Discussion about the concept and reporting o f income has been less prominent in France and Germany than in the U.S. and the U.K. Debate in the accounting literature on this topic is relatively scarce and regulators have not dedicated a specific accounting standard to the issue o f reporting income. The absence o f debate might be a result o f the internationalisation o f accounting standards, namely the adoption o f international accounting standards and U.S. standards.10 That is, as national accounting regulation adheres more to international regulation and more companies choose to follow international standards, the debate on accounting issues is transferred to the international institutions. In fact, in a sample o f eighty companies from France and Germany I found fourteen French companies and sixteen German companies using either international accounting standards or U.S. GAAP in the period from 1993 to 2001 (especially in the later years).
Traditionally, French and German regulators have permitted a wider use o f dirty surplus accounting practices than their U.S. and U.K. counterparts. In France, m ost o f these movements are related to goodwill adjustments, currency translation differences, and other gains and losses such as consolidation adjustments and provisions required by law. In Germany, dirty surplus practices arise mainly from goodwill write-offs, foreign currency translation differences and other adjustments to reserves such as consolidation adjustments.
10 In France, Law No. 98-261 o f 6 April 1998 allowed listed com panies to use international accounting standards instead o f national standards under certain conditions. Until 31 D ecem ber 2002 and in the absence o f international accounting standards, the companies may use internationally recognised standards (U.S. GAAP). In Germany, after a legislation reform in 1998, listed com panies have the choice to prepare their group accounts in accordance to the German Com m ercial Code or to international accounting standards or U.S. GAAP. Additionally, the com panies listed in the N ew M arket (Neue M arkt), launched in March 1997, were required to present financial statem ents in accordance with international accounting standards or U.S. GAAP.
More recently, French and German regulators seem to be joining the international tendency to improve the disclosure o f financial performance. In France, the Comite de Reglementation Comptable (CRC), the French Accounting Regulation Committee, issued a standard revising the consolidation methodology adopted in 1986. The new standard, CRC 99-02 in effect after 1 January 2000, introduced a new methodology (denominated Second Methodology), which now requires a statement o f changes in shareholder’s equity for consolidated accounts. Similar to the international standards the new standard allows some flexibility regarding the positions o f the statement o f changes in shareholder’s equity: either as part o f the m ain statements or as part o f the notes, although preference is given to the last option. In Germany, the recently created Deutscher Standardisierungsrat, the German Accounting Standards Committee, issued German Accounting Standard (GAS) 7: Group Equity and Total Recognised Results requiring that, for periods commencing after 30 June 2001, consolidated accounts include a statement o f changes in shareholders’ funds. The statement should be reconciled with the earnings figure reported in the income statement.
2.5.4 The IASB
The IASB definition o f income reflects a preference for the all-inclusive measure. The IASB conceptual framework refers to income as including all revenues and gains that may, or m ay not, arise in the course o f the ordinary activities, together with any unrealised gains (IASB framework, points 74 to 77). The same view is expressed in
IA S 8: N et Profit fo r the Period, Fundamental Errors and Changes in Accounting Policies (1999) which requires that all items o f income and expense should be
included in net income for the period unless an International Accounting Standard requires or permits otherwise.11
Nevertheless, the IASB allows certain items to be accounted for directly in shareholders’ funds. The main examples include corrections to fundamental errors related to prior periods and effects o f changes o f accounting policies (IAS 8),
revaluation o f assets (.IAS 16: Property, Plant and Equipment, issued in 1999, and IAS 38: Intangible Assets, issued in 1999), and certain exchange differences (IA S 21: The Effects o f Changes in Foreign Exchange Rates, issued in 1995). Goodwill is required to be capitalised and amortised according to IAS 22: Business Combinations (1999) in line w ith FR S 10 in the U.K.
Similar to U.S. GAAP and U.K. GAAP, international accounting standards require a separate statement o f changes in equity showing the net profit or loss for the period, items recognised directly in shareholders’ funds and the cumulative effects o f changes in accounting policy and corrections o f fundamental errors (IAS 7, point 86).
The IASB is currently discussing the issue under the Financial Reporting Project. The project, which started as a partnership-project with the U.K. regulators and other domestic standard setters, is as from 2004 a joint project with the FASB, designated the Joint International Group on Performance Reporting. The project concerns the presentation o f financial performance and echoes a preference for comprehensive income. In motivating the project, the Board states that:
“There is no strong conceptual motivation for having some income and expenses reported in an income statement while others are taken directly to equity.”
The m ain focus o f the project is:
11 IAS 8, point 7.
“ ...the development o f a single statement o f comprehensive income - i.e. a statement that reports all recognised income and expenses.”
A statement o f comprehensive income will be required and consequently the statement o f changes in equity and the cash flow statement will undergo some changes. It is also an objective o f the project to undertake the categorisation and display o f components o f reported performance in order to have consistency o f presentation among reporting entities. The proposed statement o f comprehensive income will contain four main categories o f items: business, financing, tax and discontinued operations, with the bottom line figure being comprehensive income. The statement will be presented in a matrix or columnar format, with a column for income and expenses from re-measurements and a column for other income and expenses. The re-measurements column will include items such as asset revaluations, fair value adjustments, etc.