Lecture 3

Question 1

IAS Regulation

Answer 1

Overrides national company law.
• Requires all listed groups to prepare financial statements using IFRS (International Financial Reporting Standards)

Question 2

UK Company Law - Companies Act 2006

Answer 2

Requires a true and fair view in financial statements.

Accounting rules apply to companies not following AS Regulation.
• Contains other rules for management and audit of a company.

Question 3

UK Company law

Answer 3

Financial Statements:
Specifies formats for the statement of financial position and profit and loss account.
Requires adherence to true and fair view principles.
Valuation:
Outlines methods for the valuation of assets and liabilities.
Emphasizes accuracy and transparency in reporting.
Rules apply to all companies not following IAS regulation.

Question 4

Financial Reporting Council (FRC)

Answer 4

Role: Independent regulator in the UK.
Responsibility: Promotes high-quality Corporate Governance (CG) and financial reporting.
Restructure: Underwent a major restructure in July 2012.
Authorization: Authorized by the UK government.
Functions:
Monitors and enforces accounting and auditing standards.
Provides oversight for professional bodies and firms.
Promotion of CG:
Actively promotes Corporate Governance practices.
Structure:
Operates through a structure of committees and councils (Weetman p.91-93).

Question 5

Accounting role in FRC

Answer 5

Primary Function: Issues UK Accounting Standards.
International Collaboration:
Collaborates with accounting standard setters from other countries.
Engages with the International Accounting Standards Board (IASB).
Influence on International Standards:
Actively seeks to influence the development of international accounting standards.
Harmonization Efforts:
Ensures that UK accounting standards align with international developments.
Balances the development of UK standards with due regard to international standards.
Advisory Role:
Advises the FRC in setting accounting standards.
Responsible for maintaining the UK’s input in the international standard-setting process.

Question 6

Corporate Governance

Answer 6

London Stock Exchange (LSE):
Sets the Code on Corporate Governance for company directors.
Responsibility:
The Financial Reporting Council (FRC) is responsible for maintaining the UK Corporate Governance Code.
Corporate Governance (CG):
Defines CG as the way a company is managed by directors for the benefit of shareholders and the wider capital market.
Code of Good Practice:
Recommends a ‘code of good practice’ for companies.
Principle of ‘Comply or Explain’:
Emphasizes a principle where companies either comply with the code or explain any deviations.

Question 7

Financial Conduct Authority (FCA)

Answer 7

Role: Single market regulator.
Market Regulation:
Regulates the market for shares.
Accounting Rules:
Sets accounting rules for fair market practices.
Disclosure and Transparency:
Ensures compliance with Disclosure and Transparency requirements.
Listing Rules:
Ensures compliance with Listing Rules.
Three Listing Categories:
Premium Listing (meets high standards of regulation).
Standard Listing (for overseas companies).
AIM Listing (for new and smaller-sized companies).

Question 8

Auditors

Answer 8

Reporting:
Report to shareholders.
Opinion:
Provide an opinion on a true and fair view derived from financial statements.
Scope:
Do not cover the entire annual report.
Audit Aim:
Aim to ‘give reasonable assurance that the financial statements are free from material misstatement’.
Standards:
Follow auditing standards, specifically International Standards for Auditing (ISAs).

Question 9

Tax System for Companies

Answer 9

Tax system
Companies pay corporation tax
Taxable profit is based on accounting profit but with additional rules.

Question 10

Is regulation necessary?
AGAINST

Answer 10

Belief that market forces naturally ensure information flow.
Lenders are motivated to seek good information for reassurance.
Concerns that the costs of regulation may exceed the benefits.

Question 11

Is regulation necessary?
FOR

Answer 11

Supply and demand do not meet unless a regulator intervenes.
Stakeholders may lose confidence or may need protection.
Scandals result where there is inadequate regulation in the business environment

Question 12

Trading and manufacturing businesses

Answer 12

Trading: Business buying goods for resale. Will hold inventories (stocks of goods).
Manufacturing:
Definition: Converts raw materials to finished products.
Inventories: Holds stocks of raw materials, work-in-progress, and finished goods.

Question 13

primary financial statements

Answer 13

primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity

Question 14

Notes to financial statements

Answer 14

Required by Companies
Act 2006 and accounting
standaras.
• Content of notes
• Accounting policies.
• Detailed analysis of some numbers.
• Information about
uncertainties

Question 15

Narrative Reports

Answer 15

Chairman’s Statement:
Overview and insights from the Chairman.
Chief Executive’s Report:
Insights and perspectives from the Chief Executive.
Business Model:
Explanation of the company’s business model.
Key Performance Indicators (KPIs):
Metrics used to evaluate the company’s performance.
Risks and Uncertainties:
Identification and assessment of potential risks and uncertainties.

Question 16

Statement of Financial Position, Income Statement, Statement of Changes in Equity:

Answer 16

IFRS Format:
No standard format.
Basic lists of items specified, expect variation in presentation.
Non-IFRS Companies:
Formats based on Fourth Directive and included in Companies Act 2006.

Question 17

Statement of cash flowsg

Answer 17

Format indicated in IAS 7
For non-IFRS companies the format of the statement of cash flows is covered by an ASB standard FRS1.

Question 18

Group structure of companies

Answer 18

Most listed companies are Groups.
Made up of a parent company who controls a number of subsidiary companies.
Control normally achieved by owning shares that hold majority voting rights in annual general meeting.
A parent company might also hold shares in companies that give less than control but nevertheless give significant influence. Called associated companies.

Question 19

Consolidated Financial Statements

Answer 19

Concept:
The Group of companies (Parent, subsidiaries, and associated) is treated as a single economic entity for accounting purposes.
Requirement:
The Parent must produce consolidated financial statements reflecting the combined results of the entire group of companies.
Example:

Question 20

Consolidated Financial Statements

Answer 20

Two columns: current and previous year
Notes to accounts for more detail
Safe and Sure illustration - compare with formats, see that order of items is consistent but subtotals are at discretion of the company’s directors

Question 21

Published income statement of Safe and Sure plc

Answer 21

More informative than Companies Act format:
Four measures of Profit
“Gross”, “from operations”, “before tax”, ‘for the period’
Continuing operations - activities that will continue into the next trading period
Discontinued operations- activity that has been stopped

Aim is to assist estimates of future profits.

Question 22

Cash flow statement (CFS)

Answer 22

Format indicated in IAS 7
Safe and Sure illustration, [Section 7.6 p 187]
CFS of Safe and Sure follows the pattern in Chapters 3, 5 & 6
Starts of with cash flows from Operating Activities
Estimated by adjusting operating profit
(Reconciliation of operating profit and cash flow from operating activities)
(See Safe and Sure note 23 and discussion section 7.6.3)