Financial Reporting

Regulatory Framework

Lecture 2
Lecture Overview
Introduction to financial reporting & regulation
Sources of financial reporting regulations
key requirements of the current regulations
What do the regulations require regarding the
preparations of financial statements?
IAS 1 Presentation of Financial Statements
what are the key requirements of this standard?
explanations of cash vs accrual accounting
Introduction to financial reporting & regulation
Financial reporting (FR) deals with the preparation
of financial statements (FS), which
inform about financial performance and position
FS are prepared within a regulatory framework:
legislation, accounting standards /other regulations
determine the information to be disclosed in FS
Question: How and to what extent should accounting be
regulated?
first we need to understand the FR needs of the different
types of business organisations
Accounting in various organisations
There are different types of business enterprises
sole traders, partnerships and limited companies
accounting is a key feature in all of these enterprises

Different forms of accounting provide information

to make internal control and management, or
to make economic decisions and to assess
performance
 Types of business enterprises
Sole traders Partnerships Limited companies

where one person where two or legal entities

owns a business more people form separate from
a business their members

Private companies - Ltd

Tax authorities Shareholders

Public companies - PLC
The need for FR in limited companies
Sole trader/partnerships are managed by owners
so, they do not need regular FS
In contrast, limited companies are owned by
large number of shareholders, but managed by a
small group of directors
owners are reliant on true FS, subject to regulation
Limited companies business models require
regular Annual Reports, because the external
users only use such information in their
economic decision making.
 Shareholders
Appoint
directors
Sent to
shareholders

Dividends
Equity and share Audit
price gains report

Annual Report Limited Companies Auditors

Appoint
Manage Emoluments auditors

Audit
/supervise
Prepared by
directors
Directors
The need for regulation of accounting
Shareholders are reliant on relevant and
faithfully represented financial information
However, if FS were not regulated, their
information could be incomplete and untrue
this may lead to poor economic decision making
In this relation, the importance of FR has always
required an attention of regulation
but it has become more important recently
especially in limited companies, where FR should be
subject to regulation.
Definition of the regulatory framework
The regulatory framework is a set of rules and
regulations which govern accounting processes
these rules and regulations control and shape the
nature and content of financial information
it impacts upon the information disclosed in FS,
it determines what kind of information should be
prepared and disclosed.
So, regulatory framework is needed to ensure
that financial information is relevant, complete,
neutral and free from errors.
Sources of accounting regulation
Sources of acc. regulation at national level
Legislation countries have their own laws and regulations
Accounting standards inter/national accounting standards
Stock exchange regulations active in some countries
these accounting standards and regulations produce
Generally Accepted Accounting Standards (GAAP)
Sources of acc. regulation at international level:
The International Accounting Standards Board
International Financial Reporting Standards (IFRS)
International Accounting Standards (IAS)
US regulatory system
Government legislation:
Securities and Exchange Commission (SEC)
Professional accounting standards:
Financial Accounting Standard Board (FASB)
Statement of Financial Accounting Standards -rule-based
Stock exchange listing rules:
eg. Sarbanes-Oxley Act (SOX) 2002
significantly impacted on the nature and content of
accounting disclosures
greater focus on internal control and compliance
UK regulatory system
Government legislation:
The Financial Conduct Authority (FCA)
Companies Act 2006
Professional accounting standards:
The Financial Reporting Council (FRC)
issued Financial Reporting Standards (FRS)
Stock exchange listing rules:
eg. UK Listing Authority regulated by FCA
https://www.handbook.fca.org.uk/handbook/DTR/4/1.html
Companies Act 2006 requirements:
companies must keep their accounting records
companies must prepare Annual Reports (i.e. FS)
these must be accompanied by directors reports
a true and fair view to be given in the account
directors must not approve unless they are satisfied
the compliance with accounting standards
the circumstances on which audit is requested
the duty to circulate Annual Reports to owners
and to make the Reports available online
What about Pakistan?
The role of accounting standards
Accounting standards are principles and rules that
govern the way we prepare FS

accounting standards provide detailed rules
regarding accounting treatments of transactions
Accounting standards improve FS uniformity,
relevance, transparency & comparability
recognition, measurement and presentation processes
become less subjective
Therefore, the applications of the national and
international accounting standards have widened
recently
International Accounting Standards Board
The IASB develop & publish international
accounting standards (IFRS and IAS):
the IASB is responsible to the IFRS Foundation,
which aims to develop global standards and
promote their use
the IFRS Advisory Council advises the IASB on its
agenda and priorities
the IFRS Interpretations Committee interprets
international standards and provides guidance on
matters not covered by standards.
Structure of the IFRS Foundation

Source: http://www.ifrs.org/About-us/Pages/How-we-are-structured.aspx
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The IASB Standard Setting Process
Setting the agenda
Planning the project
Developing and publishing the discussion paper
Developing and publishing the exposure draft
Developing and publishing the standard
IFRS or IAS
Process of monitoring
procedures after the standard is issued
Source: http://www.ifrs.org/How-we-develop-standards/Pages/How-we-develop-standards.aspx

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Purposes of accounting standards:
To reduce variations in accounting practices
To improve the uniformity of FR
through requirements regarding recognition,
measurement, presentation and disclosure in FS
To make a faithful presentation
correct & accurate, free from bias & creative
accounting
To improve comparability
meaningful comparison may be drown over time
and between entities
Examples of accounting standards
Rules on the Presentation of FS:
IAS1: Financial Statements
Rules on the Recognition of the elements:
IAS 16: PPE, Depreciation
IAS 2: Inventories
IAS 36: Impairment of Assets
Rules on the Measurement of the elements:
IFRS 13: Fair Value
Rules on the Disclosure requirements
source: http://www.ifrs.org/IFRSs/Pages/IFRS.aspx
International Accounting Standard 1 (IAS 1)
IAS 1 Presentation of Financial Statements
states the following objective of FS:
to provide information about the financial position,
financial performance and cash flows of an entity
that is useful to a wide range of users in making
economic decisions
users are current and potential investors
eg. economic decisions on buying, selling or holding
equity investments
Presentation of FS
IAS 1 requires a complete set of FS:
Statement of Financial Position (SFP)
Statement of Comprehensive Income (SCI)
Statement of Changes in Equity (SCE)
Statement of Cash Flows (SCF)
Additional Notes to Accounts
Narrative Reports:
Chairmans statement, Directors report &
business review, Auditors report and Other
reports, such as environmental reports
General features of FS
Fair presentation and compliance with IFRS
Going concern basis
Accrual basis
Materiality and aggregation size/ nature of item
Offsetting items should not be offset
Frequency of reporting annual
Comparative information previous period info.
Consistency of presentation similar to the past
How to achieve a fair presentation?
The effects of transactions should be faithfully
represented, using definitions & recognition for:
assets, liabilities, income and expenses.
FS must also be in compliance with international
standards.
The notes should provide information on:
the used accounting policies,
relevance, reliability, comparability/understandable
why compliance is not sufficient
Going concern basis
FS are prepared on the going concern basis
management assumption is that the operational
existence of the entity will continue for the foreseeable
future
there is no intention or necessity to liquidate the
business or to curtail the scale of its operation.
If FS are not prepared on a going concern basis,
then this fact should be disclosed
for example, management either intends to
liquidate the entity or to cease trading
should disclose on which basis the FS are prepared
Accrual accounting basis (1)
Accrual concept states that PROFIT of a period
should be determined as the difference between
REVENUE and EXPENSES of this period:
Profit = Revenue Expenses,
not as Cash Receipts Cash Payments.
Therefore, accrual concept requires to make the
necessary adjustments, so that:
future expected cash receipts are to be replaced by revenue,
future expected cash payments are to be replaced by expense
so, expenses should be matched with revenue
Accrual accounting basis (2)
So, transactions are recognised in the period in
which they occur
rather than when cash is received or paid
reported in the periods in which they relate
so that is not necessary to wait until the period in which cash is
received or paid

in other words, in addition to cash receipts/payments,

obligations to pay cash in future and resources that represent
cash to be received in future are also reported
Summary
Annual Reports must include a vast amount of
significant and important accounting information
to satisfy information needs of a wide range of users
thus accounting process requires close regulation
The influence of IFRS has increased significantly
FR regulation has become a tighter regulatory control
especially after corporate failures and financial crisis
Now there is extensive regulatory framework on:
transactions, transparency, disclosure and compliance
Readings
Melville, A. (2015), International Financial Reporting: A Practical Guide
(5th e), Harlow, England: Pearson.
Chapters 1, 2 and 3

Elliott, B. & Elliott, J. (2015), Financial Accounting and Reporting (17th e),
Harlow, England: Pearson.
Chapters 2, 9 and 10