Ch 10 Financial Reporting in France

1
Ch 10 Financial Reporting in France

• Main features of the Accounting system
• Long tradition of centralization with paramount
  importance of the State and top civil servants
• Code of Commerce country (Napoleon Code)
• Influence of tax on company accounts
• - Uniform set of accounts (Plan comptable)

2
10.1 Institutional framework

• 10.1.1. a two tier system company accounts
  influenced by tax provisions and depreciations
  tax deductible only if recognized in the company
  accounts. Consolidated accounts complying with
  the 7th EU directive and law of 1985. Group
  accounts, no tax influence and no approval from
  SH required and drawn up according French, US or
  IAS GAAP.

3
10.1. Institutional Framework (continued)

• 10.1.2. National Accounting Council. Actually the
  oldest accounting body in the west ( 1957).
  Consultative role but paramount importance. Part
  of the Ministry of Finance which provides finance
  and technical staff All stakeholders represented
  in the council but private sector is dominant(
  since creation). Recently reformed (1996) given
  the expected change in international rules full
  time appointed president, less members( 115 to
  58), UITF( Comité durgence acting as the
  official correspondent of the International
  Financial Reporting Interpretations Committee of
  the IASC).
• In charge of all questions relating to
  accountancy. Keep the Plan comptable updated
  (1947, 1957,1983,1999) along with professional
  accounting plans ( 150 clones of the PCG).
• Also supervises compatibility of French
  accounting standards with IAS (since 1973).
• Issues opinions (avis) most of which are
  submitted to a new body the CRC (1996) and become
  regulations.
• For more details see figure and exhibit.

4
10.1 Institutional Framework ( continued)

• 10.1.3. CRC and COB
• Unlike CNC the newly created CRC has the power
  to make regulations. It was necessary to unify
  accounting ( including banks and insurance
  companies and some private but not for profit
  institutions which had specific accounting bodies
  before the reform) and to enforce the future IFRS
  as in continental countries members of the EU it
  is impossible (Rome Treaty) and contrary to the
  sovereignty of the States to let a private body
  enforce provisions having force of law.
• COB like the US SEC . No responsibility in
  accounting standards but very powerful on
  auditors given its responsibilities similar to
  the US commission .

5
10.2. Plan comptable

• Literally uniform set of accounts with
  almost 150 adapted versions for specific
  professions. First version 1947( Financial
  accounting), revised 1957 (inclusion of cost
  accounting Part 3 of the plan), then 1983 and
  1985 ( adaptation to 4th and 7th EU directives
  and institution by law of a droit comptable as
  principles of accounting introduced in the Code
  of Commerce), finally 1999 ( inclusion of the
  opinions of the CNC).
• Discussion () advantages of uniformity,
  requires less professional judgment and
  qualifications ( which can be of some help for
  developing countries), flexible( 3 systems
  offered with extension of accounts and extended
  codification given the size of the company (
  small, medium, large). (-) Standards are not
  independent thus updating and revision are
  complex issues less options for accounting
  policys choice except for group accounts less
  initiatives to the accounting profession.
• Could be regarded as some kind of a
  conceptual framework but quite different from
  the US, IASC...

6
10.2. Plan Comptable ( continued)

• The chart of accounts included in the plan is
  as follows Balance sheet accounts (1)
  Capital ( owner equity, loans and debt payable),
  (2) Fixed assets,(3) Inventories,(4) Debts
  receivable and payable,(5) Financial Operating
  accounts (6) Charges, (7) In come (8) cost
  accounting,(9) specials.
• The elements of the financial statements are
  defined but in a legal way( enumeration). The
  codification is decimal.

7
10.3. Annual reports

• Only the balance sheet and the income
  statement and the notes to the accounts are
  mandatory under French law. But most companies(
  listed) publish a cash flow statement either as
  required from several regulations or on a
  volunteer basis.
• On the balance sheet fixed assets precede
  current assets and equities current liabilities.
  As the BS, the income statement is established on
  a functional basis revenues and expenses
  classified by nature and attached to three
  functions investment, operations, Finance.
• The accounts are drawn up to convey a true
  and fair view and the true and fair view
  override is applicable. However, as in written
  law and continental countries as Germany and
  others, whenever litigation go to courts, the
  judge would interpret the true and fair view very
  strictly comply with law, in accordance with
  the spirit of the rules).
• Given the trend towards globalization
  disclosures practices have significantly improved
  as in allover the EU.

8
10.4. Accounting Principles

• There is little influence of the profession
  on the standards but its now increasing (
  17,000 CPA also qualified as auditors). An
  important distinction has to be done between
  company accounts ( tax influence) and group
  accounts.
• Fixed assets are at carried at historical
  cost and revaluation is permitted but in company
  accounts the revaluation arising would be
  submitted to taxation. Therefore it seldom
  happens except for deficit companies.
  Straight-line amortization is common. There is no
  distinction between capital leases and operating
  leases. Consequently assets acquired by lease
  contracts are not recognized in the balance sheet
  (option available for group accounts) but the
  information has to be disclosed. Use of LIFO for
  inventories is not permitted. Subject to strict
  conditions capitalization of RD is allowed but
  seldom used in practice.
• No deferred tax liabilities or assets are
  included in the BS or PLA as the result of close
  correspondence between the figures for tax and
  financial reporting purposes with the exception
  of group accounts if the group has chosen IAS or
  US GAAP standards.
• Payments for retired benefits recorded as
  an expense but little information provided on
  liabilities for future payments under defined
  benefit schemes.
• Construction contracts of completion is
  preferred. Completed contract allowed.
• Unrealized losses on foreign exchange
  transactions must be recognized in the PLA but
  unrealized gains are not. Provisions to cover
  future uncertainties allowed even there is no
  liability at the date of the balance sheet.

9
10.5. Consolidation and Currency translation

• Consolidation really started in the 7Os as
  COB required any parent company applying for a
  new listing on a stock exchange or making a
  public issue to increase its capital. The 7th EU
  directive imported in the PCG in 1986 has allowed
  our group accounts most of the treatment not
  permitted for company accounts capitalization of
  leases assets and of interest on borrowing, LIFO,
  unrealized translation gains taken to income,
  revaluation of depreciable fixed assets and
  stocks permitted.
• Purchase accounting can be used and pooling
  of interests also. When debates took place at the
  IASC on that hot topic French companies
  supported the US perspective with long useful
  lives against IASC views. Both proportional
  consolidation and the equity method are common in
  France. Current rate is used for BS translation
  an average rate for the PLA and non autonomous
  entities by monetary/non monetary also used in
  High inflation countries.
• Auditors are appointed for a six years
  term. Group accounts must be verified by minimum
  two auditors, drawn from different firms.
  Auditors must disclose to the public prosecutor
  any criminal act by an audit client of which they
  become aware.

10
10.6.Differences with the IAS

• France and France companies were among the few
  to support the IASC from the very origin and the
  CNC has always issued opinion checking the
  differences between the IAS and French GAAP.
  Taking our 200 biggest firms 5-10 would
  follow US GAAP 20-25 IAS, others (70) French
  GAAP. Differences are shown in the following
  tables.

11
Conclusion

• Two tier system of accounting which exemplifies
  flexibility for financial reporting purposes
• Uniform chart of accounts tempered by many
  professional charts
• - Oldest accounting standard setting body in the
  world, recently reformed for expected changes in
  2005.
• - Influence of financial markets is there. The
  State keeps its influence french
  centralization still at work.