Regulatory and Conceptual Framework Flashcards
Why is external reporting regulated?
Accounting numbers are externally reported to decision-makers, accounting is not an exact science - involves subjective judgement, and accounting scandals highlight that financial results are a product of different judgements
How is external reporting regulated?
Preparers follow requirements of accounting standards: Companies Act (true and fair view requirement), Section 393 of Companies Act 2006, and UK/IFRS (fair representation
What exactly are accounting standards?
Authoritative standards for financial reporting, primary source of GAAP, and specifies how transactions and other events are to be recognised, measured, presented and disclosed in financial statements
What are the benefits of accounting standards?
Credibility, discipline, and comparability
Why should accounting standards have credibility?
So financial results are not perceived as a product of those producing them
Why should accounting standards have discipline?
So financial results are not a product of the picture companies want to present
Why should accounting standards have comparability?
So financial results can be compared over time and across companies
What are the downsides of accounting standards?
Consensus-seeking, overload (clutter), and potential economic consequences
Who are the standard setters in the UK?
Financial Reporting Council
When were the FRC set up?
In 1990 as an independent regulator to set and enforce accounting standards
What is the structure of the FRC?
3 governance committees, 2 business committees, and 3 advisory committees
What are the 3 governance committees of the FRC?
Audit, Nominations, and Remuneration
What are the 2 business committees of the FRC?
Codes & Standards, and Conduct
What are the 3 advisory committees of the FRC?
Corporate Reporting, Audit & Assurance, and Actuarial
What do the FRC do?
Issues accounting standards, issues guidance statements, and reviews SORPs
What is the standard setting process?
- Decision to include topic in work program and assign a project director
- Undertake research & identify expertise –create panel of consultants
- Publish a discussion paper
- Consultation period
- Publish FRED (Financial Reporting Exposure Draft)
- Publish Financial Reporting Standard
Who are the standard setters in the US?
Financial Accounting Standards Board
Why are there differences in financial reporting across nations?
Characteristics of national legal systems, different ways in which industry is financed, relationship between tax and reporting systems, influence and status of the accounting profession, development of accounting theory, accidents of history, and language
What is the foundation of the IFRS?
A 3 tear structure: IFRS Foundation Monitoring Board (Public Accountability), IFRS Foundation Trustees (Governance and Oversight), and IFRS Foundation - IASB & IFRS Interpretations Committee (independent standard setting and related activities)
What are the advantages of global standards for publicly accountable entities?
It reduces cost of reporting under different standards, easier to raise cross-border finance, decrease in cost of capital - increase in share price, and enables investors to compare performance
What are the disadvantages of global standards for publicly accountable entities?
Complexity, impact on net profit and equity, volatility in the accounts, and lack of familiarity
What is included in the new UK GAAP?
FRS 100 (Application of Financial Reporting Requirements), FRS 101 (Reduced Disclosure Framework), and FRS 102 (Financial Reporting Standard applicable in the UK and Ireland)
Which accounting standards will UK companies use?
UK listed companies continue to produce consolidated (group) accounts in accordance with IAS, individual listed companies can use FRS 102 or adopt FRS 101, unlisted companies use current UK standards, small/medium sized companies use FRS 102, and micro entities use FRS 105
Why do we need accounting standards?
Needed for profession itself (reactive process), existing best practice, developed by individual countries (variety of standards with national enforcement), and growth of global economy (need for global standards)
