1. 5BUS0253 FS 2 week 1
Financial Statements 2
Lecture 1

2. 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

3. 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

4. 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

5. 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

6. 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)

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.

14. IFRS structure source IASplus

15. 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

16. 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

17. 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

18. 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

19. IFRS Interpretations Committee
Gives guidance on the application of IFRSs
Gives guidance on areas of reporting not covered by an existing standard.