Conceptual and Regulatory Framework Unit 1 June 2013 Dr. VIDYA KUMAR 1

Why do we need financial reporting standards? Standards are needed because accounting numbers are important when defining contractual entitlements June Dr. VIDYA KUMAR

Why do we need financial reporting standards? changes in mandatory standards on wealth distribution is a major reason why standards are required and also why it is difficult to obtain a consensus June Dr. VIDYA KUMAR

Need for Mandatory Standards Mandatory standards are needed to define the way in which accounting numbers are presented in financial statements so that their measurement and presentation are less subjective. June Dr. VIDYA KUMAR

Arguments in support of Standards 1. Comparability Financial statements should allow a user to make predictions of future cash flows make comparisons with other companies and evaluate the management's performance. comparisons would be distorted and valueless if companies were permitted to select accounting policies at random June Dr. VIDYA KUMAR

Arguments in support of Standards 2. Credibility The accountancy profession would lose all credibility if it permitted companies experiencing similar events to produce financial reports that disclosed different results simply because they could select different accounting policies. June Dr. VIDYA KUMAR

Arguments in support of Standards 3. Influence The process of formulating standards has encouraged a constructive appraisal of the policies being proposed for individual reporting problems and has stimulated the development of a conceptual framework June Dr. VIDYA KUMAR

Arguments in support of Standards Discipline Mandatory standards will impose systematic ongoing regulation which should prevent serious loss to the entity and those who rely on the annual accounts when making credit, loan and investment decisions. June Dr. VIDYA KUMAR

Arguments against Standards 1. Adverse allocative effects Adverse allocative effects could occur if standard setters did not take account the economic consequences flowing from the standards they issued June Dr. VIDYA KUMAR

Arguments against Standards 2. Consensus-seeking Consensus-seeking can lead to the issuing of standards that are over-influenced by those with easiest access to the standard setters June Dr. VIDYA KUMAR

Arguments against Standards 3. Overload There are too many/too few standards. Standards are too detailed/not sufficiently detailed. Standards are general-purpose and fail to recognise the differences between large and small entities and interim and final accounts. June Dr. VIDYA KUMAR

Mandatory Regulations Mandatory regulations take the form of Statements of Standard Accounting Practice (SSAPs) and Financial Reporting Standards (FRSs) issued by the Accounting Standards Board. June Dr. VIDYA KUMAR

Standard setting and enforcement in the UK under Financial Reporting Council (FRC) The FRC was set up in 1990 as an independent regulator to set and enforce accounting standards. It operated through the Accounting Standards Board (ASB) and the Financial Reporting Review Panel (FRRP) to encourage high-quality financial reporting. June Dr. VIDYA KUMAR

Accounting Standards Board (ASB) The ASB issues mandatory standards (SSAPs and FRSs) confirms that SORPs are not in conflict with its mandatory standards and issues statements of best practice (such as those on OFR and Interim Reports). June Dr. VIDYA KUMAR

Statements of Recommended Practice ( SORPs) SORPs are produced for specialised industries or sectors to supplement accounting standards and other regulatory requirements June Dr. VIDYA KUMAR

The Financial Reporting Review Panel (FRRP) The FRRP has a policing role with responsibility for overseeing some 2,500 companies. It is independent of the ASB and its members include accountants, bankers and lawyers. Its role is to review material departures from accounting standards and where financial statements are defective June Dr. VIDYA KUMAR

Standard setting and enforcement in the US Reporting standards are set by the Financial Accounting Standards Board (FASB) and enforced by the Securities Exchange Commission(SEC) Since 2002 it has also been necessary to satisfy the requirements of The Sarbanes-Oxley Act (SOX). June Dr. VIDYA KUMAR

The Securities and Exchange Commission (SEC) The Securities and Exchange Commission (SEC) is responsible for requiring the publication of financial information for the benefit of shareholders June Dr. VIDYA KUMAR

SOX The SOX objectives are to reduce the risk of fraud. June Dr. VIDYA KUMAR

Reasons for differences in Financial Reporting The character of the national legal system The way in which industry is financed The relationship of the tax and reporting systems The influence and status of the accounting profession June Dr. VIDYA KUMAR

Reasons for differences in Financial Reporting The extent to which accounting theory is developed Accidents of history Language June Dr. VIDYA KUMAR

Efforts to standardize financial reporting Both the European Union (EU) and the International Accounting Standards Board (IASB) have been active in seeking to standardize financial reports. June Dr. VIDYA KUMAR

Advantages of global standards Reduces the cost of reporting under different standards Makes it easier to raise cross border finance Possible for investors to compare performances Leads to a decrease in firm’s cost of capital Leads to increase in share prices June Dr. VIDYA KUMAR

Is there a need for standards and effective enforcement in the 21 st century? The need for standards and effective enforcement remains. June Dr. VIDYA KUMAR

Q & A June Dr. VIDYA KUMAR