The Building Societies Act 1986 (International Accounting Standards and Other Accounting Amendments) Order 2004

Explanatory Note

(This note is not part of the Order)

This Order makes provision to give effect to:

Regulation (EC) 1606/2002 of the European Parliament and of the Council on the application of international accounting standards (OJ L 243, 11/09/2002 p.1 – 4) (“the IAS Regulation”), in relation to building societies; and

Parts of Directive 2003/51/EC of the European Parliament and of the Council amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC as regards modernising the annual and consolidated accounts of certain types of companies, banks and other financial institutions to bring the preparation of those accounts more into line with international accounting standards (OJ L 178, 17/07/2003, p.16 – 22) (“the Modernisation Directive”), in relation to building societies.

The Parts of the Modernisation Directive implemented by this Order, are those which require amendments to be made to the Building Societies Act 1986. The remainder of the directive will be implemented for building societies by amendments to the Building Societies (Accounts and Related Provisions) Regulations 1998.

This Order amends Part 8 of the Building Societies Act 1986 (“the 1986 Act) which deals with accounts and audit. Article 1 applies the provisions of the Order to building society’s financial years beginning on or after 1^st January 2005.

Article 2 of the Order inserts new sections 72A to 72I into the 1986 Act. These new sections give full effect to the IAS Regulation and Member State options in it, by enabling all building societies to use adopted international accounting standards to prepare their individual and their group accounts.

Article 4 of the IAS Regulation requires undertakings whose securities are admitted to trading on a regulated market to prepare their consolidated accounts in accordance with international accounting standards adopted pursuant to the Regulation. Article 5 of the IAS Regulation contains options for Member States whereby they may–

• permit undertakings to use adopted international accounting standards to prepare their individual accounts;

• permit those undertakings who do not have securities which are traded on a regulated market, to use adopted international accounting standards to prepare their group accounts.

These options have been taken up and implemented for building societies by the insertion of these new sections into Part 8 of the 1986 Act.

Part 3 of the Order implements those parts of the Modernisation of Accounts Directive that require amendments to the 1986 Act.

Articles 3 and 4 amend section 75 of and insert a new section 75A into the 1986 Act to modify the requirements regarding the contents of the directors' report. The report must now contain an analysis of the development, performance and position of the building society and its connected undertakings (if any). It must also contain a description of the principal risks and uncertainties facing the society’s business.

Article 5 amends section 78 of the 1986 Act to change the requirements regarding the contents of auditors' report. The report must now state what financial reporting framework has been applied in preparation of the accounts.

Article 6 inserts a new section 78A into the 1986 Act which deals with the requirements for an auditors' report to be signed and dated.

Article 7 inserts a new section 81A into the 1986 Act which imposes requirements on a building society about what auditors' information should be included when it publishes its accounts.

Article 8 and the Schedule to the Order deal with consequential amendments to the 1986 Act.

Article 9 includes transitional provisions.

Paragraph 2 of the Schedule amends section 6 of the 1986 Act to provide definitions of “fixed assets” and “liquid assets” for those building societies which switch from producing their accounts under the Building Societies Act framework (where these terms are defined in regulations) to the international accounting standards framework (where these terms are not defined).

Paragraph 5 of the Schedule inserts new sections 72J and 72K into the 1986 Act which impose requirements on building societies to disclose information in the notes to their accounts–

• in relation to benefits paid to directors and other officers of the society;

• in relation to employees of the society;

• in relation to undertakings that are related to the society.

The details of the information required are set out in two new Schedules to the 1986 Act, Schedules 10A and 10B which are inserted by this Order. The requirement to disclose this information in the notes to a society’s accounts was previously included in the Building Societies (Accounts and Related Provisions) Regulations 1998. It has now been included in the Act so that it will continue to apply to those societies which produce their accounts in accordance with adopted international accounting standards.

Paragraph 6 of the Schedule inserts a new section 81B into the 1986 Act which deals with interpretation of terms used in Part 8 of the 1986 Act.

Paragraph 7 of the Schedule inserts new definitions, arising out of the new provisions inserted into the 1986 Act, into section 119 of that Act.

Two different statutory powers are used to make this Order. Articles 3 and 4 are made under section 2(2) of the European Communities Act 1972 and all the remaining provisions of the Order are made under section 104 of the Building Societies Act 1986.

A regulatory impact assessment has been prepared in relation to this Order. A copy may be obtained from the General Insurance, Mutuals and Inclusion Team, HM Treasury, 1 Horse Guards Road, London SW1A 2HQ. A copy of the transposition note showing how the main provisions of this Directive (as it applies to building societies) will be transposed into UK law is available from the same address. Both documents are also available on the Treasury website (www.hm-treasury.gov.uk). Copies of both these documents have been placed in the library of both Houses of Parliament.