What Is Article 50?

Article 50 is a clause in the European Union’s (EU) Lisbon Treaty that outlines the steps to be taken by a country seeking to leave the bloc voluntarily. Invoking Article 50 kick-starts the formal exit process and allows countries to officially declare their intention to leave the EU. The United Kingdom was the first country to invoke Article 50 after a majority of British voters elected to leave the union in 2016.

How Article 50 Works

Article 50 is part of the Lisbon Treaty, which was signed and ratified by all 27 member states of the European Union in 2007 and came into effect in 2009. The article outlines how a member nation may leave the EU voluntarily. As noted above, the article states: “Any member state may decide to withdraw from the union in accordance with its own constitutional requirements.”

According to the article’s text:

1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.
3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.
4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it.
   A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union.
5. If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to the procedure referred to in Article 49.

Special Considerations

Article 50 became a subject of serious discussion during the European sovereign debt crisis of 2010 to 2014 when Greece’s economy appeared to be spiraling out of control. In an attempt to save the euro and perhaps the EU from collapsing, leaders considered expelling Greece from the eurozone.

The problem they encountered with Article 50 was that there was no clear guidance for pushing a member state out against its will. Nor was it necessary to remove Greece from the EU—just from the eurozone. Greece was eventually able to reach agreements with its EU creditors.

Origins of Article 50

The European Union began in 1957 as the European Economic Community, which was created to foster economic interdependence among its members in the aftermath of World War II. The original bloc comprised six European countries: the Netherlands, France, Belgium, West Germany, Luxembourg, and Italy. They were joined by the U.K., Denmark, and Ireland in 1973. The EU was formally created by the Maastricht Treaty in 1992, and by 1995 the bloc expanded to 15 members covering the whole of Western Europe. From 2004 to 2007, the EU experienced its largest-ever expansion, taking on 12 new members that included former Communist states.

The Lisbon Treaty was drafted with a view to enhancing the efficiency and democratic legitimacy of the Union and to improving the coherence of its action. The treaty was signed and ratified by all 27 member states in 2007 and came into effect in 2009. The treaty is divided into two parts—the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU). It has 358 articles in total including Article 50.

The author of the provision did not originally see it as being necessary. “If you stopped paying the bills and you stopped turning up at the meetings, in due course your friends would notice that you seemed to have left,” the Scottish peer Lord Kerr of Kinlochard told the BBC in November 2016. He saw Article 50 as being potentially useful in the event of a coup, which would lead the EU to suspend the affected country’s membership: “I thought that at that point the dictator in question might be so cross that he’d say ‘right, I’m off’ and it would be good to have a procedure under which he could leave.”

Example of Article 50

The first country to invoke Article 50 was the United Kingdom, which left the EU on Jan. 31, 2020. It came after a majority of British citizens voted to leave the union and pursue Brexit in a referendum on June 23, 2016, leading British Prime Minister Theresa May to invoke the article on March 29, 2017.

The process was mired by missed deadlines, extensions, negotiations, and stumbling blocks put forth by both British and EU leaders. May’s attempts for an agreement were rejected by parliament. Negotiations were renewed by Boris Johnson, who became prime minister after May resigned.

The country began an 11-month transition period immediately after its departure from the bloc. After leaving the Union, there were no British officials in the European Parliament, and the U.K. lost its veto right within the EU. But the two parties still had to work out a new trade agreement. There were still many issues to resolve during the transition period, including:

• Issues related to pensions
• How both parties would handle law enforcement and security cooperation
• Access to shared fisheries
• Customs and border controls between Northern Ireland and the Republic of Ireland
• Tariffs and other trade barriers

One big cause for concern was the issue of EU nationals migrating to the U.K. or vice versa. Prior to Brexit, an estimated three million EU nationals lived, worked, or studied in the U.K., while one million U.K. nationals did the same in the rest of the EU. Nationals were allowed to cross borders during the transition period but were afterward subject to visa requirements.

Negotiations continued during the transition period, despite many halts and roadblocks. On Dec. 24, 2020, the two sides finally announced a trade deal that would replace the EU’s single market and its customs union with respect to the United Kingdom. The EU-UK Trade and Cooperation Agreement was signed on Dec. 30 and provisionally entered force on Jan. 1. However, it was not fully ratified until the following April. The new trade agreement fully entered force on May 1, 2021.

What Is Accounting Theory?

Accounting theory is a set of assumptions, frameworks, and methodologies used in the study and application of financial reporting principles. The study of accounting theory involves a review of both the historical foundations of accounting practices, as well as the way in which accounting practices are changed and added to the regulatory framework that governs financial statements and financial reporting.

Understanding Accounting Theory

All theories of accounting are bound by the conceptual framework of accounting. This framework is provided by the Financial Accounting Standards Board (FASB), an independent entity that works to outline and establish the key objectives of financial reporting by businesses, both public and private. Further, accounting theory can be thought of as the logical reasoning that helps evaluate and guide accounting practices. Accounting theory, as regulatory standards evolve, also helps develop new accounting practices and procedures.

The most important aspect of accounting theory is usefulness. In the corporate finance world, this means that all financial statements should provide important information that can be used by financial statement readers to make informed business decisions. This also means that accounting theory is intentionally flexible so that it can produce effective financial information, even when the legal environment changes.

In addition to usefulness, accounting theory states that all accounting information should be relevant, reliable, comparable, and consistent. What this essentially means is that all financial statements need to be accurate and adhere to U.S. generally accepted accounting principles (GAAP). Adherence to GAAP allows the preparation of financial statements to be both consistent to a company’s past financials and comparable to the financials of other companies.

Finally, accounting theory requires that all accounting and financial professionals operate under four assumptions. The first assumption states that a business is a separate entity from its owners or creditors. The second affirms the belief that a company will continue to exist and not go bankrupt. The third assumes that all financial statements are prepared with dollar amounts and not with other numbers like units of production. Finally, all financial statements must be prepared on a monthly or annual basis.

Special Considerations

Accounting as a discipline has existed since the 15th century. Since then, both businesses and economies have greatly evolved. Accounting theory is a continuously evolving subject, and it must adapt to new ways of doing business, new technological standards, and gaps that are discovered in reporting mechanisms.

For example, organizations such as the International Accounting Standards Board help create and revise practical applications of accounting theory through modifications to their International Financial Reporting Standards (IFRS). Professionals such as Certified Public Accountants (CPAs) help companies navigate new and established accounting standards.

What Is Advanced Internal Rating-Based (AIRB)?

An advanced internal rating-based (AIRB) approach to credit risk measurement is a method that requests that all risk components be calculated internally within a financial institution. Advanced internal rating-based (AIRB) can help an institution reduce its capital requirements and credit risk.

In addition to the basic internal rating-based (IRB) approach estimations, the advanced approach assesses the risk of default using loss given default (LGD), exposure at default (EAD), and the probability of default (PD). These three elements help determine the risk-weighted asset (RWA) that is calculated on a percentage basis for the total required capital.”

Understanding Advanced Internal Rating-Based Systems

Implementing the AIRB approach is one step in the process of becoming a Basel II-compliant institution. However, an institution may implement the AIRB approach only if they comply with certain supervisory standards outlined in the Basel II accord.

Basel II is a set of international banking regulations, issued by the Basel Committee on Bank Supervision in July 2006, which expand upon those outlined in Basel I. These regulations provided uniform rules and guidelines to level the international banking field. Basel II expanded the rules for minimum capital requirements established under Basel I, provided a framework for regulatory review, and set disclosure requirements for assessment of capital adequacy. Basel II also incorporates credit risk of institutional assets.

Advanced Internal Rating-Based Systems and Empirical Models

The AIRB approach allows banks to estimate many internal risk components themselves. While the empirical models among institutions vary, one example is the Jarrow-Turnbull model. Originally developed and published by Robert A. Jarrow (Kamakura Corporation and Cornell University), along with Stuart Turnbull, (University of Houston), the Jarrow-Turnbull model is a “reduced-form” credit model. Reduced form credit models center on describing bankruptcy as a statistical process, in contrast with a microeconomic model of the firm’s capital structure. (The latter process forms the basis of common “structural credit models.”) The Jarrow–Turnbull model employs a random interest rates framework. Financial institutions often work with both structural credit models and Jarrow-Turnbull ones, when determining the risk of default.

Advanced Internal Rating-Based systems also help banks determine loss given default (LGD) and exposure at default (EAD). Loss given default is the amount of money to be lost in the event of a borrower default; while exposure at default (EAD) is the total value a bank is exposed to at the time of said default.

Advanced Internal Rating-Based Systems and Capital Requirements

Set by regulatory agencies, such as the Bank for International Settlements, the Federal Deposit Insurance Corporation, and the Federal Reserve Board, capital requirements set the amount of liquidity is needed to be held for a certain level of assets at many financial institutions. They also ensure that banks and depository institutions have enough capital to both sustain operating losses and honor withdrawals. AIRB can help financial institutions determine these levels.