New UK GAAP - Assignment Example

? The New UK GAAP Executive Summary A considerable amount of countries and entities around the globe have adopted IFRS (International Financial Reporting Standards) as the base for financial reporting with the means and objective to enhance the value of information on corporate performance. In the year 2010, a potential new framework proposed by the Accounting Standards Board (ASB) to replace current Irish and UK GAAP has revised the original proposal and released 3 new drafts Application of Financial Reporting Requirements FRS 100, 101, 102, etc. The need for a global reporting standard has gained more importance for small and medium sized organizations where the accountability of managers towards the investors are generally less transparent compared to large multi-national companies. Over the years such transparency might lead to mistrust between the owners and the managers leading to an Agency problem. Even though the advantage of general sets of international reporting standards are acknowledged, there are a certain implementation challenges at the international and domestic level if the objective of a harmonised and enhanced reporting structure is to be achieved. Table of Contents Executive Summary 2 Introduction 4 Advantages and Disadvantages of Global Reporting Standards 4 Importance of Accounting Standards Bodies 6 Harmonization of Reporting Standards in Recent Times 7 Conclusion 8 References 10 Bibliography 11 Introduction A considerable amount of countries and entities around the globe have adopted IFRS (International Financial Reporting Standards) as the base for financial reporting with the means and objective to enhance the value of information on corporate performance. In the year 2010, a potential new framework proposed by the Accounting Standards Board (ASB) to replace current Irish and UK GAAP has revised the original proposal and released 3 new drafts Application of Financial Reporting Requirements FRS 100, 101, 102, etc. FRS 100 (FRED 46) proposes a framework that would apply to Irish/UK specific entities and will be enforced while preparing financial statements in accordance with EU adopted IFRS for Small Entities. FRS 101 (FRED 47) proposes reduction in disclosure framework for qualifying entities. The proposed amendments to FRS 102 (FRED 48) which was issued on October 2012 restricted the proposed scope and amendments relating to accounting of service concession arrangements and multi-employer pensions. In addition, FRED 48 also contains proposed comprehensive accounting standards based on IFRS for Small and Medium-sized Entities. Even though the advantage of general sets of international reporting standards are acknowledged, there are a certain operational challenges at the international and domestic level if the objective of a harmonised and enhanced reporting structure is to be achieved (FRC, 2013, pp.3-12). Advantages and Disadvantages of Global Reporting Standards The need for a global reporting standard has gained more importance for small and medium sized organizations where the accountability of managers towards the investors are generally less transparent compared to large multi-national companies. Over times such transparency might lead to mistrust between the owners and the managers leading to an Agency problem. The implication of non-transparent reporting can be better understood when one analyzes the global financial crisis of 2008. A vigilant scrutiny of the financial crisis reveals an underestimation of the risk associated with financial instruments (such as Mortgage based securities), that led to inflated expectations ultimately triggering global financial crisis. This underestimation of risk perception of the investors was primarily motivated from the improper financial reporting of entities. Hence, an establishment of suitable reporting standards for accounting along with suitable disclosures in the financial statements has become a challenging task (Kurz, 2004, pp.1-5). The industries have experienced some tremendous changes in terms of financial reporting and accounting requirements over the last decade. The changes are mainly caused by the introduction of market deregulation, new technology, globalisation, and market volatility. Also, the use of derivatives has amplified over the years primarily due to their inherent property to offset the risk associated with underlying asset (Gebhardt and et al., 2003, pp.1-2). Therefore, the incumbency of an appropriate disclosure of information with respect to assessment of financial instruments or recording of financial information in the balance sheet as financial liability and asset is necessary for the expansion of international accounting and reporting standards. One of the most significant aspects that have raised questions about the professional and ethical standards related to accounting and handling of financial disclosures is the determination of fair worth of assets and liabilities. A contentious issue associated with financial disclosures is the assessment of assets at their fair value. Even though accounting of fair value is considered as the most pertinent information for predicting future cash flows, nonetheless the reliability of the fair value accounting has been questioned. Fair value is the price which can be realised when a liability is paid or an asset is sold between market participants at a given date (Hitz, 2007, pp.323-362). It is occasionally referred to as the exit price (Zack, 2009, p.56). The fair values of liabilities are generally reflected after taking into consideration of the non-performing assets. The above discussion suggests that if the fair value of the liabilities or assets is not determined bearing in mind adequate risk related with the financial instrument then there subsist likelihood that the shareholder might fail to notice or underestimate the latent risk of the financial instruments. The responsibilities of the organisations as well as relevant authorities have increased with globalisation as business entities at present do not run in isolation. Disintegration of one financial system might also influence other economies adversely which are indirectly dependent on the former. Globalisation has created the need for unifying of accounting and reporting standards especially with respect to disclosure of financial instruments. It is always encouraging when companies make additional revelations within their financial statements about inherent risks associated with assets and liabilities. One more way to rationalize the significance of global accounting standards is that if diverse market participants become accustomed to dissimilar accounting standards then their disclosures and recordings would not be standardised. This will consequently lead to contradictory and less comparable financial reports. Improper disclosures will further carry a higher risk in particular to determining the true financial position of the firms as on any given date. A global accounting standard will ensure comparability of financial statements and at the same time uniformity in standards and norms will augment the transparency, trust and reliability in the financial markets. Importance of Accounting Standards Bodies International Financial Reporting Standards (IFRS) or International Accounting Standards (IAS) is applicable in more than 90 countries. In the European Union, for listed companies only IFRS is obligatory. The proposed amendments to reporting standards in UK in the form of FRS 100, 101 and 102 initially provides the necessary regulatory framework for presentation and recognition aspects of accounting specific to UK and Irish reporting standards. The standards issued directly by the IASB (International Accounting Standards Board) are not those that UK listed companies will follow, but are those that the European Commission has endorsed. Department of Trade and Industry has said that the unlisted companies would still be permitted to adopt IFRS over UK GAAP as there are no mandatory instructions for unlisted companies to move to IFRS. Listed companies in the United Kingdom use IFRS as the basis of their consolidated accounts. Financial Reporting Standard for Smaller Entities (FRSSE) can be used by companies which are deemed small under the Companies Act. FRSSE is a distillation of UK standards with some exemptions such as consolidated cash flow statements and accounts and fewer disclosure requirements. Unlisted companies in the United Kingdom have a choice of implementing IFRS or UK GAAP (ACCA, 2011). The reason why some unlisted companies have adopted IFRS is that their parent companies are listed and it becomes easier to implement the same basis of accounting across all group companies. The reporting requirement of large companies with public accountability and for companies without public accountability and small, publicly accountable entities is International Financial Reporting Standards. For small companies with no public accountability the reporting requirement is FRSSE. Harmonization of Reporting Standards in Recent Times If non-comparable accounting standards are adapted by firms functioning in different countries then difficulty of enforcing strict regulation increases due to non-standardised assumptions and inappropriate revelation of financial facts by business entities. The development of technology with time has amplified the quantity of transactions in the domestic and global markets. The development of conventional financial instruments (such as debt and equity) into more modern financial instruments like derivatives has not only enlarged the likelihood of creation of more profits from speculative trading but at the same time it also increases risk considerably. Organizations are often encouraged to provide quantitative information in monetary terms regarding the market risk associated with related financial instruments and also other assets (such as non-performing assets) and liabilities (excess leverage). There is a possibility that the businesses are unable to estimate and derive the fair value of assets and other issued securities. In such cases the business entities should keep notes in their annual reports and financial disclosures regarding why they are unable to disclose the fair value of assets and liabilities if such situation occurs. Such kind of revelations will always be in the interest of general investors and will also help the shareholders to take wise and informed decision regarding investment in those companies, depending on their appetite for tolerating risk. Conclusion In the 21st century, organizations do not run in segregation and the responsibilities of the regulatory bodies and corporate entities have enlarged considerably. If necessary financial disclosures and accounting standards are not adapted then the corporate social responsibility of corporate entities may be questioned and investor sentiments will be pessimistic. The accountability of managers to the shareholders is inherent to any organization irrespective of the scale of operation. Mistrust between the managers and owners lead to an Agency problem and puts question marks on the corporate social responsibility of the business entity. All domestically and globally operating corporate entities in UK are advised to comply with the existing regulatory frameworks and also follow the respective amendments in terms of reporting standards as per new guidelines. Such initiatives are expected to develop the excellence of presenting financial facts more transparently facilitated by adoption of global reporting standards and adherence to corporate social responsibility by companies in best interest of shareholders. References Gebhardt, G., Reichardt, R., and Wittenbrink, C., 2003. Accounting for Financial Instruments in the Banking Industry: Conclusions from a Simulation Model. [Pdf]. Available at: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.128.5073&rep=rep1&type=pdf. [Accessed on November 11, 2013]. Hitz, J. M., 2007. The Decision Usefulness of Fair Value Accounting-A Theoretical Perspective. European Accounting Review, 16(2). Kurz, K., 2004. IAS 39 – Accounting for Financial Instruments. Germany: GRIN Verlag. Zack, G. M., 2009. Fair Value Accounting Fraud: New Global Risks and Detection Techniques. United States: John Wiley & Sons, Inc. FRC, 2013. Financial Reporting Council: Impact Assessment. [Pdf]. Available at: http://www.frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/Impact-Assessment-FRS-100,-FRS-101-and-FRS-102.aspx. [Accessed on November 14, 2013]. Bibliography International Accounting Standards Board, 2009. International Financial Reporting Standards. London: IASC Foundation Publications Department. Ryan, S. G., 2007. Financial Instruments and Institutions: Accounting and Disclosures. United States: John Wiley & Sons, Inc. Gee, P., 2006. UK GAAP for Business and Practice. United Kingdom: Butterworth-Heinemann. Bragg, S. M., 2004. GAAP Implementation Guide. New Jersey: John Wiley & Sons, Inc. KPMG, 2013. New UK GAAP. [Online]. Available at: http://www.kpmg.com/uk/en/services/audit/ifrs/pages/future-gaap.aspx. [Accessed on November 14, 2013]. Grant Thornton, 2012. Introducing FRS 101 Reduced Disclosure Framework – Why it could be Beneficial for Your Business. [Pdf]. Available at: http://www.grant-thornton.co.uk/PageFiles/17080/FRS%20further%20reading.pdf. [Accessed on November 14, 2013]. PWC, 2013. Flash News: The Future of UK & Irish GAAP. [Pdf]. Available at: http://download.pwc.com/ie/pubs/2013_flash_news_the_future_of_uk_and_irish_gaap.pdf. [Accessed on November 14, 2013]. Read More