Financial Statements 2

Lecture 1

Topics to be covered• Regulatory framework for accounting standards of

limited companies. International harmonisation.

• Understanding of the nature and content of the IASB conceptual framework

• Accounting standards in detail for non-current assets, leasing and liabilities

• Preparation of consolidated accounts

How is accounting regulated?

• Company Law – Companies Act 2006 – gives outline rules• European Law• UK accounting standards – non-listed companies• International accounting standards - all EU listed companies

and companies in a number of other countries – gives detailed rules on recognition, measurement and disclosure

• Financial Services Authority – listed companies – disclosure of price-sensitive information – compliance with the Combined Code

Purposes of financial reporting – stewardship

• Companies are separate legal persons owned by shareholders and managed by directors

• Need to ensure that the directors work in the best interests of the shareholders not themselves. This is the stewardship function

• Financial reporting is part of this corporate governance process.

• One purpose of regulation is to ensure the information provided by directors to shareholders fairly portrays how well they have managed the business

Purposes of financial reporting – information for decisions

• The markets require that financial reports provide reliable and relevant information to help users such as shareholders and lenders to make decisions.

• They also need to be able to compare information about different companies

• Investors may operate across national boundaries so internationally standardised accounting is useful

Accounting standards in the UK

• Up until the 1970’s there were no accounting standards. The only control on the financial statements came from some limited rules in statute

• Abuse of this position led to a crisis of confidence in financial accounting

• Therefore in 1970, the UK’s 6 main accounting bodies set up the Accounting Standards Committee to issue standards known as SSAPs (Statements of Standard Accounting Practice)

• Collectively they were Generally Accepted Accounting Practice (GAAP)

Accounting standards in the UK

• By the late 1980s many people were questioning the quality of the work of the ASC

• In the early 1990s the Financial Reporting Council was set up to take over overall responsibility for financial reporting

• They set up the Accounting Standards Board to replace the ASC

The work of the ASB

• They have issued many new standards, known as FRSs (Financial Reporting Standards)

• Some have replaced SSAPs, others have covered areas not covered by SSAPs

• They have based their work on a conceptual framework known as the Statement of Principles

• They are fully committed to harmonising UK GAAP with International GAAP

International GAAP

• The International Accounting Standards Committee was set up in 1973

• It issued International Accounting Standards (IASs)

• They were not very prescriptive as they were based on compromises since countries had different views on how the standards should operate

• No coherent logical structure to their work

International GAAP

• In 2001 the International Accounting Standards Board (IASB) was set up to take over from the IASC

• It adopted the existing IASs and later produced International Financial Reporting Standards (IFRSs)

• These were based on a conceptual framework

The current position in the UK

• Following a European Union Directive, the consolidated accounts of all quoted companies in the EU have to be produced in line with international accounting standards

• The UK government has said that other companies may follow international standards or UK standards. Most have stuck to UK standards

Regulation in the USA

• Federal system – no overall accounting law, each state has its own laws

• Some law relating to share dealing• Securities and Exchange Commission (SEC) regulates

stock exchanges and requires listed companies to disclose some information.

• Financial Accounting Standards Board issues standards applicable to listed companies and has a conceptual framework

The USA and International Standards

• Until 2008 foreign companies wanting a US listing had to prepare a detailed statement showing their accounting figures in compliance with US standards

• Now such companies may produce accounts using international standards.

• US companies may not use international standards• There is a programme of harmonisation between the US and

international standards, applying to the conceptual framework and to particular standards.

IFRS structuresource IASplus

Monitoring Board

• Link between the capital markets authorities and the IFRSF

• Purpose is to enable the capital markets authorities to be effective in investor protection, market integrity and raising capital.

• They are involved in appointing and advising the trustees.

• Goal is to improve public accountability of the IFRSF

IFRS Foundation

• Responsible for the financial and organisational aspects of setting and monitoring standards

• Oversees the work of the IASB but does not get involved in the detail of standard setting

• Repsonsible for overall policy issues

International Accounting Standards Board

The aims of the IASB are:• to develop, in the public interest, a single set of high quality,

understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial reporting to help participants in the world's capital markets and other users make economic decisions

• to promote the use and rigorous application of those standards

• to bring about convergence of national accounting standards and International Financial Reporting Standards

IFRS Advisory Council

• The IFRSAC provides a forum for the IASB to consult a wide range of interested parties affected by the IASB's work

• They give advice on which areas of reporting should have priority in the IASB’s schedule

• They comment on major standard-setting projects

IFRS Interpretations Committee

• Gives guidance on the application of IFRSs• Gives guidance on areas of reporting not

covered by an existing standard.