1 Flashcards
What is accountability
A duty/responsibility that one individual, group or organisation owes to another
How can managers and entities be held accountable for their actions
Financial statements
Who can be held accountable
Companies and their managers/directors
To who are companies accountable
Those with power over the company such as providers of capital and the state
Who are affected by the company
Stakeholders
How can you ensure information is provided
Voluntary action by employees, develop best practice and develop regulations
Who sets regulations
Government through laws
Standard setting bodies
Industry bodies
Where can accounting rules come from
National legislators or standard setters
Transnational legislators
International standard setters
What are the different forms of regulation
General principle
Detailed rules
What is general principle
Gives high level guidance on how to account for various situations and transactions but doesn’t go into detail meaning those preparing financial statements need to use their judgement in applying the principles leading to lack of consistency in how similar situations are dealt with
What is detailed rules
Gives specific guidance on how to deal with situations and transactions. Business and rules are complex (IFRS) so may not be possible to anticipate every situation to which a rule should apply
Why are accounting regulations needed
Ensures minimum levels of disclosure
Enhance comparability
What does the agency theory regard a company as
Nexus of contracts between parties
Equity investors
Lenders
Managers
What does it mean if many contacts are based on accounting numbers
Managers pay may be profit related bonus
Lenders look at ability for companies to borrow (gearing)
Dividends tax
What is the link between Agency theory and accounting rules
Managers are responsible for preparing financial statements so risk they’ll choose accounting methods to benefit managers over shareholders. Reporting higher profits will lead to higher bonus. Reporting lower gearing will allow company to borrow more. Shareholders and lenders want to limit managers opportunities to prepare financial statements that suit managers interest and can be achieved by specifying how accounting numbers are measured in contracts.
What are the Economic motivations for regulation
A common and recognised set of accounting rules/principles is a signal of quality and better comparability leading to better investment decisions and lowers cost of capital.
What are the Accounting issues covered by EU directives
4th and 7th directive of company law
What is 4th directive
Single companies
What is 7th directive
Groups
Why would there be a change in accounting regulations
Response to corporate scandals, misleading, fraudulent information
What is the aim of IASB
Develop single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles
What does the aim of IASB imply the need of
Conceptual framework
Rigorous process of developing standards
Acceptance of standard by national regulators
What is the conceptual framework
A constitution, coherent system of inter-related objectives and fundamentals that can lead to consistent standards and prescribes the nature, function and limits of financial accounting and financial statements
What does the conceptual framework tend to apply
General purpose of financial statements
Prepared and presented at least annually and directed towards a wide range of users
List the Purpose of IASB Framework
Assist board
Auditors can use it for areas not covered by standards
Framework is not a standard - may conflict
What are possible objectives of accounting
Stewardship/accountability
Help owners manage
Protect creditors
Calculate taxable income
Decision making
What does IASB framework focus on meeting the needs of
All users but prioritise investors as they believe needs of investors meets most of others
What information is likely to be useful from IASB framework
economic decisions require information on entity’s ability to generate cash looks at financial position and performance and cash in and out flows
What are the Qualitative characteristics of IASB framework
Relevance
Faithful representation
What are the enhancing characteristics of the IASB framework
Comparability
Verifiability
Timeliness
Understandability
What are the criticisms of the conceptual framework
Too focused on investment decisions and does not recognise seperate need to provide information for assessing managers stewardship of resources
Deleted concept of prudence
Guidance on measurement was weak and confusing
What is stewardship
Responsibility of managers to use resources entrusted to them in interest of stakeholders to whom they are responsible
