Regulatory Environment Flashcards
What is the need for regulation?
Regulatory Framework means theregulations, decisions, directives, regulatory policies, guidelines, recommendations and procedures made by an Authority that guide how things are done.
Required for information reliability and consistent interpretation by different stakeholders.
Promote consistency in preparation of financial info
To ensure minimum information adequate for decision making is provided.
Accounting standards do not give complete regulation. Legal and market regulations also required.
What are the elements of regulatory framework?
Local law
Local accounting standards
International accounting standards
Conceptual frameworks e.g. Statement of Principles in UK
International body requirements e.g. EU
Regulatory framework informs GAAP.
Country specific Generally accepted accounting principles e.g.UK GAAP, US GAAP
GAAP defines conventions, rules and procedures necessary for accepted accounting practice at a particular time
GAAP includes local legislation, accounting standards and local regulation
National company law
EU directives or other trading body rules eg FCA
Security exchange rules
Why do we need financial reporting standards?
Provides clarity and consistency in treatment of transactions
Reduces risk of adoption of measures that increase PBT but which are not in the best interest of shareholders
Eg Deferring expenditure/amortisation
limits opportunities for manipulation of figures
Measurement and presentation of accounting numbers in financial statements less subjective
What is IFRS and when did it change from IAS?
International financial reporting standards since 2001
What does IASB’s conceptual framework deal with?
the objectives and users offinancial statements,
the characteristics that make accounting information useful,
the basic elements offinancial statements(e.g., assets, liabilities, equity, income, and expenses)
What is the importance of conceptual framework?
It is a practical tool that assists:
the IASB to develop Standards
preparers to develop consistent accounting policies
others to understand and interpret IFRS
It underpins the decisions made by the IASB when setting Standards
It will affect future Standards developed by the IASB
It addresses fundamental issues:
What is the objective of financial reporting?
What makes financial information useful?
What are assets, liabilities, equity, income and expenses, when should they be recognised and how should they be measured, presented and disclosed?
What are the objectives of financial reporting?
to provide information about the results of operations,financialposition, and cash flows of an organisation.
used by the readers offinancial statementsto make decisions regarding the allocation of resources.
What are the two fundamental characteristics of qualitative financial information?
Relevance – information is relevant if it is capable of making a difference to the decisions made by users.
Faithful representation – information must be complete, neutral and free from error
What are the enhancing characteristics of qualitative financial information?
Comparability
Verifiability
Timeliness
Understandability
How are accounting standards set and used?
two approaches
Principle-based approach
based on the conceptual framework (eg. IASB framework)
Accounting standards set based on the framework
They are principles that companies should apply.
The IFRS states that a company’s financial statements must be understandable, readable, comparable, and relevant to current financial transactions.
Rules-based approach
Accounting standards are rules that companies must follow.
What is the harmonisation of accounting standards?
Reduces cost of reporting under different standards
Makes it easier to raise cross-border finance
Leads to a decrease in firms’ costs of capital with a corresponding increase in share prices
Enables investors to compare performance
What are the three arguments in support of standards?
Credibility
Discipline
Comparability
What are the arguments against standards?
Overload:
Too many standard setters with differing requirements - FRC (UK), FASB(US), EU
Standards too detailed if rule-based, not sufficiently detailed if principle-based
Too many notes to financial statements
