UK GAAP, except to the extent that in the directors’ opinion there are good reasons for not doing so (new section 227C(1) of the 1985 Act). Therefore, if a parent company chooses to use IAS for its individual accounts, it must also ensure that the individual accounts of all its subsidiary undertakings are prepared using IAS (but see paragraphs 4.14 and 4.15 below for certain exceptions to this requirement).

4.14 There are three specific exceptions to this requirement in new section 227C(2)-(4). It does not apply:

 if the parent company does not prepare group accounts;

 to the accounts of subsidiary undertakings that are not required to be prepared under Part VII of the 1985 Act (for example foreign subsidiaries);

11  to any subsidiary undertakings that are charities (so charities and subsidiary undertakings that are not charities are not required to use the same accounting framework).

4.15 There is also one partial exception to this requirement in new section 227C(5). If the parent company prepares both consolidated and individual accounts under IAS, it is not required to ensure that all its subsidiary undertakings also use IAS. However, it must ensure that all its subsidiary undertakings use the same accounting framework, again unless there are good reasons for not doing so.

4.16 If the directors believe that there are good reasons for not preparing all individual accounts within a group using the same accounting framework, they are not required to do so. This provision is intended to provide a degree of flexibility where there are genuine (including cost/benefit) grounds for using different accounting frameworks within a group of companies. Examples of “good reasons” could include:

 A group using IAS acquired a subsidiary undertaking that had not been using IAS; in the first year of acquisition, it might 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 list and so might wish to convert to IAS in advance, but the rest of group wasn’t listing.

 The group contains minor or dormant subsidiaries where the costs of switching accounting framework would outweigh the benefits.

The key point is that the directors of the parent company must be able to justify any inconsistency, to shareholders, regulators or other interested parties.

One way choice?

4.17 If a company has prepared its accounts using IAS for a financial year, it cannot switch back to UK GAAP in subsequent financial years (new section 226(4) for individual accounts and 227(5) for consolidated accounts). There are three exceptions to this rule in new section 226(5) and new section 227(6):

 The company become a subsidiary undertaking of an undertaking that does not prepare its accounts in accordance with adopted IAS. This is intended to deal with situations where a subsidiary undertaking is sold by a group generally using IAS, to another group or entity not using generally using IAS. It is not intended that companies switch between accounting regimes on the basis of an internal group restructuring.

12  The company ceases to be publicly traded (e.g. in a de-listing).

 Any parent undertaking of the company ceases to be publicly traded (e.g. in a de- listing).

D Parts of the 1985 Act that still apply and parts that don’t

General outline

4.18 Companies that are required to use IAS or choose to use IAS will need to prepare their accounts in accordance with the requirements of IAS rather than the 1985 Act. IAS deals with the form and content of accounts. Therefore, in broad terms, the provisions in the 1985 Act relating to the form and content of accounts (in particular the accounts formats in Schedules 4, 4A, 8, 9 and 9A) will no longer apply to companies using IAS. For example, instead of the profit and loss account and balance sheet required by the 1985 Act, companies will need to prepare the primary financial statements and supporting notes required under IAS.

4.19 It follows from this that the provisions on abbreviated accounts for small and medium sized companies based on the 1985 Act formats also do not apply. Similarly, accounts disclosure requirements in the Schedules relating to items in the accounts are no longer relevant except where they relate to items beyond the scope of the IAS Regulation (such as the disclosure requirements relating to particulars of staff, and to the emoluments and other benefits to directors, which continue to apply).

4.20 Those aspects of the 1985 Act that deal with matters outside the scope of IAS will continue to apply when accounts are prepared under IAS. For example the requirements relating to the directors’ report, publication (as opposed to preparation) of accounts, audit and certain disclosures that are beyond the scope of IAS (for example, disclosures on employee numbers and management remuneration) remain applicable to companies preparing accounts under IAS.

List of sections

4.21 Those provisions in Part VII (Accounts and Audit) of the 1985 Act that will continue to apply to companies preparing accounts under IAS are as follows:

. sections 221 and 222 (duty to keep accounting records) . sections 223 to 225 (a company’s financial year and accounting reference periods) . sections 226, 226A and 226B (preparation of individual accounts) . sections 227, 227A and 227B (preparation of group accounts) . section 227C (consistency of accounts within group) . sections 228 and 228A (exemption for parent companies included in larger groups) . section 229 (subsidiary undertakings included in the consolidation) . section 230(1), (3) and (4) (treatment of individual profit and loss account where group accounts prepared)

13 . sections 231, 231A and 232 and Schedules 5 and 6 (disclosure in notes to accounts) . section 233 (approval and signing of accounts) . sections 234 and 234A and Schedule 7(directors’ report) . [section 234ZA (statement as to disclosure of information to auditors) to be inserted by clause 9 of the Companies (Audit, Investigations and Community Enterprise) Bill] . sections 234B and 234C (directors’ remuneration report) . sections 235 to 237 (auditors’ report and duties of auditors) . sections 238 and 239 (persons entitled to receive or demand copies of accounts and reports) . section 240 (requirements in connection with publication of accounts) . section 241 (accounts and reports to be laid before company in general meeting) . section 242 (accounts and reports to be delivered to the registrar of companies) . section 242A (civil penalty for failure to deliver accounts) . section 242B (delivery and publication of accounts in euros . section 244 (period allowed for laying and delivering accounts and reports) . sections 245 to [245F to be inserted by the Companies (Audit, Investigations and Community Enterprise) Bill] (revision of defective accounts and reports) . section 246(1), (4), (5)(a) and (b), (6), (8)(b) and (c) and (9) (certain exemptions for small companies) . section 247 to 247B (qualification of company as small or medium-sized), so far as applicable to exemptions from audit, from certain directors’ report disclosures, and for exemption from obligation to prepare group accounts) . sections 249A to 249E (exemptions from audit) (save insofar as they apply to companies that are charities) . section 251 (summary financial statements) . sections 252 and 253 (private company’s election to dispense with laying of accounts and reports before general meeting) . section 254 (certain unlimited companies exempt from requirement to deliver accounts and reports to registrar of companies) . section 255A(4), (5) and (5A) (definition of banking and insurance groups) . section 255B (modification of disclosure requirements in Schedule 5 and 6 in relation to banking company or group) . sections 258 and 259 (interpretation of “parent undertaking”, “subsidiary undertaking”, and other expressions) insofar as they apply to the provisions referred to in this subsection . section 260 (meaning of participating interest) . section 261 (notes to the accounts) . sections 262 and 262A (minor definitions), insofar as they apply to the provisions referred to in this subsection.

Publication exemptions

4.22 The 1985 Act requirements in respect of laying and delivering accounts continue to apply to parent companies preparing accounts under IAS. However, the section 243 requirement for the accounts of subsidiary undertakings to be appended in certain cases has been repealed.

14 4.23 Section 230 of the 1985 Act provides that, where consolidated accounts are prepared, the parent company’s individual profit and loss account and related notes may be omitted from the annual report. Companies that prepare group and individual accounts, and present the latter in accordance with IAS, can continue to take advantage of this exemption. The omission of the profit and loss account (referred to within IAS as the income statement) might be considered to be inconsistent with certain aspects of IAS, for example the requirement in IAS 1 Presentation of Financial Statements in relation to a fair presentation. However, IAS does not in itself require the preparation of separate financial statements but permits the omission of certain elements. In other words, the separate financial statements required to be published under the 1985 Act are an extract of the full IAS separate financial statements. This exemption should not affect the ability of a parent company to be treated as a “first-time adopter” and hence to take advantage of exemptions for first time use under the provisions of IFRS 1 First Time Adoption of International Financial Reporting Standards. The company will need to provide the disclosure required by section 230(4), ie that advantage has been taken of the publication exemption in section 230(1). Auditors will also need to describe the accounting framework that has been used within their audit reports. In respect of the individual accounts, the reference to the framework will need to make clear that its basis is IAS as adopted for use in the EU and as applied in accordance with the provisions of the 1985 Act.

4.24 The exemption in the 1985 Act relates only to the profit and loss account. By virtue of section 261(2), the exemption also extends to the notes to the profit and loss account. The individual IAS accounts would however still need to include the other primary statements and note disclosures required by IAS, including a cash flow statement and a statement of changes in shareholders’ equity.

Special considerations for small companies

4.25 There are several points that small companies considering switching to IAS should note.

4.26 At present, IASB standards do not provide a simplified regime for small companies. There is no equivalent to the exemptions available to small companies in the 1985 Act or to the ASB’s Financial Reporting Standard for Small Entities. Therefore, small companies electing to use IAS will have to use the full set of adopted IAS. However, the IASB is looking at this area and issued a discussion paper on 5 July 2004 (at www.iasb.org/current/dp_pv.asp).

4.27 The thresholds in section 247(3) and section 249(3) of the 1985 Act defining small and medium companies and groups are based on turnover, balance sheet total and employee number figures. The thresholds themselves will not change. However, in some cases the thresholds refer to particular items in the accounts formats in the 1985 Act. If a small company switches to IAS, these formats will no longer be relevant. Compliance with the thresholds will be determined using the equivalent items derived from IAS accounts. For example, the aggregate of amounts shown as assets in a balance sheet prepared using IAS will need to be used instead of the balance sheet total. Also, IAS uses the term revenue rather than turnover.

15 4.28 As stated above in paragraph 4.19, the provisions on abbreviated accounts do not generally apply, as the format of accounts on which they are based do not apply to companies using IAS.

4.29 However, a small company that elects to use IAS will continue to be permitted to omit its profit and loss account from its published accounts (the IAS equivalent is an income statement), including supporting notes. It will also be permitted to continue to use the exemptions in relation to its directors’ report.

4.30 The exemption for unlisted small groups from the requirement to prepare consolidated accounts continues to be available to a small parent company.

4.31 The exemptions for small companies in relation to statutory audit of the accounts will also continue to be available where the accounts are prepared in accordance with IAS. 5. CHANGES TO CONSOLIDATION RULES

5.1 Several changes have been made to the rules on when a parent/subsidiary relationship exists, when subsidiary undertakings can be exempted from inclusion in consolidated accounts, and the circumstances in which a parent company does not have to prepare consolidated accounts. These changes are being reflected in amendments to FRS 2 Accounting for Subsidiary Undertakings as noted in Annex B.

Participating interest

5.2 The requirement in section 258(4) of the 1985 Act for a participating interest to exist in order for an undertaking to be a subsidiary of another undertaking is being removed and the circumstances in which a parent/subsidiary undertaking relationship exists are being extended. At present, a parent/subsidiary relationship exists in various circumstances, including where a participating interest is held, and the “parent” actually exercises dominant influence. As amended, a parent/subsidiary relationship will exist where the parent has the power to exercise dominant influence or control, whether or not a participating interest is held. The intention of this change is to align more closely the definition of a subsidiary undertaking in the 1985 Act with that contained in IAS 27 Consolidated and Separate Financial Statements. In IAS 27, a subsidiary is defined as an entity that is controlled. Control is in turn defined as the “power to govern the financial and operating policies of an entity so as to obtain benefit from its activities”. It is not intended that the new definitions in the 1985 Act will commonly create parent/subsidiary relationships in circumstances in which IAS 27 would not.

Exemption for parent companies included in non-EEA group accounts

5.3 An exemption from the requirement to prepare consolidated accounts is to be made available to a parent company governed by GB law, which is also a subsidiary undertaking of a parent undertaking not governed by EEA law. In order to qualify for exemption, the company must meet all of the conditions listed in section 228A.

16 5.4 One of the conditions is that accounts of the exempted intermediate parent (and its subsidiary undertakings) are included in consolidated accounts of a larger group. The consolidated accounts and, where appropriate, the annual report of that larger group must be drawn up in accordance with the provisions of the Seventh Directive or “in a manner equivalent” to that Directive. It is considered that, in most circumstances, financial statements of the larger group prepared on the basis of IAS would meet this equivalence test.

5.5 The concept of equivalence of accounting frameworks also appears in the EU’s Transparency Obligations Directive and Prospectus Directive. In these cases, equivalence refers to non-EU accounting frameworks and their equivalence or otherwise to IAS. Work on the assessment of equivalence for this purpose has been commenced by the Committee of European Securities Regulators, in accordance with a mandate provided by the EC. The outcome of this work might also, by extension, have an impact on an assessment of the equivalence of specific accounting frameworks to the Seventh Directive.

5.6 The exemption does not apply to a company whose securities are admitted to trading on a regulated market of any EEA State (see Annex C for current list of regulated markets).

Exclusion from consolidation if held for resale

5.7 Section 229(3) of the 1985 Act has been amended to make it possible for a subsidiary undertaking to be excluded from consolidation where the parent company’s interest in it is held exclusively with a view to subsequent resale irrespective of whether or not it has previously been included in consolidated accounts.

Exclusion from consolidation on the basis of incompatible activities

5.8 Section 229(4) of the 1985 Act has been repealed. Therefore, it is no longer possible for an undertaking to be excluded from the consolidated accounts of the parent company if its activities are so incompatible with those of the parent that inclusion would not give a true and fair view of the undertakings in the consolidated accounts, taken as a whole.

17 6. CHANGES TO ACCOUNTING PROVISIONS FOR NON-IAS ACCOUNTS

6.1 The changes described below apply only to accounts prepared in accordance with the 1985 Act, not to accounts prepared in accordance with IAS. Many of the legal changes are being reflected in new UK FRS, as noted in Annex B.

Dividends

6.2 The requirement in paragraph 3(7) of Schedule 4 to the 1985 Act for companies to show paid and proposed dividends as separate items in the profit and loss account has been removed. Now, companies are required to show in the notes to the accounts:

 any amount set aside to reserves or withdrawn from reserves, or proposed to be set aside or withdrawn;

 the aggregate amount of dividends paid in the financial year (other than those for which a liability existed at the immediately preceding balance sheet date);

 the aggregate amount of dividends liable to be paid at the balance sheet date; and

 the aggregate amount of dividends proposed before the date of approval of the accounts, and not otherwise disclosed under the previous two categories.

Presentation of items

6.3 A new paragraph 5A has been inserted into Schedule 4 to the 1985 Act to amend the existing requirements so that the presentation of items within the balance sheet and profit and loss account must have regard to the economic substance of the reported transaction or arrangement. This provision relates only to the presentation of items within the accounting formats, not to their recognition or measurement. Its intention is to align more closely the presentation of balance sheets and profit and loss accounts with the requirements of IAS.

6.4 One effect of the new requirement is that some preference shares will be shown as liabilities in the balance sheet rather than as part of share capital and reserves. This will be the case where the preference shares in question would fall to be treated as liabilities in accordance with IAS 32 Financial Instruments: Disclosure and Presentation.

6.5 Certain provisions of the 1985 Act in relation to capital maintenance operate by reference to items as stated in companies’ accounts (section 270(2) of the 1985 Act). Therefore, this reclassification will affect the application of the “net assets test” in section 264 of the 1985 Act (which applies only to public limited companies). The

18 interaction of section 264 and section 270(2) is such that, where preference shares are classified as liabilities, they should be treated as such for the purposes of the net assets test, and should not be treated as part of called-up share capital and undistributable reserves for that purpose.

6.6 Preference shares should continue to be included in the disclosures required by paragraph 38 of Schedule 4 to the 1985 Act (in respect of 1985 Act accounts).

Fair Value options

6.7 A new section D has been inserted into Schedule 4 to the 1985 Act. This allows companies to choose to value some of their financial instruments, investment property and living plants and animals at fair value. There is no requirement in the legislation to use fair value; it is an optional accounting treatment. However, the ASB’s accounting standards may in practice determine the circumstances in which fair value measurement is applied. Equivalent amendments are made for small companies and banking and insurance companies.

6.8 Companies that choose to take up the option will be required to make a number of disclosures about their use of fair value (see paragraph 6.13 below). Even where companies choose not to use fair value, certain disclosures must be made about the fair value of derivatives (see paragraph 6.15 below).

6.9 “Financial instrument” includes cash, loans and receivables, equity instruments and debt securities as well as financial derivatives such as futures, options and swaps. Those financial instruments that are not permitted to be fair valued are listed at paragraph 34A of new section D.

6.10 “Fair value” can be described as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Paragraph 34B of new section D sets out how the fair value of a financial instrument should be determined. The fair value of investment property or living plants and animals should be determined using the relevant IAS (currently IAS 40 Investment Property and IAS 41 Agriculture respectively).

6.11 New section D also permits the use of a fair value hedge accounting system for financial instruments (paragraph 34C).

6.12 Paragraph 34E requires that changes in the fair value of a financial instrument or asset must be included in the profit and loss account except in certain specified circumstances. In these circumstances, changes in value must be recorded in a separate fair value reserve. Changes in value in an available for sale financial asset that is not a derivative may be recorded in the fair value reserve.

6.13 Companies that choose to use fair value for financial instruments, investment property or living plants and animals must disclose certain information about their use of fair value in the notes to the accounts. For financial instruments, the information that must be disclosed is set out in new paragraph 45A of section D. It includes the assumptions underlying the valuation models used, the fair value of each category of financial instruments and changes in value, and the extent and

19 nature of derivatives. For investment property and living plants and animals, the information that must be disclosed is set out in new paragraph 45D. It includes the balance sheet items affected and the basis of valuation adopted.

6.14 Many of the new technical accounting terms concerning fair value that are included in the 1985 Act are not defined in that Act or in the Fair Value Directive (e.g. financial instruments, hedge accounting). Instead, users will need to look at the relevant accounting standards and related guidance.

Derivatives

6.15 There is a new requirement in paragraph 45B of new section D for companies to disclose information on derivatives that have not been fair valued. For each class of derivatives, they must state the fair value of the derivatives in that class (if it can be determined as set out in paragraph 34B) and the extent and nature of the derivatives. Small companies are exempted from this requirement.

Adjustment of corresponding amounts

6.16 Paragraph 4(2) of Schedule 4 required companies to adjust prior-year comparative figures in their balance sheet and profit and loss accounts where such amounts are not comparable with current year figures. This has been amended so that companies have a discretion rather than a duty to make adjustments to non- comparable prior-year amounts. The parallel requirement to disclose prior year figures in the notes to the accounts (eg in paragraph 58 of Schedule 4) has also been removed. However, companies will have to give particulars of any non- comparability and, when an adjustment is made, particulars of that adjustment.

6.17 In future, the determination of when companies should make adjustments to non-comparable prior-year amounts will be dealt with in FRS. On 17 March 2005 the ASB published an exposure draft on the treatment of corresponding amounts (Financial Reporting Exposure Draft 35 Corresponding Amounts). 7. CLARIFICATION OF DISTRIBUTION RULES FOR INVESTMENT COMPANIES

7.1 Section 265(1) of the 1985 Act allows investment companies to make a distribution out of accumulated, realised profits less realised and unrealised losses. This is subject to certain conditions including an asset adequacy test, intended to ensure that a distribution will be made only if the assets are sufficient to ensure a reasonable margin of protection to creditors. Under the assets adequacy test, a distribution can be made only if assets are at least equal to one and a half times total liabilities and provided that the distribution does not reduce assets to less than that amounts.

7.2 In order to clarify that preference shares should not be counted as liabilities for the purposes of the section 265 assets test, references to “liabilities” in sections 265(1) and 265(2) have been amended to “liabilities to creditors”. It is considered that “liabilities to creditors” would exclude, for example, amounts with the legal form

20 of share capital of the company presented under a liabilities caption within the balance sheet. It would not, however, exclude accruals, deferred income and deferred tax liabilities.

7.3 This amendment will apply regardless of whether accounts are prepared in accordance with the 1985 Act or IAS.

21 8. FINANCIAL INSTRUMENTS DISCLOSURES IN THE DIRECTORS’ REPORT

8.1 There is a new requirement in paragraph 5A of Schedule 7 to the 1985 Act to disclose information about financial instruments in the directors’ report. Companies must disclose certain information about the use of financial instruments by themselves and their subsidiary undertakings where this is material for an assessment of the company’s (and the group’s if appropriate) financial position. This includes information about their financial risk management objectives and the exposure of the company to risks. Small companies are not required to make this disclosure.

8.2 Small companies that are part of “ineligible groups” for the purposes of the audit and accounts exemptions are also entitled to the exemption in relation to these disclosures. This exemption was introduced by the Companies Act 1985 (Operating and Financial Review and Directors’ Report etc.) Regulations 2005 (SI 2005/1011), which apply to financial years beginning on or after 1 April 2005. However, the exemption has been brought forward to apply to financial years beginning on or after 1 January 2005.

8.3 This new requirement will apply regardless of whether accounts are prepared in accordance with the 1985 Act or IAS.

22 9. CHANGES TO AUDIT PROVISIONS

Audit report requirements

9.1 Section 235 of the 1985 Act includes a new requirement (section 235(1A)) for the audit report to identify the financial reporting framework applied in the preparation of the accounts (ie whether IAS as adopted for use in the EU or UK GAAP), and the auditing standards in accordance with which the audit was conducted. The audit report must state whether the accounts give a true and fair view in accordance with the financial reporting framework used to prepare the accounts (section 235(2)). As Recital 10 of the Modernisation Directive makes clear, the requirement that an audit opinion states whether the annual or consolidated accounts give a true and fair view in accordance with the relevant financial reporting framework clarifies the context in which the audit opinion was given; it does not represent a restriction of the scope of that opinion.

9.2 The 1985 Act requirement is for accounts to give a “true and fair view”. The IAS requirement is for accounts to “present fairly”. New section 262(2A) makes clear that these two terms should be read as having the same meaning. This is supported by the IASB’s framework document, which refers to “the application of the principal qualitative characteristics and of appropriate accounting standards normally [resulting in] financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information” (IASB Framework for the Preparation and Presentation of Financial Statements, paragraph 47).

9.3 There is a new requirement in section 235(2A) that the auditors’ report be qualified or unqualified, and that it include a reference to any matters to which the auditors want to draw attention without actually qualifying the accounts.

9.4 Section 236 now requires that audit reports be dated as well as signed.

9.5 The requirements on the publication of non-statutory accounts in section 240(3)(d) of the 1985 Act have been amended slightly. Previously, a company had to include a statement indicating whether the auditors had reported on the full statutory accounts, and state whether that report was qualified. Now, a company must state whether the auditors’ report was qualified or unqualified, and whether the auditors have drawn attention in their report to any matter by way of emphasis, without qualifying the audit report.

23 Audit exemption for certain financial intermediary companies

9.6 Companies that qualify as small under section 247 of the 1985 Act and have a turnover of not more than £5.6m and a balance sheet total of not more than £2.8m can opt not to have their accounts audited. However, certain categories of companies are not entitled to benefit from the audit exemption option, regardless of whether they would otherwise qualify to do so. One such category is companies that carry on a regulated activity under the Financial Services and Markets Act 2000. As a result of changes made in October 2004 and January 2005, companies acting as financial intermediaries and carrying on certain activities (for example, arranging or advising on mortgages or engaging in general insurance mediation) were brought within the scope of the Financial Services and Markets Act 2000. This meant that some small companies that had been entitled to take advantage of the audit exemption option were no longer able to do so.

9.7 This position has now been reversed, so that such companies will still be able to benefit from the audit exemption option. Regulations 13 and 17 of the Companies Act 1985 (Investment Companies and Accounting and Audit Amendments) Regulations 2005 (SI 2005/2280) exclude certain specified activities from the list of regulated activities under the Financial Services and Markets Act 2000. These provisions come into force on 5 September 2005 and apply to accounts delivered to the registrar of companies on or after that date.

24 10. SUMMARY FINANCIAL STATEMENTS

Extension of summary financial statements option

10.1 Listed companies are permitted to send to willing “entitled persons” (the company’s members, debenture holders, and any others entitled to receive notice of company general meetings) an SFS instead of the full reports and accounts. The SFS is optional, and prepared in addition to full financial statements. This option has now been extended to all companies whose accounts have been audited and where the auditor expresses a positive opinion as to the consistency of the SFS will the full accounts.

10.2 An SFS must be in the form, and contain the information, specified in regulations made under the 1985 Act. The detailed requirements in respect of SFS are set out in section 251 of the 1985 Act and the Companies (Summary Financial Statement) Regulations 1995 (SI 1995/2092), as amended by the Companies (Summary Financial Statement) (Amendment) Regulations 2005 (SI 2005/2281).

10.3 An SFS includes a summary auditors’ report, and for quoted companies a summary directors’ remuneration report. However, an SFS need no longer include a summary directors’ report (see paragraph 10.10 below), and for quoted companies need not include a summary Operating and Financial Review (although companies may voluntarily provide such summaries). If a full copy of the Operating and Financial Review does not accompany the SFS, the company must publish it on a web site, and give details of that web site in the SFS.

10.4 Before taking up the option to send an SFS rather than the full financial statement, the company must first establish whether an entitled person wishes to receive an SFS. An entitled person can choose to continue receiving the company’s full financial statement if they prefer. An entitled person also remains entitled to request a copy of the full financial statements even if they have chosen to receive the SFS.

10.5 The procedure to be followed before sending out SFS, to establish whether an entitled person wishes to receive one, is set out in the Companies (Summary Financial Statement) Regulations 1995. Put simply, whether or not an entitled person wishes to receive copies of the full financial statements is ascertained:

 from an express relevant notification that the person gives to the company, or

 failing such express notification, from any failure by an entitled person to respond to an opportunity given to him to elect to receive full financial statements either –

(a) in response to a notice sent by the company under regulation 5 of the Companies (Summary Financial Statement) Regulations 1995, or (b) as part of a relevant consultation of his wishes under regulation 6 of these Regulations.

25 10.6 Some companies, on learning that the Government was minded to extend the SFS option to them, undertook the necessary procedures to ascertain entitled persons’ wishes in advance of the recent changes to the law. The regulations clarify that any such “prior consultation” will be valid.

Summary financial statements for companies using IAS

10.7 The previous requirements for SFS were based on the various formats for full accounts in the accounts Schedules to the 1985 Act. Those full formats will not apply to IAS accounts, so the prescribed summary formats would in many instances be incompatible with full IAS accounts.

10.8 Therefore, the Companies (Summary Financial Statement) (Amendment) Regulations 2005 set out requirements for the contents of SFS for IAS companies. The requirements draw on the framework for interim financial reports in IAS 34 (Interim Financial Reporting). IAS-based SFS must include summarised versions of the full balance sheet and income statement, prepared using the same headings and line items as the full statements. However, directors have flexibility to combine items of a similar nature where they consider that this is appropriate, as long as the resulting SFS is still consistent with the full accounts. In other respects, the SFS requirements for companies using IAS will be the same as those for non-IAS accounts.

10.9 The “consistency” requirement does not require the SFS balance sheet and income statement to be identical in format to the statements in the full accounts. However, the SFS should not give a misleading view of the company’s financial position and performance in comparison to that given by full accounts. The permission to combine headings and line items is therefore limited to items of a similar nature, which DTI believes would generally preclude offsetting of assets and liabilities and income and expenditure. Application of the permission to combine will require use of judgement as to how a more concise presentation can be achieved without giving a misleading impression.

Summary directors’ report

10.10 Section 251 of the 1985 Act and the Companies (Summary Financial Statement) Regulations 1995 have been amended so that companies no longer need to include a summary directors’ report in their SFS. However, the SFS must include information on dividends paid and proposed as a note to the summary profit and loss account.

26 11. OTHER CHANGES TO REPORTING REQUIREMENTS

Automatic three month extension for companies with overseas interests

11.1 Section 244(3) of the 1985 Act allowed the right to claim an automatic three month extension of the period allowed for laying and delivering reports and accounts where the company had overseas interests. This automatic right has been repealed. However, companies may continue to apply for an extension on a discretionary basis under section 244(5).

Voluntary revision of summary financial statements, directors’ remuneration report and Operating and Financial Review

11.2 Section 245 of the 1985 Act allows voluntary revision of annual accounts, SFS, the directors’ report, the directors’ remuneration report and the Operating and Financial Review. The 1985 Act did not however expressly permit voluntary revision of SFS where the accounts and reports on which they were based were not being revised. The law has now been amended to extend voluntary revision to SFS in those circumstances. This is intended to deal with situations where the full accounts and reports are not defective, but a defective SFS has been prepared based on them.

11.3 Regulations made under section 245 of the 1985 Act (the Companies (Revision of Defective Accounts and Report) Regulations 1990, SI 1990/2570) set out the detail of how accounts and reports should be revised. These regulations have also been amended so that they cover everything for which revision is permitted by section 245.

11.4 In addition, voluntary revision of SFS can now be done by way of a supplementary note to the original statements, rather than by having to reissue the complete corrected SFS. It has always been possible to revise full financial statements in this way, but was not previously permitted for SFS.

Disclosure of staff particulars by small companies

11.5 The exemption for small companies from the requirement to disclosure staff particulars was inadvertently removed by structural changes to the 1985 Act made by the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004. This exemption has now been restored.

27 Is the body a company under the relevant definition? ANNEX A

NO YES

The company is not required to prepare IAS Is the company accounts. governed by the law of a Member State?

NO YES The company is not required to prepare IAS accounts. Are the company’s securities traded on a

regulated market listed

at Annex A? NO

The company is not required to prepare IAS accounts. YES

Does the company have to prepare consolidated account, under section The company is not NO 227 of the Companies required to prepare IAS Act 1985? accounts.

The company must prepare IAS accounts.

28 ANNEX B

CORRESPONDING CHANGES IN UK FINANCIAL REPORTING STANDARDS [UPDATE FOR CORRESPONDING AMOUNTS]

The following table summarises the position under accounting standards for the legal changes described in the Guidance Notes. It does not reflect changes to the Financial Reporting Standard for Smaller Entities for which an exposure draft is expected to be published shortly.

Guida Companies Changes being made to UK accounting Scope and nce Act standards effective paragr reference date aph (periods beginning) 5.2 s258(4) The ASB has published an amendment to 1 January 05 FRS 2 that revises the definition of a all entities parent/subsidiary relationship to reflect the removal of the requirement for a participating interest to exist. FRS 2(14(e)) 5.3 s228A The amendment to FRS 2 extends the 1 January 05 exemptions from the preparation of all entities consolidated accounts to include the new exemption* in the Regulations. FRS 2(21(d)) * Exemption from the requirement to prepare consolidated accounts is now available to a parent company governed by GB law, which is also a subsidiary undertaking of a parent undertaking not governed by EEA law. In order to qualify for exemption, the company must meet all of the conditions listed in section 228A. 5.7 s229(3) A subsidiary undertaking may be excluded Extant for all from consolidation where the parent entities company’s interest in it is held exclusively with a view to subsequent resale irrespective of whether or not it has previously been included in consolidated accounts. This has not been reflected in the amendment because FRS 2 remains more restrictive than the law because it requires (rather than permits) exemption from consolidation of the subsidiary by the parent, but only when the subsidiary has not previously been consolidated by the parent. FRS 2(25(b))

29 Guida Companies Changes being made to UK accounting Scope and nce Act standards effective paragr reference date aph (periods beginning) 5.8 s229(4) The amendment to FRS 2 reflects the 1 January 05 repealed restriction of circumstances in which subsidiary for all undertakings may be excluded from the entities consolidation. An undertaking should no longer be excluded from the consolidated accounts of the parent company if its activities are so incompatible with those of the parent that inclusion would not give a true and fair view of the undertakings in the consolidated accounts. FRS 2(25(c)) 6.2 Schedule 4 The disclosure requirement for dividends 1 January 05 paragraph proposed after the balance sheet date and for all 35A before the date of approval of the accounts is entities reflected in FRS 21(13) ‘Events after the balance sheet date’. 6.4 Schedule 4 FRS 25 ‘Financial Instruments: Disclosure and 1 January 05 paragraph Presentation’ requires preference shares that for all 5A are obligations to be classified as liabilities entities rather than as part of shareholders’ funds. FRS 25(15) 6.7 Schedule 4 FRS 26 ‘Financial Instruments: Measurement’ 1 January 05 Section D paragraphs 43 et seq sets out the for listed circumstances in which fair value entities. measurement is applied. 1 January 06 for certain unlisted entities SSAP 19 already requires investment properties to be measured at their open market Extant for all value. entities

There is currently no UK standard that specifically requires an entity to fair value living plants and animals. 6.9 Schedule 4 FRS 26(2(a)) sets out the scope of the 1 January 05 paragraph financial instruments covered by the standard. for listed 34A Those financial instruments that will not be entities. permitted to be fair valued are noted in 1 January 06 paragraphs 46-47 of FRS 26. for certain unlisted entities 6.10 Schedule 4 FRS 26(48, AG69-AG82) sets out the 1 January 05 paragraphs considerations for determining the fair value of for listed 34B and 34D a financial instrument entities. 1 January 06

30 Guida Companies Changes being made to UK accounting Scope and nce Act standards effective paragr reference date aph (periods beginning) for certain SSAP 19(11) already requires investment unlisted properties to be measured at their open market entities value. Extant for all entities There is currently no UK standard that specifically requires an entity to fair value living plants and animals. 6.11 Schedule 4 Hedge accounting requirements are set out in 1 January 05 paragraph FRS 26 paragraphs 71-102. for listed 34C entities. 1 January 06 for certain unlisted entities 6.12 Schedule 4 The requirements for recognising gains and 1 January 05 paragraph losses arising from the changes in fair value of for listed 34E a financial instrument are set out in: entities.  FRS 26(55(b)) in respect of available for 1 January 06 sale financial assets; for certain  FRS 26(85 et seq) in respect of hedging unlisted instruments; entities  FRS 23(32) in respect of exchange differences arising on a monetary item that forms part of a company’s net investment in a foreign entity. 6.13 Schedule 4 Disclosure requirements for certain information 1 January 05 paragraph about the use of fair value in the notes to the for all 45A accounts are set out in: entities 45C  FRS 25(92) in respect of the significant 45D assumptions underlying the valuation models and techniques used;  FRS 25(60) in respect of the extent and nature of derivatives held at fair value;  SSAP 19(12) in respect of the basis of valuation of investment property; Extant for all entities

There is currently no UK standard that specifically requires an entity to fair value living plants and animals. 6.14 For entities applying UK GAAP, definitions are given in FRS 25(11) and FRS 26(9). 6.15 Schedule 4 FRS 25(92) sets out disclosure requirements 1 January 05

31 Guida Companies Changes being made to UK accounting Scope and nce Act standards effective paragr reference date aph (periods beginning) paragraph in respect of the significant assumptions for all 45B underlying the valuation models and entities techniques used; FRS 25(90) requires disclosure in respect only of derivatives linked to unquoted equity instruments. 7.1 Schedule 7 The requirement to indicate (in the directors’ 1 January 05 paragraph report) the use of financial instruments will in for all 5A addition be required to be disclosed in the entities financial statements by FRS 25(51-59).

32 ANNEX C LIST OF REGULATED MARKETS [CHECK UP TO DATE]

List of Regulated Markets under Article 16 of the Investment Services Directive (ISD) (Council Directive 93/22/EEC) at 17.02.2004 (OJ C72/3 of 23.3.04)

Country Title of Regulated Operating entity Competent authority for Market designation and oversight of market

Austria 1. Amtlicher Handel Wiener Börse AG Finanzmarktaufsichtsbehör de (official market) (1-3) 2. Geregelter Freiverkehr (semi-official market) 3. Dritter Markt (third market)

Belgium 1. Bourse de 1. Euronext 1. Bourse: valeurs Brussel SA Législateur = Ministre des mobillièes Finances; d'Euronext Autorité de Marché = Brussels: Autorité de Marché  Le premier d'Euronext Bruxelles. marché (official market)  Le second marché  Le nouveau marché 2. Marché des Intruments  le marché trading derives facilities 2. Euronext Ministre des Finances sur Brussels SA avid de la CBF. 2. Le Marché des Autorité de Marché = Instruments Autorité de Marché derives d'Euronext Bruxelles. d'Euronext 3. Ministre des Finances sur Bruxelles proposition du Comité due

33 Country Title of Regulated Operating entity Competent authority for Market designation and oversight of market

fonds des rentes.

3. Fonds des rentes 3. Le marché secondaire hors 4. Nasdaq Europe: bourse des Ministre des Finances sur obligations avis de la CBF. linéaires, des Autorité de Marché = titres scindés et Autorité de Marché de des certificates Nasdaq Europe. de trésorerie 4. Nasdaq SA 4. Nasdaq Europe Denmark 1. Københavns 1-2. Copenhagen Finanstilsynet (Danish Fondsbørs Stock Exchange financials supervisory  Equity market; Ltd. authority)  Bond market;  Derivatives market

2. XtraMarket - Authorised marketplace for unlisted units of investment associations (UCTIS) and Special Purposes Associations

3. Dansk Autoriseret 3. Danish Markedsplads Authorised A/S (Danish Market Place Authorised Ltd. (DAMP) Market Place Ltd. (DAMP)) [authorised market place = regular trade in securities

admitted for trading but not listed on stock exchange]

Finland 1. Arvopaperipörssi For both 1 & 2: Designation: Ministry of (Stock Finance. Exchange); Helsingin  Päälista (Main Arvopaperi- ja Oversight: List for equity johdannaispörssi,  Approval of rules: Ministry and Debt selvitysyhtiön Oy, of Finance; Instruments); (Helsinki  Supervision of compliance:  I-, NM-, Pre- ja Securities and Rahoitustarkastus/Finnish Meklarien lists Derivatives Financial Supervision (parallel Lists I-, Exchange, Authority. NM-, pre- and Clearing House Brokers' list for Ltd) equity and debt instruments);

2. Optioyhteisö (Option Corporation). (Derivatives exchange and clearing house).

France 1. Bourse de Paris: Euronext Paris Proposition de I'Autorité des  Premier marché (1-4) des marches financiers (AMF) (official list); (cf. article L.4211 du code  Second marché; monétaire et financier).  Marché des EDR (European Depositary Receipts.

2. Nouveau marché Approbation par le Ministre de I'economie et des finances. 3. MATIF

4. MONEP

Germany 1. Börse Berlin- 1. Berliner Börse Börsenaufsichtsbehörden de Bremen AG. Länder (stock exchange (Amtilcher supervisory authorities of the Handel, deferral states) and the Geregelter Bundesanstalt für Markt) Finanzdiensteistungsaufsicht 2. Börse (BAFin). 2. Düsseldorfer Düsseldorf AG. Börse (Amtilcher State authorities: Handel, 1. Senatsverwaltung für Geregelter Wirtschaft und Technologie, Markt) 3 & 4. Deutsche Berlin. Börse AG. 3. Frankfurter 2. Finanzministerium Wertpapierbörse desLandes Nordrhein- (Amtilcher Markt, Westfalen, Düsseldorf. Geregelter Markt) 3 & 4. Hessisches Ministerium für Wirtschaft, Verkehr und 4. Eurex 5. BÖAG Landesentwicklung, Deutschland (Börsen AG) Wisebaden.

5. Hanseatische 5. Freie und Hansestadt Wertpapierbörse Hamburg, Wirtschaftbehörde. Hamburg (Amtilcher Markt, 6. Niedersächsisches Geregelter Markt, 6. BÖAG Ministerium für Wirtschaft, Startup market) (Börsen AG) Technologie und Verkehr, Hanover. 6.

Niedersächsisch 7. Bayerisches e Börse zu 7. Bayerische Staatsministerium für Wirtchaft, Hannover Börse AG Verkehr und Technolgie, (Amtilcher Markt, München. Geregelter Markt) 8. Börse- 8. Wirtschaftsministerium Stuttgart AG Baden-Württemberg, Stuttgart. 7. Börse München (Amtilcher Markt, Geregelter Markt)

8. Baden- Württembergisch e Wertpapierbörse (Amtilcher Markt, Geregelter Markt)

Greece 1. Athens 1 and 2. Athens Capital market Commission Stock Stock Exchange Exchange (A.S.E)/Thess aloniki Stock Exchange Centre T.S.E.C.)  Main Market  Parallel Market  Parallel Market for Emerging Markets  New Market

2. Athens Derivatives Exchange (A.D.EX) 3. Bank of 3. Electronic Greece Secondary Securities Market (HDAT-Bond Market, under the competence and supervision of the Bank of Greece)

Ireland Irish Stock Exchange Irish Stock The Irish Financial Services comprising: Exchange Ltd. Regulatory Authority authorises  Official List "regulated market" and (with

 Exploration exc. of listing conditions) vets Securities Market and approves rules for  Developing operation of the different Companies segments as prepared by the Market ISE.  ITEQ

Italy 1. Stock Exchange, (1-4) Borsa CONSOB authorises divided into the Italiana S.p.A. companies which manage following markets, and approves segments: (5-6) Società per  Electronic share il Mercato dei For wholesale markets for market (MTA); Titoli di Stato - Government securities,  Electronic MTS S.p.A.: operating company is covered warrants authorised by Treasury having market (MCW); regard to the opinion of  After-Hours CONSOB and Banca d'latlia. Market (TAH);  Electronic bond and government securities market (MOT);  Electronic market for Eurobonds, foreign bonds and asset- backed securities (EuroMOT).

2. Mercato Ristretto (second market).

3. Derivatives market (DEM).

4. Nuovo Mercato (New Market - NM).

5. Wholesale Market for

Corporate and International Organisations Bonds.

6. Wholesale Market for Corporate and International Organisations Bonds.

Luxembourg Bourse de Société de la Commission de surveillance du Luxembourg: Official Bourse de Secteur Financier List Luxembourg S.A.

Netherlands 1. Euronext Euronext N.V. Recognition by the Minister of Amsterdam Cash and Euronext Finance after advice from the Market: Amsterdam N.V. Netherlands Authority for the  Official market Financial Markets.  Domestic market for unlisted Supervision by the Netherlands securities authority for the Financial  Euro NM Markets and The Netherlands Amsterdam Ministry of Finance.

2. Euronext Amsterdam derivatives Market.

Portugal 1. Mercado de Markets 1-4: Finance Ministry authorises Cotações Oficiais Euronext Lisboa - markets on basis of proposal (Official Sociedade from Comissão do Mercado de Quotation Gestora de Valores Mobillários (CMVM) - Market) Mercados latter responsible for regulation Regulamentados and oversight of market. 2. Segundo SA Mercado (Second Market)

3. Novo Mercado

(New Market)

4. Mercado de Futurose e Opções (Futures and Options Market)

5. MEDIP - Market 5: MTS Mercado Portugal - Especial de Sociedade Dívida Pública Gestora Mercado (Special Market Especial Dívida for Public Debt) Pública SA

Spain A. Bolsas de A1. Sociedad CNMV (Comisión Nacional del Valores (all comprise Rectora de la Mercado de Valores) first, second and new Bolsa de Valores market segments) de Barcelona S.A. Banco de España responsible 1. Bolsa de Valores A2. Soc. Rectora for market for public debt. de Barcelona; de la Bolsa de 2. Bolsa de Valores Valores de Bilbao de Bilbao; S.A. 3. Bolsa de Valores A3. Soc. Rectora de Madrid; de la Bolsa de 4. Bolsa de Valores Valores de de Valencia. Madrid S.A. A4. Soc. Recotora de la Bolsa de Valores de Valencia S.A. B. Mercados oficiales de Productos B1. Soc. Rectora Financieros de Productos Derivados Financieros 1. MEFF Renta Derivados de Fija; RENTA Fija S.A. 2. MEFF Renta B2. Soc. Rectora Variable. de Productos Financieros Derivados de

Renta Variable S.A. C. Mercados FC&M de Futuros y C. (FC&M) Soc. Opciones sobre Rectora del Cítricos [commodity Mercado de derivatives not Futuros y covered by section B Opciones sobre annex ISD: related Criticos SA. markets do not fall within ISD definition of "regulated market"]

D. AIAF Mercado de Renta Fija. D. AIAF Mercado E. Mercado de de Renta Fija. Deuda Pública en Anotaciones.

Sweden 1.Stockholmsbörsen: 1.Stockholmsbörs Finansinspektionen (Financial en Aktiebolag Supervisory Authority)

2. Nordic Growth 2. Nordic Growth Market Market NGM- Aktiebolag. 3. Aktietorget 3. Aktietorget Aktiebolag.

United 1. Domestic Equity Markets 1-6. Entities operating regulated Kingdom Market London Stock markets are recognised Exchange Ltd. investment exchanges within 2. European Equity the meaning of s285 of the Market Financial Services Act 2000 and are regulated by the 3. Gilt Edged and Financial Services Authority Sterling Bond (FSA). Market

4. Alternative

Investment Market (AIM)

5. International Retail Service

6. International Order Book

7. The London 7. LIFFE International Administration Financial Futures and Management. and Options Exchange (LIFFE) 8. Virt-x 8. Virt-x Exchange Limited

9. EDX London 9. EDX Limited

Iceland 1. Verõbréfaþing 1. Kauphöll Fjármála-eftirlitiõ (Financial Íslands hf. Íslands. Supervisory Authority) (kauphöll Íslands. - official market)

2. Tilboõsmarkaõur VþÍ (Regulated 2. Kauphöll OTC Market - not Íslands. official listing)

Norway Oslo Stock Oslo Børs ASA Kredittilsynet (The Banking, Exchange Insurance and Securities  Equity Market Commission of Norway)  Derivative Market  Bonds Market

42 Department of Trade and Industry

URN 05/1218