Why all the change?

The financial reporting environment and the financial reporting rules that have to be applied are in a constant state of flux. The annual report of a UK listed company now looks very different from its equivalent of twenty years ago. The same is true to a lesser extent for an unlisted company. The main factors that underlie the changes are:

• developments in business;

• activities of standard-setters;

• legislation and EU regulation; and

• responses to scandals.

Developments in business

Business transactions continue to be innovative and become more complex. The leasing industry, for example, has changed from being clearly in two halves – lessors who rent out equipment for the short term, and subsidiaries of banks who provide finance through finance leases – to an industry where a variety of players offer leases with varying degrees of risk for different parties, thus blurring the traditional clear divide. This has led to pressure to update the lease accounting rules to reflect contemporary business. A more obvious example is the whole area of financial instruments, including derivatives, which has witnessed an explosion in volume and sophistication in the last twenty years or so.

New industries also emerge and bring new accounting challenges. Revenue recognition – primarily the question of when (i.e. in which accounting period) revenue should be recognised – was not a problem when factories made goods, put them on a lorry and delivered them the same day. The day the goods left the factory gate coincided with the date of invoicing and that was the date the revenue was recognised.