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

2. Why do we need financial reporting standards? Standards are needed because accounting numbers are important when defining contractual entitlements June 20132 Dr. VIDYA KUMAR

3. 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 20133 Dr. VIDYA KUMAR

4. 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 20134 Dr. VIDYA KUMAR

5. 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 20135 Dr. VIDYA KUMAR

6. 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 20136 Dr. VIDYA KUMAR

7. 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 20137 Dr. VIDYA KUMAR

8. 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 20138 Dr. VIDYA KUMAR

9. 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 20139 Dr. VIDYA KUMAR

10. 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 201310 Dr. VIDYA KUMAR

11. 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 201311 Dr. VIDYA KUMAR

12. 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 201312 Dr. VIDYA KUMAR

13. 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 201313 Dr. VIDYA KUMAR

14. 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 201314 Dr. VIDYA KUMAR

15. Statements of Recommended Practice ( SORPs) SORPs are produced for specialised industries or sectors to supplement accounting standards and other regulatory requirements June 201315 Dr. VIDYA KUMAR

16. 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 201316 Dr. VIDYA KUMAR

17. 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 201317 Dr. VIDYA KUMAR

18. 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 201318 Dr. VIDYA KUMAR

19. SOX The SOX objectives are to reduce the risk of fraud. June 201319 Dr. VIDYA KUMAR

20. 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 201320 Dr. VIDYA KUMAR

21. Reasons for differences in Financial Reporting The extent to which accounting theory is developed Accidents of history Language June 201321 Dr. VIDYA KUMAR

22. 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 201322 Dr. VIDYA KUMAR

23. 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 201323 Dr. VIDYA KUMAR

24. Is there a need for standards and effective enforcement in the 21 st century? The need for standards and effective enforcement remains. June 201324 Dr. VIDYA KUMAR

25. Q & A June 201325 Dr. VIDYA KUMAR