4. Regulatory Framework PDF

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first year accounting intro with Brian Kay...

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Regulatory Framework In accounting the Professional Accounting Bodies make the rules. UK legislation for companies:  UK Companies Acts  New Companies Act 2006  Heavily influenced by EU Stock Exchange Regulation:  Financial Services Authority (FSA)  Any public company wanting to sell shares on the LSE (London Stock Exchange must: o Secure a quotation/listing o Conform with rules of the LSE:  Stock Exchange listing regulations  Admission of Securities to Listing Regulation by Profession:  Accounting evolved over time  Driven by practical necessity  No theoretical framework o Result – different accountants used different policies → different results for same company International Accounting Standards:  Aim to harmonise accounting standards worldwide  From Jan 2005 EU Quoted Companies must comply with International Financial Reporting Standards (IFRS’s)  Almost 180 require/allow IFRS’s to date Mandatory UK Regulation:  Statements of Standard Accounting Practice (SSAPs)  Financial Reporting Standards (FRSs) Important as users of accounting info need confidence that the numbers are a fair representation and are not manipulated by management. They define the way accounting numbers are measured and presented in financial statements. Who enforces the ‘rules’?:  Legal Enforcement – Companies Acts o Stipulate that accounts must show a ‘true and fair view’ o Compliance with standards take as first evidence of this  By the Profession o All professional accountants must comply with concepts and standards o Non-compliance may lead to disciplinary action/expulsion  Financial Services Authority (Stock Exchange) Financial Reporting Standards (FRSs) – Dec 2000

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Two fundamental concepts: Going Concern Concept – Business will continue existence for foreseeable future Accruals (Matching) Concept – Expenses incurred in a period are ‘matched’ to the revenue they helped generate

Key Qualitative Characteristics: Free from errors and bias

Influences decisions

Reliable

Relevant

Understandable

Comparable

Reasonably know

Other Concepts:  Prudence – Don’t anticipate profit, do anticipate losses  Consistency – Accounting treatment of similar items should be consistent  Substance over form – Reflect the substance of the economic reality and not just the legal form  Historic cost – Items recorded at original cost  Money Measurement – Accounts only include items which can be measured objectively  Materiality – If omission or misstatement of item could affect user’s decisions  Periodicity – Financial statements are prepared on a regular basis (usually annually) Useful Set of Accounts should be:  Reliable  Relevant  Understandable  Comparable Concepts to be aware of:  Entity  Duality  Going Concern  Accruals  Prudence  Consistency  Substance over form  Historic Cost  Money Measurement  Materiality  Periodicity...