Week 3: Regulatory Framework

Question 1

What are Accounting Standards? (3)

Answer 1

• Authoritative standards for financial reporting
• Primary source of generally accepted accounting principles
• Measurement, presentation, disclosure of transactions

Question 2

Benefits of Accounting Standards (3)

Answer 2

• Credibility: Financial results not perceived as a product of those producing them
• Discipline: Financial results are not a product of the picture companies want to present
• Comparability: Financial results can be compared over time

Question 3

Down-side Of Accounting Standards? (3)

Answer 3

1) Consensus Seeking: Length of time to develop new standards

2) Overload:
- Different Standards setters with different requirements
- Volume of Standards
- Level of detail

3) Potential Economic Consequences

Question 4

Why differences in Financial Reporting across nations? (7)

Answer 4

1) Characteristics of national legal systems
2) Different ways in which industry financed
3) Relationship between tax and reporting systems
4) Influence and status of the Accounting Profession
5) Development of Accounting Theory
6) Accidents of History
7) Language

Question 5

Advantages of Global Standards For Publicly Accountable Entities (4)

Answer 5

1) Reduces cost of reporting under different standards
2) Easier to raise cross border finance
3) Decrease in cost of capital - increase in share price
4) Enables investors to compare performance

Question 6

Disadvantages of Global Standards for publicly Accountable Entities (4)

Answer 6

1) Complexity
2) Impact on net profit and equity
3) Volatility in the accounts
4) Lack of familiarity

Question 7

What is a Conceptual Framework?

Answer 7

1) A statement of principles - provides guidance - develop new accounting standards
2) Important role in the standard setting process
3) A reference document - assist those involved in financial reporting (Preparers, auditors and users, as well as standard setters)

Question 8

Benefits of Conceptual Framework (5)

Answer 8

1) Principles vs Rules
2) Consistent theoretical basis
3) Avoids contradictions in Standards
4) May limit lobbying
5) May limit creative accounting

Question 9

Qualitative Characteristics of useful financial information (3)

Answer 9

1) Relevance - Predictive, confirmatory, materiality
2) Faithful Representation - Neutral, freedom from error
3) Enhancing qualities - Comparability, verifiability, timeliness, understandability