the regulatory framework of accounting
TRANSCRIPT
The The Regulatory Regulatory Framework of Framework of AccountingAccounting
Copyright, 2002 © M C Pratt
M C PrattM C Pratt
St Martin’s CollegeSt Martin’s College
LancasterLancaster
Introduction Introduction 11
Unincorporated UK businesses can prepare Unincorporated UK businesses can prepare their financial statements in any form they their financial statements in any form they choosechoose
Companies must comply with the Companies must comply with the provisions of:provisions of: the Companies Act 1985 the Companies Act 1985
SSAPsSSAPs Accounting standardsAccounting standards
FRSsFRSs
Introduction 2Introduction 2
Accounting standards apply to all Accounting standards apply to all financial statements whose purpose financial statements whose purpose is to give a ‘true and fair’ viewis to give a ‘true and fair’ view
therefore, they apply to therefore, they apply to every every UK UK company’s financial statements company’s financial statements
Introduction Introduction 22
Introduction 3Introduction 3
Therefore, regulatory framework based on:Therefore, regulatory framework based on:
company lawcompany law
accounting standardsaccounting standards
International accounting standards International accounting standards and and
other national standard setting bodies’ influenceother national standard setting bodies’ influence
Stock Exchange Stock Exchange requirementsrequirements
Introduction Introduction 33
Company law 1
Companies Act 1985 consolidated most Companies Act 1985 consolidated most previous UK company legislation and previous UK company legislation and subsequently amended by Companies subsequently amended by Companies Act 1989 Act 1989
EU: UK obliged to comply with EU EU: UK obliged to comply with EU legislation by enacting UK laws to legislation by enacting UK laws to implement EU directives. Companies implement EU directives. Companies Act 1989 in part enacted to implement Act 1989 in part enacted to implement provisions of EU’s 7provisions of EU’s 7thth and 8 and 8thth Directives Directives
Company law Company law 11
Company law Company law 22
Some accounting Some accounting principles principles are are embodied in law. embodied in law.
Others are regulated by Others are regulated by accounting standardsaccounting standards
Accounting Accounting standards 1standards 1
rules or sets of rules prescribing the method(s) by which accounts (financial statements) should be prepared and presented.
These are ‘working regulations’ and are issued by a national or international body of the accountancy profession.
Accounting standards 2Accounting standards 2
previously known as SSAP s
formulated by Accounting Standards Committee (ASC)
now known as FRS s
formulated by the Accounting Standards Board (ASB)
ASB is the successor to the ASC
Accounting Accounting standards 2standards 2
Accounting standards 2Accounting standards 2
SSAPs formulated by ASC, and not been replaced by an FRS, are still in force
accounting standards interact with company law:
final accounts (financial statements) must state whether accounting standards provisions have been followed or give reasons for any departures
Accounting Accounting standards 3standards 3
Stock Exchange insists on member Stock Exchange insists on member organizations (listed companies) organizations (listed companies) following following accounting standardsaccounting standards
failure to comply with accounting failure to comply with accounting standards will lead to standards will lead to auditorsauditors “qualifying” their report “qualifying” their report
– – which companies will wish to avoid!which companies will wish to avoid!
Accounting Accounting standards 4standards 4
Dearing Committee Report 1988 led Dearing Committee Report 1988 led to ASC being disbandedto ASC being disbanded
Replaced by following:Replaced by following:
F R CF R C guides the standards setting body guides the standards setting body
(ASB) on policy and (ASB) on policy and sees that its work is properly sees that its work is properly
financed financed
UK standards setting UK standards setting process (1)process (1)
A S BA S B devises the accounting standards devises the accounting standards issues standards on its own authorityissues standards on its own authority full-time chair and technical directorfull-time chair and technical director two-thirds majority required to two-thirds majority required to
approve (and issue) new accounting approve (and issue) new accounting standardstandard
legal backing to accounting legal backing to accounting standardsstandards
UK standards setting UK standards setting process (2)process (2)
U I T FU I T F Offshoot of ASBOffshoot of ASB FunctionFunction:: ‘‘to tackle urgent matters not to tackle urgent matters not
covered by accounting standards covered by accounting standards and for which, given the urgency, and for which, given the urgency, the normal standards-setting the normal standards-setting process would not be practicable.’ process would not be practicable.’
(Sir Ron Dearing) (Sir Ron Dearing)
UK standards setting UK standards setting process (3)process (3)
U I T F cont’dU I T F cont’d pronouncements called ‘abstracts’pronouncements called ‘abstracts’ and intended to become effective and intended to become effective
quicklyquickly tend to become effective within approx. tend to become effective within approx.
1 month of pub. date 1 month of pub. date abstracts then superseded by FRSs and abstracts then superseded by FRSs and
FREDsFREDs abstracts close loopholes, thus halting abstracts close loopholes, thus halting
abuses when they become widespreadabuses when they become widespread
UK standards setting UK standards setting process (4)process (4)
Review PanelReview Panel 11 chaired by barristerchaired by barrister concerned with examining and concerned with examining and
questioning departures from accounting questioning departures from accounting standards by large companiesstandards by large companies
Companies Act 1985’s provisions - Companies Act 1985’s provisions - financial statements must give reasons financial statements must give reasons for any departures - ‘triggers’ cases for for any departures - ‘triggers’ cases for investigation by Review Panelinvestigation by Review Panel
UK standards setting UK standards setting process (5)process (5)
Review PanelReview Panel 22 revised accounts have to be revised accounts have to be
circulated to all persons likely to rely circulated to all persons likely to rely on the previous accounts on the previous accounts
companies are becoming more companies are becoming more cautious in their attempts to break or cautious in their attempts to break or bend the rulesbend the rules
most ‘disciplined’ companies have most ‘disciplined’ companies have obeyed Panel decisions without any obeyed Panel decisions without any real argumentreal argument
UK standards setting UK standards setting process (6)process (6)
Review PanelReview Panel 33 discussion with company should discussion with company should
resolve most referrals, but resolve most referrals, but Panel has power to apply to courts for Panel has power to apply to courts for
revisions of company’s accounts revisions of company’s accounts court costs potentially payable by court costs potentially payable by
directorsdirectors auditors can also be disciplined if audit auditors can also be disciplined if audit
report was report was notnot qualified due to qualified due to departure from accounting standards departure from accounting standards
UK standards setting UK standards setting process (7)process (7)
Produced by IASCProduced by IASC
I A S C I A S C 11 set up in 1973set up in 1973
works for improvement and works for improvement and harmonisation of financial reportingharmonisation of financial reporting
develops IASdevelops IAS s through an s through an international process, involving:international process, involving:
International Accounting International Accounting standards (IASs)standards (IASs)
IASC IASC 22 involving:involving:
world-wide accounting profession,world-wide accounting profession,
preparers and users of financial preparers and users of financial statements statements
national standard setting bodiesnational standard setting bodies
International Accounting International Accounting standards (IASs)standards (IASs)
IASC IASC 33 ObjectivesObjectives::
formulate and publish accounting standards (in formulate and publish accounting standards (in public interest) for companies to observe in public interest) for companies to observe in presenting financial statements, and presenting financial statements, and
promote world-wide acceptance and promote world-wide acceptance and observanceobservance
works generally for improvement and works generally for improvement and harmonisation of regulations, accounting harmonisation of regulations, accounting standards and procedures relating to financial standards and procedures relating to financial statements presentationstatements presentation
International Accounting International Accounting standards (IASs)standards (IASs)
IASC IASC 44 impact on ASB:impact on ASB:
IASC’s IASC’s Framework for preparation Framework for preparation and presentation of financial and presentation of financial statementsstatements was introduced to: was introduced to: ‘‘set out the concepts that underlie set out the concepts that underlie
the preparation and presentation the preparation and presentation of financial statements for external of financial statements for external users’users’
International Accounting International Accounting standards (IASs)standards (IASs)
IASC IASC 55 ASB has adopted same conceptualASB has adopted same conceptual
approach to financial reporting as theapproach to financial reporting as the
IASC, because:IASC, because:
ASB has based own ASB has based own Statement of Statement of PrinciplesPrinciples on the IASC’s on the IASC’s FrameworkFramework
ASB states in its FRSASB states in its FRS s that they s that they complycomplywith IASwith IAS s or IAS exposure draftss or IAS exposure drafts
International Accounting International Accounting standards (IASs)standards (IASs)
The Stock Exchange 1The Stock Exchange 1
In UK, two different securities markets: Stock Exchange
Alternative Investment Market
shares quoted on Stock Exchange are said to be ‘listed’
to obtain listing, company must conform with Stock Exchange rules in ‘Yellow Book’ issued by Stock Exchange’s Council
The Stock Exchange 2The Stock Exchange 2
firms commit themselves to obey certain procedures and standards, including rules on accounting information disclosure
rules are more stringent than Companies Acts
Yellow Book requirements not backed by law,
Stock Exchange can withdraw company’s securities from its market/listing, so company’s shares would not be traded on Stock Exchange
GG AA AA PP (1)(1)
Means all rules from whatever source Means all rules from whatever source which govern accounting.which govern accounting.
In UK, combination of:In UK, combination of:
Company law, mainly Companies Act Company law, mainly Companies Act 19851985
Accounting standards Accounting standards
Stock Exchange requirementsStock Exchange requirements
GG AA AA PP (2)(2)
Also includes:Also includes:
International Accounting standards International Accounting standards
Laws in other countries, particularly in Laws in other countries, particularly in USAUSA
Not backed by law in UK. Not backed by law in UK.
No UK legal definitionNo UK legal definition
Has US legal definition/authorityHas US legal definition/authority
GG AA AA PP (3)(3)
dynamic – changes with circumstances: dynamic – changes with circumstances: legal, accounting standards and practice legal, accounting standards and practice changeschanges
this recognised in ASB’s this recognised in ASB’s Statement of Statement of AimsAims: ‘changes’:: ‘changes’:
‘‘evolving business practices, new evolving business practices, new economic developments and deficiencies economic developments and deficiencies identified in current practice…’identified in current practice…’
GG AA AA PP (4)(4)
emphasis has shifted from ‘principles’ to ‘practice’ in UK GAAP
Not easy to settle ‘generally accepted’ so is: whether practice addressed by UK accounting
standards, laws, international equivalents,
whether other companies have adopted practice.
Especially: is practice consistent with needs of users and objectives of financial reporting and
is it consistent with ‘true and fair’ concept
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (1)(1)
FASB (USA) has defined Conceptual FASB (USA) has defined Conceptual Framework.Framework.
Conceptual FrameworkConceptual Framework:: (1)(1)
‘‘a constitution, a coherent system of a constitution, a coherent system of interrelated objectives and fundamentals interrelated objectives and fundamentals that can lead to consistent (accounting) that can lead to consistent (accounting) standards and that prescribes the nature, standards and that prescribes the nature, function and limits of financial accounting function and limits of financial accounting and financial statements.’and financial statements.’
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (2)(2)
avoids ‘fire fighting’ – in SSAP approachavoids ‘fire fighting’ – in SSAP approach
aim to develop underlying philosophy as basis aim to develop underlying philosophy as basis for consistent accounting principles so each for consistent accounting principles so each SSAP/FRS structured into whole frameworkSSAP/FRS structured into whole framework
lot of work on conceptual framework carried lot of work on conceptual framework carried outout
by IASC’s by IASC’s Framework for preparation and Framework for preparation and presentation of financial statementspresentation of financial statements, , published 1989published 1989
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (3)(3)
Professor David Solomons’ 1989 Professor David Solomons’ 1989 discussion paper addressed to:discussion paper addressed to:
ASC’sASC’s Guidelines for Financial Reporting Guidelines for Financial Reporting StandardsStandards
paper known as Solomons Reportpaper known as Solomons Report
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (4)(4)
IASC’s IASC’s FrameworkFramework not mandatory. Deals with: not mandatory. Deals with:
Objectives of financial statements Objectives of financial statements
Qualitative characteristics that decide Qualitative characteristics that decide usefulness of information in financial statements usefulness of information in financial statements
Definition, recognition and measurement of Definition, recognition and measurement of elements from which financial statements builtelements from which financial statements built
Concepts of ‘capital’ and ‘capital maintenance’Concepts of ‘capital’ and ‘capital maintenance’
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (5)(5)
IASC believe international harmonisation of IASC believe international harmonisation of accounting methods possible by focussing on accounting methods possible by focussing on aboveabove
Solomons Report is similar and deals with: Solomons Report is similar and deals with: purpose of financial reportingpurpose of financial reporting
financial statements and their elementsfinancial statements and their elements
qualitative characteristics of accounting qualitative characteristics of accounting informationinformation
recognition and measurementrecognition and measurement
choice of a general purpose accounting model.choice of a general purpose accounting model.
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (6)(6)
Solomons Report: Solomons Report:
Recognises unsatisfactory nature of then Recognises unsatisfactory nature of then current ‘fire fighting’ approach current ‘fire fighting’ approach
to UK standard setting andto UK standard setting and
Produced his own set of guidelines he felt Produced his own set of guidelines he felt could provide an explicit statement of could provide an explicit statement of
agreed financial accounting conceptsagreed financial accounting concepts
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (7)(7)
Advantages : (1) SSAPs were on ‘patchwork’ basis
Certain SSAPs were subject to considerable political interference from interested parties
Some external pressure was too strong for ASC to withstand
Policies derived from conceptual framework would be less open to criticism leading to strong external pressure
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (8)(8)
Advantages : (2)– Some SSAPs concentrated on Income
Statement.
– Others concentrated on Balance Sheet.
– An unambiguous definition of ‘income’ and ‘value’ would ensure that all financial statements have equal usefulness to different user groups.
GAAP and Conceptual GAAP and Conceptual Framework of AccountingFramework of Accounting (9)(9)
Disadvantages : (1)
Counter argument might be:
Financial statements intended for variety of users and may not be possible to devise single conceptual framework suiting all users.
May need variety of accounting standards, each produced for different purpose (and with different concepts as basis)
Accounting Standards Accounting Standards Board (ASB)Board (ASB) (1)(1)
ASCASC set up in 1970 set up in 1970
joint committee of 6 major UK accountancy joint committee of 6 major UK accountancy bodies, members of CCAB bodies, members of CCAB
Produced SSAPs after consultationProduced SSAPs after consultation
Not all consultation was satisfactory and some Not all consultation was satisfactory and some SSAPs criticised for being ‘unrealistic’ and SSAPs criticised for being ‘unrealistic’ and ‘unfair’.‘unfair’.
SSAPs applied to all financial statements intended SSAPs applied to all financial statements intended to give a ‘true and fair’ view, including overseas to give a ‘true and fair’ view, including overseas companies incorporated in UK company accounts companies incorporated in UK company accounts
Accounting Standards Accounting Standards Board (ASB)Board (ASB) (2)(2)
Some SSAPs only applied to listed companies Some SSAPs only applied to listed companies
Some areas of SSAPs overlap with company Some areas of SSAPs overlap with company law but intention is to cover areas where law is law but intention is to cover areas where law is silentsilent
UK accountancy bodies prefer self-regulation, UK accountancy bodies prefer self-regulation, not lawsnot laws
Departure from Companies Act 1985 allowable Departure from Companies Act 1985 allowable if consistent with giving ‘true and fair’ view, so if consistent with giving ‘true and fair’ view, so
SSAPs may recommend departure from SSAPs may recommend departure from the lawthe law
Accounting Standards Accounting Standards Board (ASB)Board (ASB) (3)(3)
SSAPs and FRSs generally apply to UK private SSAPs and FRSs generally apply to UK private companies companies
accounting standard will choose accounting standard will choose oneone particular treatment deemed to be best particular treatment deemed to be best practicepractice
But is it?But is it?
SSAPs have been developed haphazardlySSAPs have been developed haphazardly
Accounting Standards Accounting Standards Board (ASB)Board (ASB) (4)(4)
• FRSFRS ss
Draft for Discussion (DD)Draft for Discussion (DD) is first produced is first produced
Then converted into Then converted into FF RR EE DD ss
Other ASB published documents known as Other ASB published documents known as Exposure DraftsExposure Drafts
Accounting Standards Accounting Standards Board (ASB)Board (ASB) (5)(5)
• Statement of AimsStatement of Aims
‘‘To establish and improve (accounting) To establish and improve (accounting) standards of financial accounting and standards of financial accounting and reporting by’ :reporting by’ :
developing principles developing principles
issuing new accounting standards issuing new accounting standards
addressing urgent issues promptlyaddressing urgent issues promptly
Urgent Issues Task Force (UITF)Urgent Issues Task Force (UITF)
offshoot of Accounting Standards Boardoffshoot of Accounting Standards Board
‘‘urgent matters not covered by existing urgent matters not covered by existing standards, and for which, given... urgency,… standards, and for which, given... urgency,… normal standard setting normal standard setting process ...not ...practicable’ (Dearing)process ...not ...practicable’ (Dearing)
‘‘abstracts’ intended to come into force quicklyabstracts’ intended to come into force quickly
at least 22 ‘abstracts’ so far; some ‘turned into’ at least 22 ‘abstracts’ so far; some ‘turned into’ FRSs or FREDsFRSs or FREDs
has closed many loopholeshas closed many loopholes
Most UK companies small, generally owned and Most UK companies small, generally owned and managed by one person or familymanaged by one person or family
No outside shareholdersNo outside shareholders
Large companies with outside shareholders Large companies with outside shareholders needing protection so larger companies need needing protection so larger companies need tougher rulestougher rules
Could have Could have 22 types of company accounts: types of company accounts:
Simple ones with fewer rules and requirementsSimple ones with fewer rules and requirements
Complicated ones for large companies with Complicated ones for large companies with stringent rules and requirementsstringent rules and requirements
Big GAAP/Little GAAP (1)Big GAAP/Little GAAP (1)
Big GAAP/Little GAAP (2)Big GAAP/Little GAAP (2)
Therefore, been that suggested small Therefore, been that suggested small companies should be exempt from companies should be exempt from allall accounting standards, except certain (5) accounting standards, except certain (5) corecore onesones
This seen as too radical at first, This seen as too radical at first,
now idea is being more acceptednow idea is being more accepted
an FRS for small companies/entities (an FRS for small companies/entities (FRSSEFRSSE) ) has been developed has been developed
Big GAAP/Little GAAP (3)Big GAAP/Little GAAP (3)
FRSSEFRSSE (1)(1)
retains all basic principles of accounting retains all basic principles of accounting standards but discards detailed explanatory standards but discards detailed explanatory notesnotes
applicable to all companies meeting definition applicable to all companies meeting definition of ‘small company’of ‘small company’
company complying with FRSSE then exempt company complying with FRSSE then exempt from all other accounting standards from all other accounting standards
FRSSE contains, in simplified form, FRSSE contains, in simplified form, requirements from existing accounting requirements from existing accounting standards relevant to most small entitiesstandards relevant to most small entities
Big GAAP/Little GAAP (4)Big GAAP/Little GAAP (4)
FRSSEFRSSE (2)(2)
large companies must prepare large companies must prepare cash flow cash flow statementstatement
small companies do not need to, small companies do not need to,
but but recommended torecommended to produce simplified produce simplified version by FRSSEversion by FRSSE
‘‘a commendable summary of UK GAAP… a commendable summary of UK GAAP… succint and to the point.’ succint and to the point.’
(Barry Johnson, (Barry Johnson, Certified AccountantCertified Accountant, Feb. , Feb. 1996)1996)
Big GAAP/Little GAAP (4)Big GAAP/Little GAAP (4)
FRSSEFRSSE (3)(3)
However:However:
FRSSE not likely to make preparing financial FRSSE not likely to make preparing financial statements easier or cheaperstatements easier or cheaper
exemptionexemption from from disclosuredisclosure, not measurement, not measurement
Not everybody convinced of case for relaxing Not everybody convinced of case for relaxing measurement for smaller companiesmeasurement for smaller companies
Some say it should say, in each FRS or SSAP, Some say it should say, in each FRS or SSAP, what not applicable to smaller companieswhat not applicable to smaller companies
Big GAAP/Little GAAP (4)Big GAAP/Little GAAP (4)
FRSSEFRSSE (4)(4)
questionable whether accounts produced questionable whether accounts produced under FRSSE will give ‘true and fair’ view under FRSSE will give ‘true and fair’ view (which applies (which applies to to allall companies) companies) under the under the Companies ActsCompanies Acts
users users would still have to refer to ‘mainstream’ would still have to refer to ‘mainstream’ accounting standards in order to give a ‘true accounting standards in order to give a ‘true and fair’ viewand fair’ view
balance between those favouring balance between those favouring no no accounting standards for small companies and accounting standards for small companies and those wanting those wanting to retain present systemto retain present system
Big GAAP/Little GAAP (4)Big GAAP/Little GAAP (4)
FRSSEFRSSE (5)(5)
FRSSE will be periodically updated and FRSSE will be periodically updated and revised to reflect future developments in revised to reflect future developments in financial reporting financial reporting
FRSSE will probably be carefully monitored FRSSE will probably be carefully monitored and reviewed after 2 years in operationand reviewed after 2 years in operation
Key (1)
• AIMAIM Alternative Investment Market Alternative Investment Market • ASBASB Accounting Standards BoardAccounting Standards Board• ASCASC Accounting Standards CommitteeAccounting Standards Committee• CA Companies Act(s) (eg CA 1985)• CCABCCAB Consultative Committee of Accounting BodiesConsultative Committee of Accounting Bodies• DDsDDs Drafts for Discussion/Discussion DraftsDrafts for Discussion/Discussion Drafts• DTIDTI Dept. of Trade and IndustryDept. of Trade and Industry• EDsEDs Exposure DraftsExposure Drafts• EUEU European UnionEuropean Union• FASBFASB The Financial Accounting Standards Board The Financial Accounting Standards Board
(USA)(USA)• FRCFRC Financial Reporting CouncilFinancial Reporting Council
Key (2)
• FREDsFREDs Financial Reporting Exposure DraftsFinancial Reporting Exposure Drafts• FRRPFRRP (Financial Reporting) Review Panel(Financial Reporting) Review Panel• FRSsFRSs Financial Reporting StandardsFinancial Reporting Standards• FRSSEFRSSE FRS for Small EntitiesFRS for Small Entities• GAAPGAAP Generally Accepted Accounting PracticeGenerally Accepted Accounting Practice• IASCIASC International Accounting Standards International Accounting Standards
CommitteeCommittee• IASsIASs International Accounting StandardsInternational Accounting Standards• SORPsSORPs Statements of Recommended PracticeStatements of Recommended Practice• SSAPsSSAPs Statements of Standard Accounting PracticeStatements of Standard Accounting Practice• UITFUITF Urgent Issues Task ForceUrgent Issues Task Force• UK United Kingdom