Unit 1 The Regulatory Framework

Unit 02: Accounting Standards & the Framework

Learning Outcomes

• Purpose of the Lesson:

  • Outline the need for accounting regulation and accounting standards

  • Explain duties and responsibilities of directors regarding financial statements

  • Describe the purpose & scope of the Conceptual Framework

  • Identify qualities that make financial statements useful

  • Outline the elements of financial statements

Types of Organisation

• Profit Making Organisations:

  • Sole Traders: Owned and managed by a single individual

  • Partnerships: Two or more people share profits and losses

  • Companies: Separate legal entity distinct from owners

• Not for Profit Organisations:

  • Include charities, clubs, and societies owned by members or trustees for non-commercial purposes

  • Public sector organisations owned by the general public

Limited Companies

• Types of Limited Companies:

  • Public Companies (‘plc’)

  • Private Companies (‘limited’)

• Nature of a Limited Company:

  • Separate legal entity, able to enter contracts, acquire assets, incur liabilities

  • Provides owners limited liability (liability to their shareholding)

  • Large size with many shareholders; ownership by shareholders, management by directors appointed on their behalf

The Regulatory Framework

• Definition: Rules and regulations to ensure standardization in preparing and presenting financial statements.

• Importance of Regulations:

  • Facilitate performance comparisons over time and between different entities

  • Aid in decision-making by users of the financial statements

Sources of Regulation

• Key Regulations:

  • The Companies Act (2007)

  • Accounting Standards (e.g., IAS & IFRS)

Accounting Standards

• Definition: Authoritative statements determining how transactions/events should be reflected in financial statements.

• Compliance: Necessary for fair presentation of performance and financial position.

• Local vs. International Standards: Countries may adopt local standards or follow international IFRSs issued by IASB.

International Accounting Standards (IAS)

• Purpose: Provide a common language in accounting practice as businesses operate across borders.

• Categories of Standards:

  • IASs: Issued before 2001 by IASC

  • IFRSs: Issued after 2001 by IASB

IASB Objectives

• Develop a globally acceptable set of financial reporting standards

• Promote rigorous application and use of these standards

• Address the needs of various entities in different economic contexts

• Facilitate IFRS adoption

The Standard Setting Process

• Main Steps:

  • Setting the agenda (Identify topics)

  • Planning the project (Discussion at Board meetings)

  • Developing and publishing the Discussion Paper (DP)

  • Developing and publishing the Exposure Draft (ED)

  • Developing and publishing the Standard

  • Monitoring the process post-issuance

Directors’ Duties

• Main Responsibilities:

  • Prepare and approve annual accounts; distribute them to shareholders

  • Ensure accounts are audited

  • File accounts with the Registrar of Companies (Deadlines: 6 months for public companies, 9 months for private companies)

  • Maintain adequate accounting records

Full Set of Accounts (Financial Statements)

• Components:

  • Statement of financial position

  • Statement of comprehensive income

  • Statement of changes in equity

  • Statement of cash flows

  • Disclosure notes (Notes to the financial statements)

Purpose and Scope of Conceptual Framework

• Definition: A collection of concepts and principles for preparing and presenting financial statements.

• Not mandatory compliance but serves several purposes:

  • Assists in developing future IFRS and reviewing existing ones

  • Promotes harmonization of standards

  • Aids national standard setters in establishing standards

• Further Assistance:

  • Helps in applying IFRS

  • Guides auditors in opinion formation

  • Aids users in interpreting statements

  • Provides information on the development approach of IFRS

Objectives of Financial Reporting

• To furnish financial information useful for investors, lenders, and creditors in decision-making regarding resource provision

• Aids decisions on buying, selling, or holding instruments, providing loans, and settling debts

Users of Financial Statements

• Intended users include:

  • Existing and potential investors

  • Lenders and other creditors

  • Employees

  • Management

  • Analysts

  • Government agencies

Limitations of Financial Statements

• Financial statements do not reflect full value of reporting entity (e.g., assets at original cost, excluding non-physical assets)

• Intended primarily for investors and lenders, may not serve all user needs

• Often based on estimates and judgments rather than exact figures (e.g., depreciation)

Characteristics of Useful Information

• Qualitative Characteristics:

  • Relevance: Must influence decisions; material information only included

  • Faithful Representation: Economic events depicted accurately and completely; neutral, error-free, substance over form

• Enhancing Characteristics:

  • Comparability

  • Verifiability

  • Timeliness

  • Understandability

Underlying Assumptions

• Going Concern: Assumes entity will continue operations for the foreseeable future.

• Accruals Accounting: Financial statements prepared on an accrual basis; effects of transactions recognized in periods they occur, not when cash is exchanged.

Elements of Financial Statements

1. Financial Position (Balance Sheet)

   • Assets

   • Liabilities

   • Equity

2. Performance (Income Statement)

   • Income

   • Expenses

Recognition of Elements

• An item is recognized if:

  • It is likely future economic benefits will flow to/from the entity

  • Its cost or value can be reliably measured

• Derecognition occurs when an item is removed from financial statements.

Measurement of Financial Statements

• Financial items measured based on:

  • Historical Cost: Fair value when asset acquired

  • Current Cost: Current cash equivalent for similar asset

  • Net Realizable Value: Sale amount of asset or payment expected for liability

  • Present Value: Discounted value of future cash flows

Class Activities

• Various examples assess understanding:

  • Whether purchases should be recognized as assets or expenses

  • Differentiating between current and historical values of assets

Test Your Understanding

• Tasks to assess knowledge on:

  • Accounting regulations

  • Duties of directors

  • Objectives of Financial Reporting

  • Elements of financial statements as per the Conceptual Framework