Regulation in Financial Accounting

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Presentation transcript:

Regulation in Financial Accounting

function of financial Accounting What is the function of financial Accounting? To;- (i) Identify (ii) Measure and (iii) Communicate info to users of accounting information to allow them make decisions.

Why is regulation of financial accounts needed? Because financial accounting info is used by so many people there is a need to ensure that the financial info produced is accurate and is regulated. This is particularly the case for limited companies (PLC’s or Ltd’s) because;- (i) They have limited liability – means greater risk for those that interact with limited companies and (ii) Ownership of limited companies tends to be much broader and in most cases the shareholders are not involved in day-to-day running of business Regulation ensures accounts are more reliable, consistent and comparable. Regulations ensure that the accounts show a true and fair view of the performance and financial position of the business.

Regulatory Framework or GAAP Therefore, there is a broad and diverse group of users who rely on accurate financial statements for limited companies. Every user of the accounts will require info for different reasons, regardless of this, they all have a common requirement – that the info is relevant, reliable, understandable & comparable. In response, a wide variety of regulation has developed around the preparation of financial statements. These regulations are referred to as the Regulatory Framework or GAAP (Generally Accepted Accounting Principles).

Regulatory Framework or GAAP Regulatory Framework includes;- Professional Regulation (IFRS) Company law requirements EU Directives Stock Exchange Regulations

Professional Regulation -International Regulation In response the IASC (International Accounting Standards Committee) was set up in 1973. The IASC issued accounting standards called IAS’s. The development of these standards was a major step towards promoting international comparability & consistency between the financial statements prepared by companies worldwide. In 2001, the IASB (International Accounting Standards Board) replaced the IASC as the standard setting body.

STRUCTURE OF IFRS Regulatory system The functions of the various bodies are summarised as follows;-

STRUCTURE OF IASB The IFRS Foundation – comprised of 21 Trustees who are appointed to the Monitoring Board & report back to the Monitoring Board. Activities undertaken by this body include;- (i) Appointing members of the IASB, the IFRS Advisory Council and IFRIC. (ii) Overseeing the work of the IASB, in terms of structure & strategy (iii) Assisting with formulation of IASB agenda (iv) Promotion of the use and application of the IAS’s developed by the IASB (v) Establishing & maintaining financing arrangements

STRUCTURE OF IASB IASB – International Accounting Standards Board. (i) responsible for issuing new IFRS’s and (ii)approving interpretations developed by IFRIC. IFRIC (International Financial Reporting Interpretations Committee) – issues guidance where there is difficulty interpreting the IAS/IFRS’s. IFRIC reports to the IASB and must obtain IASB approval before their interpretations are published.

STRUCTURE OF IASB IFRS Advisory Council – provides a forum for participation by organisations and people interested in international financial reporting. It has c.40 members, including representatives of the national standard setting bodies and accounting experts. Role ;- (i) Advises the IASB on their agenda and emphasises priority IAS’s that should be developed by the IASB. (ii) Informs the IASB of the views of the organisations and individuals on the Advisory Council and (iii)Gives other advice to the IASB and/or the Trustees

The Standard Setting Process Development of IFRS’s involves 6 steps;- Setting the agenda Planning the project Developing and publishing the discussion paper Developing and publishing the exposure draft Developing and publishing the standard Review after the standard is issued

Corporate GOVERNANCE Most shareholders hold their investments in PLC’s over a long period. Unless a significant shareholding is purchased, shareholders in a PLC are unlikely to be involved in the day-to-day running of the company. Instead this is delegated to a Board of Directors The problem is that directors are often focused on short-term goals, furthermore they may only be appointed for a period of between 3 and 5 yrs. Therefore the interests of directors and many shareholders may be misaligned – Directors may make decisions that are beneficial to the short-term only

Corporate GOVERNANCE Furthermore, directors are in effect employed by shareholders so there is a natural bias for them to try to portray the best financial picture possible in the financial statements, as they will often be remunerated on the basis of the performance of the company, as shown in the accounts. Therefore there is a need to ensure companies and in particular boards of directors behave in an ethical manner and this is referred to as the area of “Corporate Governance” (i.e. the system by which companies are directed and controlled)

Corporate GOVERNANCE There are two competing schools of thought in relation to ensuring companies behave in an ethical manner. These are;- The Rules Based Approach This is based on the idea that if we want companies to behave in an ethical manner, rules must be set up to enforce this. The US have adopted this approach and have detailed rules and regulations as set out in the SOX Act 2002. This act has a huge volume of rules and regulations hoping to lead to good corporate governance and ethical behaviour in companies.

Corporate GOVERNANCE The Principles Based Approach This states that its not possible to have a single set of rules for all companies for all situations. Instead a corporate governance code should apply consisting of a set of principles which companies should apply to any given situation as opposed to a set of exact rules. The UK and Ireland favour this approach. In 2010 the UK Corporate Governance Code was issued and in 2011 it was adopted by the Irish Stock Exchange The Code sets out a standard of good practice in relation to some of the following areas;

Corporate GOVERNANCE Board of director composition Executive remunerations Accountability of directors Audit and relationship with shareholders The Combined Code sets out a set of principles as opposed to rules and public companies although they are expected to comply with them, do not have to.