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The FRC is mainly responsible for setting standards for financial reporting, monitoring the implementation of the accounting and auditing standards as well as enforcing company in full compliance with the standards.
The FRC is also responsible for promoting proper corporate governance by overseeing public interest case and by disciplining other accounting regulatory body to ensure high standard of corporate governance
To conclude, the overall goal of the Financial Reporting Council is to enhance public confidence in corporate reporting and governance. To realize this goal, the financial reporting council set up two operating bodies under its jurisdiction, that is, Accounting Standard Board and Financial Reporting Review Panel, which assist the Financial Reporting Council to achieve its aim.
Accounting Standard Board
The function of the Accounting Standard Board is to establish and to develop new accounting standards (FRSs) in accordance with the evolving environment and new business needs.
Another function of ASB is to revamp and to improve the existing standard, making it well adaptable to the new business environment.
The third function is to promote EU to adopt IASB's high quality standards as the unified standard across Europe.
The Fourth function is to address urgent issue through its Urgent Issues Task Force.
To sum up, the ASB, which comprises of nine members--one full-time chairman, one full-time practicing director and seven part-time employees, is the functional and implemental body of FRC.
Urgent Issues Task Force
The UITF's main responsibility is to handle the conflicts raised from misunderstanding of accounting standards by accounting standard users or from ambiguous principle issued by ASB. The UITF interpret the complicated principle in an easily comprehensive way so that the people preparing the account can well know how to prepare the account in accordance with the FRS. Also, when deputes over certain account treatment occur, UITF needs to arbitrate and suggest in which ways the account should be prepared. Under the guidance of UITF, the financial statement of one company is more comparable to that of the other companies in the same industry and to that of the company itself from previous period. The UITF issues its interpretation in the form of abstracts, which clarify the situation and detail any accounting treatment considered to be appropriate under this situation.
Financial Reporting Review Panel
The FRRP's main obligation is to review the annual account prepared by corporations, especially those large private corporations and public corporations, whether their accounting treatments are in full compliance with the FRSs, whether all the accounts meet the disclosure requirements, and whether the financial statements give a true and fair view about the performance of the company and truly reflect the strengths and weakness of the company.
Other functions include, maintaining a panel from various groups (accountants, businessmen, and lawyer) while doing so can assure the fairness, proactively reviewing the selective account to assess risks on the company to make sure that the company is not over involved in high-risk incurring business, and informing any findings of the panel to the correspondent regulatory body so that the regulatory body can determine whether any regulatory work should be applied.
The International Accounting Standard Board
"Our mission is to develop, in the public interest, a single set of high quality, understandable and international financial reporting standards (IFRS) for general purpose financial statements".
The IASB issues and develops IFRs, which is the extension of the FRSs issued by ASB. The primary object of IASB is to develop accounting standards well adaptable to the general business users all over the world by firmly cooperating with native accounting regulatory body. Hence, one of the main functions of IASB is to enhance the relationship between the IASB and national accounting regulatory body.
Another function is to promote the adoption of use of IFRs in the world. The IFRs advantages the company to compare its performance with its global competitors and to know its position in the global market.
Company Acts 1963
The company Act 1963 has clearly defined the aim of the financial statements--give a true and fair view about the state of affairs and profit and loss account of a company as at its end of the financial year.
The acts also lay out the additional requirements on accounting treatments and disclosures in preparing a financial statement of a public company and of a holding company with subsidiaries.
The company Act 1963 addresses other issues as well, such as what financial statements should be filed at Corporation Registration Office, the consequence of failure to follow the Company Act in preparing financial statement, and the duty of director to make sure that the financial statement accord with company acts and other regulations.
Company Act 1996
Company Act 1996 is the complement of Company Act 1963; it further advances the binding requirements on which companies must meet, such as the date within which to file the financial statement to the Corporation Registration Office and the least duration that the accounting records must be kept, Also, The 1996 Act detailed any penalties which companies or directors may suffer, such as the penalty to directors who provide misleading financial information to the public.
EU Directive and Regulation
The Fourth Directive, which is directed toward the limited company, aims to coordinate the different presentation of financial statements in each member states, concerning the different format, content and revaluation method used in each member state. The fourth Directive regulates the following issues: layout of financial statement and note disclosure, etc. The Directive also made an emphasis on the importance of accrual concept and consistency concept in preparing financial statements. The implementation of EU directive allows companies to compare their performance with their peers.
The Seventh directive, which follows the fourth directive, extends the principle into preparation of consolidated account.
Then, EU Regulation came into place, requiring that all listed companies in EU with subsidiaries must prepare their consolidated financial statements in full compliance with the IFRs and publish their consolidated financial statements since the regulation took effect.
Cases Law is also an important source of legislation. For example, in the case Lubbock v. British Bank of South America (1892), the court held that the dividends may be paid out of the capital profit that has actually been realized. And in a later case Dimbula Valley Tea Co. Ltd v. Laurie (1961), the court held that an unrealized capital profit was available for dividends, but only for preference shareholders. The court gave a cautionary note that Dumbula case might be completely appropriate for another case.
The case law explores the interpretation of the legislation and extends the legislation into practice.
(Financial Reporting 7th Edition, David Alexander and Anne Briton 2005 Gary Publishing)
Stock Exchange Regulation
There are additional requirements for the listed company operating on the stock market, which include full disclosure of certain transaction, such as transfer of shares. The full disclosure is to ensure the transparency of the transaction.
The reason why FRRP review the annual account lies in the incidence that some businesses cannot prepare their annual account in line with financial reporting standards. It's the FRRP's obligation to inform those businesses of their distraction from FRS. Another reason is that FRRP intends to stimulate certain account treatment, which is of public interest or which has fundamental effect on the integrity of the report, so that the public can gain more awareness and acceptance of the particular accounting treatment. The intention of FRRP to review the accounts of company has been illustrated as to minimize the possibility of companies to manipulate account and to involve in creative accounting.
The findings of the report point out the defect or flaw in the subject's financial statements. FRRP also demonstrates the reason why the defect is referred and the side effect that the defect may bring .For example, in Thorn Group Plc case, FRRP finds that the company didn't charge depreciation on the hired out equipment on the grounds that maintenance fees had been incurred to renew the asset. The FRRP holds that no assets can last in use forever through maintenance and that the accounting policy this company adopted is contradictory to accrual & matching concept and FRS 15. Therefore, the findings provide sufficient grounds for the company to make necessary changes on its annual report.
Normally, FRRP can reach consensus with the company on what adjustments should be entailed. In some certain circumstance, the adjustments may require company to look backward on its past financial statement and to make some essential changes, and the work involved on the changes can be tedious. For instance, in the Thorn Group Plc case, the consensus was reached that the directors of Thorn Group Plc change their accounting policy by creating an accumulated depreciation account on the hired out equipment as at the end of the financial year 2002 and by reducing its reserve on the balance sheet dated back to May 1999.
On the other hand, if no agreements are reached between the FRRP and the company, FRRP can take further step, normally making a case to the court, to seek the enforcement of its instruction.
Various user groups are interested in the financial information provided by the company. Specifically,
The financial statements can assist manager to better perceive the overall performance of the company. Also, by conducting ratio analysis, the managers can figure out how efficient the company is operating and how many resources are consumed to generate one unit of profit. The financial statements also enable management team to compare its performance with the industry average performance.
Shareholders and Investors
The shareholders are eager to know whether the company they invest in is creating their wealth during the financial year. The balance sheet and statement of change of equity are the best indicators which reflect the shareholder wealth. Besides, potential investors often question about whether their future investment can generate good money return, and the most direct way to find the answer is through checking and analyzing the financial statements of the company.
A strong financial position shown on the financial statement can assure the lenders; rather, a weak financial position foreshadowing bankruptcy of the company often the lenders, because they may suffer a huge loss on the money lent. Hence, Lenders show interest in the financial statement of their debtors especially during the time their debtors underperformed.
Sometimes, the government collects date from financial statement in order to ascertain the current market situation. For example, in the economic downturn, the government may collect the profit and loss account figure of all the private company to see how the economic downturn affects companies' bottle line.
Competitors and Customers
Competitor compares its financial statements with its peers, in order to find out its strengths and weakness relative to its peers so as to exploit strengths and amend weakness to increase its competitive advantage, and in order to better formulate its strategy according to its current position in the market.
The customers involved in long-term contract with the company most concern the viability of the company. A strong financial status shown by the financial statement can surely assure the customers of the business.
The biggest advantage that flows from international harmonization of accounting standards will be the allowance of comparability between international businesses. The harmonization of accounting standards eliminate any local settings or any unreliable local factors on the financial statements, so investors can compare the performance of businesses in using current financial statements directly with no needs to translate financial statements into one standardized way.
Another advantage of harmonization is that international businesses can substantially reduce their cost in preparing financial statements because those multi-national businesses do not have to retranslate their statements. All they need to do is to prepare a standardized state applying all over the world.
Another benefit is that harmonization leads to the adoption of higher accounting standard, because only the highest accounting standard can be regarded as the international standards by the world.
One obvious disadvantage is that the harmonization of accounting standards reduces the flexibility of business in preparing financial statements. Most companies, which cannot be seen as standardized companies concerning their culture, and customers they serve, has its uniqueness in carrying business, which some people argue that the accounting system should be flexible enough to reflect the uniqueness of business.
Second, it's not feasible to operate a standardized accounting system, given that huge pressures from local group exist. And the cost may be even greater if business have to interpret their accounts to their local customers.
The information that financial statement provided should be firmly associated with the needs of the information user. For example, investors may need to know the earnings per share of the company, so the financial statements of that company should be able to provide such information which enable investors to calculate the earnings per share. The provision of the relevant information enables users to predict the future capability of the business in generating profit.
However, because the relevant information of one group may be deemed to be irrelevant by other interest group and because more and more interest groups are emerging from the even more complex business world, it's not likely for a company to provide a financial statement which can satisfy the needs of all interest group.
ReliabilityÂ is the extent to which information isÂ verifiable, representationally faithful,Â and neutral.
Reliability heavily relies on objectivity, and objectivity, contrary to subjectivity, leaves no place for manipulation of accounts. For example, the cost of a fixed asset is objective while the market value of the asset is somewhat subjective, leaving space for manipulation. So, it's deemed that the original cost of the asset is more reliable than the market value in terms of reliability.
Company should provide reliable information to users. Any unreliable information could mislead shareholders and general public. For example, Enron, with a so called creative accounting system, highly reckon its profit on unreliable source such as future profit, in this sense, the figure on the financial statement of Enron is unreliable; thus, shareholders can't gain a true and fair view of the company through the financial statement.
The financial statement of one company should be comparable to that of a similar company or to itself from previous period. Comparability cannot be achieved unless similar transactions are accounted similarly among businesses. Comparability allows potential investors to assess each company's competitive advantages relative to its competitors and assists the investors in final decision making.
In reality, however, the different accounting policies adopted by different companies undermine the comparability among companies. Furthermore, every nation may have its own accounting regulatory body, even though the principle guiding the preparation of statements may be almost the same across the world, however, difference did exist in certain account treatment and disclosure requirements. This difference cannot be neglected when comparing the account of two companies that fall under different jurisdiction of accounting regulatory body.
The financial statements should enable people with ordinary sophistication to understand since understandability is the premise of comparability. Most of the items appeared in the financial statements are easy to understand, if not, at least can be easily perceived. However, some terminologies, such as depreciation, may not be easy for people to fully comprehend, because of its abstract nature. Also, information users may fail to understand the statements prepared on accrual basis which indicates revenue and expenses may be earned or incurred before realization.
This theory argues that the financial statements should disclose all the information about the company. People who are against it contend that it's unnecessary for a business to disclose all the information which is considered not material. If the statement contains all the information about the business, information user may feel frustrated and time-consuming to skim these statements.
The financial statement should be prepared non-biased. It should not be prepared in order to delight a certain group such as shareholders. The statement must give a true and fair view of the performance of the business.
Information is valuable only when users can get it timely. The timely information can assist users in better decision making. In this sense, companies should publish their financial reports timely and promptly.
The figure on financial statements should be maintained with a certain level of accuracy. If it's not accurate, any analysis based on the figure may not reflect the truth or even mislead the company into a wrong direction; however, if accuracy is overemphasized, a large amount of resource devoted to the accuracy could have been wasted simply because nobody needs that kind of accurate data.