Lecture 2 - Theoretical Aspects Of Accounting Regulations

Question 1

What is ‘Agency theory’? And how is it solved?

Answer 1

Agency theory is when the objectives of owners and managers don’t correlate.
Managers work towards their own goal, not mirroring the wishes of the owners.

Solution:
Performance related pay
Goal congruence

Question 2

Four arguments against the need for regulation/too much regulation.

Answer 2

1) Voluntary disclosure (to show investors why they should invest)
2) Cost to businesses
3) Politically charged regulations
4) Cost to enforce regulations

Question 3

Two problems of not having regulations

Answer 3

1) Public interest

2) Free-riders

Question 4

Three advantages of regulation

Answer 4

1) Simple and effective way of making information available to the public.
2) Verification stage
3) Easy comparability between firms

Question 5

Two arguments against regulation

Answer 5

1) Standard overload

2) Regulatory capture

Question 6

What two ‘forms’ can regulations take?

Answer 6

• Legal requirements

- Accounting standards

Question 7

What legal acts are in place now within the UK?

Answer 7

EU 2nd and 4th directive and 7th directive (Statutory backing for accounting standards)
Companies act 2006

Question 8

What is the “True and Fair View’? And What implementations does it have?

Answer 8

Information provided is true and fair.
The ‘True and Fair View’ overrides any specific requirements of accounting standards.
In the EU 7th and 8th directives, a “True and Fair View” overrides the International accounting standards (IAS).

Question 9

Who is responsible for setting accounting standards in the UK?

Answer 9

Financial Reporting Council (FRC)

Question 10

What two committees make up the Financial Reporting Council? And What councils fall under these committees?

Answer 10

Codes and standards committee
- Audit and assurance Council
- Corporate reporting council
- Actuarial council
Conduct Committee
- Corporate reporting review
- Audit quality review
- Case management

Question 11

What are the Three stages in the Financial Reporting Council standard setting process?

Answer 11

The council creates a Statement of principle.

1) Discussion paper (DP)
2) Exposure Draft (FRED)
3) Accounting standards (FRF)

Question 12

Name three influences on UK accounting standards

Answer 12

IASB
FRC
Government (company law)
EU
FASB (American FRC)

Question 13

Name some reasons for the international differences in financial reporting

Answer 13

• National legal system’
• National GAAP
• Influence/status of accounting profession
• Accidents of history
• Language

Question 14

What is the IFRS?

Answer 14

International Financial Reporting Standards

Question 15

What are the four steps to developing IFRS standards?

Answer 15

1) Agenda consultation stage (Request information)
2) Research programme stage
3) Standards programme (Exposure draft, Final IFRS)
4) Implementation

Question 16

In what year was the IASB adopted by the EU?

Answer 16

2002, all EU listed companies had to prepare consolidated accounts in accordance with the IFRS and IAS

Question 17

What are the concerns regarding the adoption of IASB by the EU?

Answer 17

• Enforcement and effective monitoring
• Translation between languages
• What are the future roles of standard setters (FRC)

Question 18

Where does the IASB gain its power from?

Answer 18

It relies on the acceptance of nations.
Multinational company directors want a single set of accounting standards
Emerging countries can simply adopt these standards