Financial Statements 2 Lecture 1 1

The module Please look carefully at the module guide under Module Information on the module website You should have passed Accounting Techniques or Accounting Practice at Level One and have studied Financial Statements 1 in Semester A 40% coursework/ 60% exam. Must pass both elements Coursework consists of drafts due in February and a final essay due in March Two hour exam in June Textbook – use the same book as for Financial Statements 1 2

Teaching and learning Weekly two hour lecture – with preparatory work Weekly one hour feedback tutorial – with preparatory work. It is vital that you prepare for classes as this is the main part of the feedback you get during the semester It is your responsibility to do enough private study to ensure you have understood the material. Staff consultation hours for additional support 3

Topics to be covered Regulatory framework for accounting standards of limited companies. International harmonisation. Understanding of the nature and content of the IASB conceptual framework Accounting standards in detail for non-current assets, leasing and liabilities Preparation of consolidated accounts 4

Coursework You are required to write three short essays, answering the questions below. Each question relates to the material set for the relevant tutorial. You must research and draft your ideas and submit a draft by the time indicated for each essay. These will not be marked, but some generic feedback will be given. Each of the three drafts submitted will be awarded 10 marks out of the total of 100. You must also bring them to the relevant tutorial. Your contribution in the class will enable you to get some feedback on your thinking and to learn from the views of other students. You can then improve your draft before the final submission. You should write about 600 words on each of the first two questions, with an overall total of 1200 words (+/- 10%). Start each question on a new page and give a separate bibliography for each question. Bibliography is not part of the word count. The final submission carries 70 marks out of 100. The final work must be submitted as a single Word document in hard copy on the last lecture of tutorial week #12. 5

How is accounting regulated? Company Law – Companies Act 2006 – gives outline rules European Law UK accounting standards – non-listed companies International accounting standards - all EU listed companies and companies in a number of other countries – gives detailed rules on recognition, measurement and disclosure Financial Services Authority – listed companies – disclosure of price-sensitive information – compliance with the Combined Code 6

Purposes of financial reporting – stewardship Companies are separate legal persons owned by shareholders and managed by directors Need to ensure that the directors work in the best interests of the shareholders not themselves. This is the stewardship function Financial reporting is part of this corporate governance process. One purpose of regulation is to ensure the information provided by directors to shareholders fairly portrays how well they have managed the business 7

Purposes of financial reporting – information for decisions The markets require that financial reports provide reliable and relevant information to help users such as shareholders and lenders to make decisions. They also need to be able to compare information about different companies Investors may operate across national boundaries so internationally standardised accounting is useful 8

Accounting standards in the UK Up until the 1970’s there were no accounting standards. The only control on the financial statements came from some limited rules in statute Abuse of this position led to a crisis of confidence in financial accounting Therefore in 1970, the UK’s 6 main accounting bodies set up the Accounting Standards Committee to issue standards known as SSAPs (Statements of Standard Accounting Practice) Collectively they were Generally Accepted Accounting Practice (GAAP) 9

Accounting standards in the UK By the late 1980s many people were questioning the quality of the work of the ASC In the early 1990s the Financial Reporting Council was set up to take over overall responsibility for financial reporting They set up the Accounting Standards Board to replace the ASC 10

The work of the ASB They have issued many new standards, known as FRSs (Financial Reporting Standards) Some have replaced SSAPs, others have covered areas not covered by SSAPs They have based their work on a conceptual framework known as the Statement of Principles They are fully committed to harmonising UK GAAP with International GAAP 11

International GAAP The International Accounting Standards Committee was set up in 1973 It issued International Accounting Standards (IASs) They were not very prescriptive as they were based on compromises since countries had different views on how the standards should operate No coherent logical structure to their work 12

International GAAP In 2001 the International Accounting Standards Board (IASB) was set up to take over from the IASC It adopted the existing IASs and later produced International Financial Reporting Standards (IFRSs) These were based on a conceptual framework 13

The current position in the UK Following a European Union Directive, the consolidated accounts of all quoted companies in the EU have to be produced in line with international accounting standards The UK government has said that other companies may follow international standards or UK standards. Most have stuck to UK standards 14

Regulation in the USA Federal system – no overall accounting law, each state has its own laws Some law relating to share dealing Securities and Exchange Commission (SEC) regulates stock exchanges and requires listed companies to disclose some information. Financial Accounting Standards Board issues standards applicable to listed companies and has a conceptual framework 15

The USA and International Standards Until 2008 foreign companies wanting a US listing had to prepare a detailed statement showing their accounting figures in compliance with US standards Now such companies may produce accounts using international standards. US companies may not use international standards There is a programme of harmonisation between the US and international standards, applying to the conceptual framework and to particular standards. 16

IASCF source IAS plus IFRS in your pocket

Monitoring Board Link between the capital markets authorities and the IASCF Purpose is to enable the capital markets authorities to be effective in investor protection, market integrity and raising capital. They are involved in appointing and advising the trustees. Goal is to improve public accountability of the IASCF 18

IASC Foundation Responsible for the financial and organisational aspects of setting and monitoring standards Oversees the work of the IASB but does not get involved in the detail of standard setting Reposonsible for overall policy issues 19

IASB The aims of the IASB are: to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial reporting to help participants in the world's capital markets and other users make economic decisions to promote the use and rigorous application of those standards to bring about convergence of national accounting standards and International Financial Reporting Standards 20