Company Financial Accounting and Reporting Is Regulated by a Variety of Sources - Term Paper Example

Company financial accounting and reporting is regulated by a variety of sources Table of Contents Introduction 2 Conclusion 6 Reference 8 Introduction Accounting standards are a set of uniform rules that are required to be followed while making the financial reports. These standards deal with various methods of treating the accounting problems according to their nature and context. The need for a distinct accounting standard was felt by the business institutions long back. Earlier, in the absence of a fixed set, various organisations followed their own practices framed according to their own convenience. This dissimilarity in the accounting policies resulted in various problems and thus made it imperative to develop and amend the accounting standards after analysing the international accounting standards and external environmental factor. All the listed companies were asked to follow these accounting standards for maintaining their accounting transaction and developing financial reports. These accounting standards were introduced to enhance credibility and reliability of the financial statement developed by the listed companies of a nation. These accounting standards assisted the accountants and auditors to resolve different controversies related to different accounting practices. Even the managers consider these accounting policies while developing various strategies and policies to be followed by the company. The Accounting standards and reporting in UK Like other developed nation, the accounting standards were formulated in UK in early 1980s. People identified the necessity of a well structured accounting standard that assures “relevance, reliability, comparability and understand-ability” in the financial report that is developed by the listed companies (Kirk, 2005, p.9). In UK, the accounting standards are popularly known as Financial Reporting Standards (FRS). These FRS were developed by Accounting Standards Boards (ASB) and all the listed companies are required to adhere to these standards so that a true and fair picture of the companies’ financial condition can be represented. Figure 1: UK’s Accounting Standards’ Regulatory Framework (Source: Jones, 2007, p.234) Prior to 1990, the accounting standards were developed by Accounting Standards Committee (ASC) which was later replaced with Accounting Standards Boards (ASB). In the first meeting of ASB, it formally accepted all the accounting standards prevailing in UK GAAP. With time, this board introduced few new standards and modified many existing standards. In UK, the four main constituents responsible for development and maintenance of accounting standards are Financial Reporting council (FRC), The Accounting Standards Board (ASB), Urgent Issues Task Force (UITF) and The Financial Reporting Review Panel (FRRP). FRC is basically a supervisory body that is responsible for the overall functioning of the system. ASB can be considered as the engine of the process that endeavours to develop and maintain the accounting standards process. There are many people engaged with this board (a full time technical director, a full time chairman and more than eight part time members). The changes introduced by the ASB in accounting standards are consequently followed up by the accountants and the auditors. The main aim of ASB is to enhance transparency and fairness in the accounting practices followed in UK. UITF is considered as the ‘Flying Squad’ for the standard setting process. It is responsible for various contingencies that might arise out of it. This is because setting up a new standard or making any change in the existing standard is a time consuming process. FRRP is responsible for dealing with debatable issues related to accounting standards. Often, FRRP acts as a detective arm of ASB. The parties that are affected by the Companies Act or accounting standards address their queries to FRRP. Therefore, instead of being proactive, this department is reactive in nature (Jones, 2007, p.233-235). According to the accounting standards, a listed company needs to produce a balance sheet that will provide a full disclosure of assets, liabilities, and ownership interest. The financial report should also possess a profit and loss account revealing the profits and losses incurred during the course of business. Apart from balance sheet, and profit and loss account, the companies are also required to publish a cash flow statement that gives information regarding the inflow as well as out flow of cash in the financial year. The company are asked to disclosure some vital information in the form of notes in the last section of the financial statement (Kirk, 2005, p.9-13). While developing the financial statements, the listed companies are required to adhere to the accounting standards developed by ASB. ASB identifies the topics that are subjected to FRSs, after analysing the external sources or the research conducted by the broad. Once the topic is notified by ASB, it asks its board to conduct the required research. The staff members take into account the existing accounting practices followed in UK, the Republic of Ireland and other overseas nations along with their legal framework, economic condition and the prevailing accounting practices. ASB develops the draft which is later circulated among all the interested parties. If the board feels that the issues require further discussions, it will then develop a discussion paper and publish it with the recommendation and solutions. Later on, the parties of interest are encouraged to articulate their views. The suggestions provided by the parties within the deadline are used for further modification and finally the FRS is developed (McAuley, 2005, p.6). With time, an independent accounting standard setting board was created in London. This board came into existence in April 2001, and was named as International Accounting Standards Board (IASC). This board constituted of two main bodies; the trustees and the International Financial Reporting Interpretations Committee. It is the duty of the trustees to appoint IASB members, keep an eye on the overall functioning of the board and raising fund. The committee is also responsible for setting up accounting standards (McAuley, 2005, p.9). From January 01, 2005 onwards, the listed companies in UK were asked to prepare their group accounts as per the International Accounting Standards (IASs) instead of following UK GAAP. Such change was introduced to make the UK accounting standards at par with the international accounting standards followed in other developed nations, like US. With the advent of globalisation, many UK based companies opened their subsidiaries in other nations. Many of the UK base companies were having subsidiaries in other parts of the world, therefore these companies used to present vital information in both UK GAAP as well as US GAAP in the financial statement. Thus, this was a time consuming and costly process. It was realised that once IAS is adopted, the companies can save their time as well as the associated cost used in converting the financial information derived from UK GAAP to US GAAP. Many of the small and medium sized companies that were not listed in the stock exchange decided not to shift from UK GAAP to IAS. Again, the charitable companies were excluded from this transition because they are non profit making. This variation in the accounting standards followed by different companies has perplexed the investors and other stakeholders (Morris, et al., 2009, p.468). In 2005, EU decided to adopt IFRS while developing the consolidated accounts. However, for the managers of different UK companies it was not easy to decide whether IFRS will prove beneficial for the company in the long run. After considering the tax implication and the dividend traps, many UK companies decided to report their financial standards as per UK GAAP even when the companies were supposed to adopt IFRS. According to the UK Accounting Standards Board, IFRS will attempt to frame a common structure for financial reports developed by companies operating in different industries. Thus, the investors can easily compare financial reports of different industries to make a fair comparison regarding operation and profitability of the companies. Even the companies were facing much difficulty to introduce a centralised system like ERP with different subsidiaries following different GAAPs. Though IFRS has many advantages, it too possesses certain shortcomings. The main problem is regarding the calculation of tax. In UK, the tax is calculated with the help of accounting standards taking into consideration the financial statement of the company as the starting point. However, the tax calculation process has become more complex and cumbersome under IFRS. Companies often face complexity is realising the distributable reserves and developing the future reorganisation strategies. Conclusion The history of accounting standards is quite old in UK. With changing market conditions, these accounting standards underwent several modifications to fulfil the requirements of the business houses and stakeholders. Earlier, the companies were not that very particular about the accounting standards while maintaining and developing the financial statements. However, with time many regulatory bodies were formulated that took up the responsibility of developing and modifying the account standards that best suits the requirement of market and business entities. Professionals like accountants and auditors were instructed to adhere to these accounting standards while developing the financial statements. During 1990s, the UK regulatory bodies decided to shift from FRS to IAS. This decision was taken to make the UK GAAP at par with international accounting standards followed in other developed nations. Again, a major change was seen in 2005 when the UK regulatory board further decided to switch over from UK GAAP to IFRS. Undoubtedly, IFRS assists in minimising differences arising due to individual GAAPs followed by subsidiaries operating in different locations. However, IFRS too suffers with certain disadvantages that enhance the complexity faced by the UK based companies. It’s high time for the regulatory boards to analyse the international market condition and bring in further changes to make the accounting standards acceptable worldwide. (1560 words) Reference Jones, M. (2007). Accounting For Non-Specialists. Wiley. Kirk, R.J. (2005). UK Accounting Standards: A Quick Reference Guide. Elsevier. McAuley, S. (2005). Financial Accounting Regulations, Social Accounting and Principles of Auditing. Learning and Teaching Scotland. [Online]. Available at: http://www.ltscotland.org.uk/Images/accountingah_tcm4-193223.pdf [Accessed on September 9, 2010]. Morris, G. M., McKay, S. & Oates, A. (2009). Finance Director's Handbook. Butterworth-Heinemann. Read More