Regulatory framework for company financial statements Flashcards
Regulation of company financial statements
Why is this needed? (3)
- Separation of contral from ownership as directors need to account for their stewardship over the year
- There’s limital liability of shareholders so creditors need extra protection
- Social justice as large companies hold extensive economic power which can affect a lot of people if they fail .
Where do these rules and regulations come from?
Legislation – The Companies Act 2006
Rules:
- Accounting Profession – Accounting Standards
- Stock exchange listing rules
Legislation – Companies Act 2006
What must all UK limited liability companies do?
What must their statements do?
What must they be prepared in accordance with?
Where must these statements be approved?
- All UK limited liability companies must prepare and publish financial statements annually (audited if large company)
- The statements must give a true and fair view of the performance and position of the company
- They must be prepared in accordance with either UK GAAP (Generally Accepted Accounting Practice) or IFRS Standards
- These statements must be approved by the shareholders at a general meeting and then filed with Registrar of Companies where open to inspection for a nominal fee.
Accounting Standards
In business…?
When is professional judgement required?
Historically?
As business and investment became…?
- In business, different people may interpret the same situation in a different way.
- Professional judgement is often required creating subjectivity and accounting standards were developed to try to limit this to allow comparability between different organisations
- Historically many countries developed their own accounting standards
- As business and investment became increasingly global, clear need developed for harmonisation of standards
Accounting Standards in the UK and Ireland
Difference between listed and unlisted companies?
- Listed companies are required to apply IFRS Standards
- Unlisted can choose either IFRS or UK GAAP
UK GAAP (generally accepted accounting practice)
Who mostly abides by this?
Differences (4)
It’s a ….?
Some differences between UK GAAP and IFRS in terms of…?
- Financial statements are prepared under UK GAAP for most private unlisted companies
- UK GAAP: The rules, from whatever source, that govern accounting and financial reporting in the UK.
- Company law (CA2006) - UK accounting standards (FRS100-105) set by Financial Reporting Council (FRC) - Effects of stock exchange listing requirements - Effects of IFRS standards
- It’s a dynamic changing concept, not always easy to define
- Some differences between UK GAAP and IFRS in terms of treatment, presentation and terminology
Harmonization of global accounting standards
Generally jurisdictions around the world are moving towards harmonizing global standards
Why? (4)
Any drawbacks to harmonization? (4)
Any drawbacks to financial statements? (3)
Generally jurisdictions around the world are moving towards harmonizing global standards
Why?
- Allows comparability, easier fund raising, reduces costs, provides legitimacy
Any drawbacks to harmonization?
- Threat to national identity & culture, lack of flexibility, costly to change, still need local standards as inappropriate for SME
Any drawbacks to financial statements?
- Too general, lack non financial information, largely historical
Elements of financial statements (Define)
- Asset
- Liability
- Equity
- Income
- Expense
Asset
- Present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits
Liability
- A present obligation of an entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that an entity has no practical ability to avoid.
Equity
- Residual interests in the assets of an entity after deducting all its liabilities
Income
- Increases in assets or decreases in liabilities that result in increases in equity other than those relating to contributions from holders of equity claims
Expense
- Decreases in assets or increases in liabilities that result in decreases in equity other than those relating to distributions to holders of equity claims
Corporate Social Responsibility (CSR)
What does CSR describe?
What can it include?
What does it help?
What does it have accusations of?
What are more favoured now?
- CSR describes how entities adopt/integrate social and environmental concerns in their business operations to benefit stakeholders
- Could include policies on local communities, employees, customers, the environment, general ethical code
- Help recruitment and retention of employees, good risk management, build brand and reputation, may reduce costs
- Accusations of greenwashing and just a marketing ploy
- Sustainability and ESG (environmental, social and governance) more favoured now
Sustainability standards
- In 2021 the International Sustainability Standards Board (ISSB) was formed by the IFRS Foundation
What was the aim?
Why?
How?
In 2021 the International Sustainability Standards Board (ISSB) was formed by the IFRS Foundation
Aim?
- To provide users with information to understand the entity’s environmental, social and governance risks and responses to them
Why?
- Users increasingly interested in sustainability issues
How?
- Develop IFRS Sustainability Standards to provide consistency in disclosure
Initial two standards issued in 2023 (IFRS S1 and IFRS S2) designed to set a global baseline about sustainability related risks and opportunities useful for investor decision making – effective reporting periods beginning from 1 January 2024
Sustainability standards
IFRS S1 – General requirements for disclosure of sustainability related financial information
- Disclosure requirements to enable companies to _______________ to __________ about sustainability related risks and opportunities over the short, medium and long term
- How it manages its sustainability related risks and opportunities
IFRS S2 – Climate related disclosures
- Specific climate related disclosures designed to be used with IFRS __
IFRS S1 – General requirements for disclosure of sustainability related financial information
- Disclosure requirements to enable companies to communicate to investors about sustainability related risks and opportunities over the short, medium and long term
- How it manages its sustainability related risks and opportunities
IFRS S2 – Climate related disclosures
- Specific climate related disclosures designed to be used with IFRS S1
Ethical considerations
What and who was it issued by?
Who does is apply to?
Based on…?
Members must?(3)
- Code of Ethics issued by International Federation of Accountants (IFAC) in 2005
- Applies to all members of professional accountancy bodies
- Based on 5 fundamental principles, the spirit of which must be complied with at all times
Members must- Identify threats - Evaluate the significance of a threat - Implement safeguards to eliminate / reduce threats
Code of Ethics (3/5,5,2)
Fundamental Principles
- Integrity
- Objectivity
- Professional competence and due care
- Professional behaviour
- Confidentiality
Threats
- Self-interest
- Self-review
- Advocacy
- Familiarity
- Intimidation
Safeguards
- Profession, legislation or regulation
- Work environment
Function of the Annual Report (3)
- Fulfil legal obligations to shareholders
- Allows the directors to explain what has happened during the year and also provide an outline of the strategy going forwards
- Used to help persuade
Typical contents of Annual Reports (3/6,4,4)
Strategic Information
- Overall review
- Strategy
- Chairman’s report
- Risk analysis
- Key performance indicators
- CSR reports
Directors Information
- Directors report
- Governance report
- Audit committee
- Directors remuneration and responsibilities
Financial Information
- Auditors report
- Financial statements
- Notes to the accounts
- 5/10 year summary
