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Comparative Study of Equity Accounting in the United States and the United Kingdom from a Generally Accepted Accounting Practices Viewpoint

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Comparative Study of Equity Accounting in the United States and the United Kingdom from a Generally Accepted Accounting Practices Viewpoint University of Montana ScholarWorks at University of Montana Graduate Student Theses, Dissertations, & Professional Papers Graduate School 1992 Comparative study of equity accounting in the United States and the United Kingdom from a generally accepted accounting practices viewpoint James Paul Luther The University of Montana Follow this and additional works at: https://scholarworks.umt.edu/etd Let us know how access to this document benefits ou.y Recommended Citation Luther, James Paul, "Comparative study of equity accounting in the United States and the United Kingdom from a generally accepted accounting practices viewpoint" (1992). Graduate Student Theses, Dissertations, & Professional Papers. 1845. https://scholarworks.umt.edu/etd/1845 This Thesis is brought to you for free and open access by the Graduate School at ScholarWorks at University of Montana. It has been accepted for inclusion in Graduate Student Theses, Dissertations, & Professional Papers by an authorized administrator of ScholarWorks at University of Montana. For more information, please contact [email protected]. Maureen and Mike MANSFIELD LIBRARY Copying allowed as provided under provisions of the Fair Use Section of the U.S. COPYRIGHT LAW, 1976. Any copying for commercial purposes or financial gain may be undertaken only with the author's written consent. University of Montana A comparative study of equity accounting in the United States and the United Kingdom from a generally accepted accounting practices viewpoint. By James Paul Luther Presented in partial fulfillment of the requirements for the degree of Master of Business Administration University of Montana April 1992 UMI Number: EP34235 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent on the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. UMI' Dissertation Publishing UMI EP34235 Copyright 2012 by ProQuest LLC. All rights reserved. This edition of the work is protected against unauthorized copying under Title 17, United States Code. ProQuest* ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 TABLE OF CONTENTS Introduc tion 1 Purpose 3 Methodology 3 Called Up Share Capital 5 Share Premium 9 UK Treatment 9 US Treatment 10 Revaluation Reserve 10 UK Treatment 11 Revaluation of assets 11 Depreciation of revalued assets 13 Temporary diminution in value 15 Foreign exchange differences 16 US Treatment 17 Ouasi-reorganization 17 Foreign exchange differences 17 Capital Redemption Reserve 18 UK Treatment 19 Proceeds from other than a new issuance 19 Proceeds from a new issuance 19 US Treatment 20 Intent to retire 20 No intent to retire 21 Reserve for Goodwill 22 UK Treatment 23 Disposition of purchased goodwill 23 Amortization of goodwill 24 US Treatment 26 Merger Reserve 27 Section 131 27 Section 132 30 Accounting presentation of Section 131 or 132 32 Profit and Loss 34 Revenue Recognition 34 UK Treatment 34 US Treatment 35 Analysis of Revenue Recognition 36 Deferred Taxes 36 UK Treatment 36 US Treatment 37 Related Parties 38 UK Treatment 38 US Treatment. 39 i Directors Disclosure 41 UK Treatment 41 Compensation schemes 41 Loans, transactions and equity 43 US Treatment 45 Analysis 46 Conclusions 51 APPENDIX 1 - Prescribed format of company equity accounts in the UK 53 APPENDIX 2 - Acronyms used 54 APPENDIX 3 - Financial Statements Analyzed 55 References 56 ii LIST OF EXHIBITS 1. Beazer, P.L.C. UK/US Comparison _2 2. Currency Translation of Share Capital J 3. Capital Shares Disclosure 3 4. Revaluation Reserve Note .12 5, Revaluation Reserve Disclosure .16 6, Treasury Share Disclosure 22 7 Reserve Note 24 8 Goodwill Amortization Note 25 9 Goodwill Disclosure 27 10 Merger Relief Journal Entry 28 11 Merger Relief Disclosure 30 12 Group Reorganization Journal Entries „ 31 13 Group Reorganization Disclosure 32 14 Revaluation Reserve Presentation .33 15 Deferred Taxation Note 37 Related Party Disclosure 40 Directors Compensation Note 43 Directors Disclosure 45 A comparative study of equity accounting in the United States and the United Kingdom from a generally accepted accounting principles viewpoint. The many diverse systems of generally accepted accounting principles (GAAP) used to create financial statements around the globe yield financial statements of varying inter­ company and inter-period comparability. This lack of global standards places a foreign investor, or any other user of foreign financial statements, in a rather disadvantageous position, as compared to a user of domestic financial statements. For effective communication of financial information to occur, financial statement users should be able to interpret the statements in question with adequate knowledge of the principles and procedures used to produce those financial statements. Unfortunately, the broad issue of cross-cultural communication of financial accounting disclosures (or lack thereof) is far beyond the scope of this paper. Instead, this paper focuses on the relatively narrow issue of equity accounting and reporting in the United States (US) as compared to that in the United Kingdom (UK). The vast differences between US and UK accounting standards are exemplified by an actual extract from Beazer, P.L.C.'s 1990 financial statements contained in Exhibit 1 (following page) displaying a UK GAAP net income of £67.9 million and a US GAAP net income of £26.0 million for the 1990 fiscal year. The UK company's reported income suffers a 62 percent reduction in the translation to US GAAP. Beazer's total stockholders' equity under UK GAAP is £1,051.6 million, but only £590.6 million under US GAAP—a reduction of 44 percent. The information in this paper is relevant to a wide variety of people. UK GAAP (or an accounting system closely related to UK GAAP) is practiced throughout the Commonwealth, including Hong Kong, India, Australia, and New Zealand. Anyone working, or investing, in the business sector in any of the commonwealth countries would need some knowledge of UK GAAP. EXHIBIT 1 - Beazer, P.L.C. ADDITIONAL FINANCIAL INFORMATION FOR US INVESTORS Reconciliation of UK GAAP to US GAAP 1990 1989 1988 Consolidated income statement £ m £m £m Net income after minority interests but before extraordinary items, under UK GAAP 67.9 92.6 75.6 Extraordinary items reclassified (29.0) (4.6) 0.6 Utilization of tax losses • (0.6) (3.3) Profit on sale and leaseback of a fixed asset (6.6) - - Amortization of goodwill (6.5) (5.8) (4.7) Reduction of depreciation arising from negative goodwill 0.2 0.2 0.2 Income from discontinued operations . (0.6) (8.21 Net income from continuing operations 26.0 81.2 60.2 Gain (loss) on disposal of discontinued operations - (0.6) 19.6 Income from discontinued operations • 0.6 2.8 Extraordinary item - utilization of tax losses - - 0.2 Net income after minority interests and extraordinary items, under US GAAP 26.0 81.2 82.8 Net income per ordinary share Undiluted Under UK GAAP 22.76p 31.85p 26.12p Adjusted for US GAAP Continuing operations (note) 7.76p 27.71p 20.58p Discontinued operations 0.22p l.Olp Disposal of discontinued operations (0.22p) 7.09p Extraordinary items ^ : Q,Q7p Net income 7.76p 27.71p 28.76p Fully diluted Under UK GAAP 21.51 p 29.90p 24.68p Adjusted for US GAAP Continuing operations (note) 7.82p 26.10p 20.51p Discontinued operations - 0.19p 0.95p Disposal of discontinued operations - (0.19p) 6.68p Extraordinary items ; : 0.07P Net income 7.82p 26.1Op 28.21p Shareholders equity £ m £m £m Shareholders' equity under UK GAAP 1,051.6 1,145.7 458.8 Goodwill 128.6 120.5 95.3 Negative goodwill (4.2) (4.2) (3.6) Deferred taxation (595.8) (663.8) (33.5) Reduction in depreciation arising from negative goodwill 0.7 0.5 0.3 Profit on sale and leaseback of a fixed asset (6.6) - - Property revaluation (0.1) (0.1) (0.3) Proposed dividends 16.4 16.2 13 9 Shareholders' equity under US GAAP 590.6 614.8 530.9 2 The UK is the single largest foreign investor in the US, with an investment balance (at historical cost) estimated at $108,055 million as of January 1, 1991. US investors also have substantial interests in the UK: an estimated historical cost investment balance of $64,983 million as of January 1, 1991. With the exception of Canada, the UK is the largest investment partner of the US. (United States Department of Commerce 1991) The cultural, linguistic and historical bonds between the US and the UK guarantee this close relationship will continue into the future. PURPOSE The purpose of this paper is to discern a logical pattern of thought in both UK and US accounting systems by providing a meaningful comparison of selected portions of GAAP used in the US and the UK. This paper presents a detailed analysis of accounting practices in the United States and the United Kingdom, and draws general conclusions based on that analysis. The stated goal of understanding current financial accounting thought was chosen due to the fast paced changes anticipated in UK accounting, resulting from the integration of the UK into the European community- Because of the numerous changes in UK GAAP anticipated in the near future, conceptual understanding of UK accounting thought should be far more beneficial than a knowledge of precise accounting standards at any one point in time. Based on a preliminary analysis, one would expect to find: 1. UK GAAP requires more disclosure than US GAAP, and, 2. UK GAAP allows individual companies far more latitude in choosing appropriate accounting methods than US GAAP. METHODOLOGY To assess the differences in accounting practices, the author compared US and UK GAAP as reflected in the respective accounting standards.
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