The communication of the financial statements to external parties is known as financial reporting. Financial Accounting is responsible for financial reporting and provides information to the owners of a business. It provides similar information to the owners as required by the government and other interested third parties, such as potential investors, employees, lenders, suppliers, customers and financial analysts. Financial Reporting is concerned with the statement of financial position, income statement and cash flow statement of a company (Davies and Boczko, 2005). The purpose of financial reporting is to provide financial information and satisfy the needs of external users, this financial information is drawn up within a regulatory framework which is very important for businesses because the organization must prepare financial statements according to the rules and regulations so that it can give a true picture to its users (Collis and Hussey, 2007).
The regulatory framework ensures that the financial statements are prepared in a standard way and provide high quality, reliable information to its users. This regulatory frame work is known as Generally Accepted Accounting principles (GAAP). In the UK this regulatory framework is partly based on principles and rules which mean that there are mandatory and non-mandatory elements but the key elements are Accounting standards, company legislation and stock exchange rules (Collis and Hussey, 2007). The regulatory framework exists to see fairplay and the responsibility is jointly held by the government and the private sector which includes the accountancy profession and the stock exchange. The Government use bodies such as the Department of Trade and Industry (DTI) and parliament by the enactment of legislation. An increase in regulatory framework is discouraged by many business environments because companies like to follow regulations which are in practice and there is also an increase in the number of financial scandals (Davies and Boczko, 2005).
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The regulatory system of UK consists of principal financial reporting rules and the bodies that make these rules and UK as part of the European Union is obliged to give more detailed format of the financial statements. Accounting standard is issued by the accounting standards board and the ASB is a very important element in the UK's rule making system. The rules issued by the accounting standard board covers a wide field which include putting more obligations on enterprises and the output of Accounting Standard Board is to impose detailed rules for the preparation of consolidated accounts (Flower and Ebbers, 2002). The main aim of Accounting Standard Board is to establish and improve standards of financial information for its users, preparers and auditors by developing principles through which others can make their own judgement in resolving accounting issues. Accounting Standard Board also issues new Accounting Standards or makes necessary changes in the existing standards which are currently in practice due to new economic developments and in response to business practices. Accounting Standard Board uses a number of guidelines which ensure that the information resulting from the application of accounting standards are faithful and neutral in a sense that it is free from any biasness to influence its users in a particular direction and should not be designed to favour any group of users or preparers. The Guidelines ensure that accounting standards are expressed clearly and supported by analysis. Through a process of regular communication, accounting standards are produced with regard to international developments. Accounting standard Board will analyze the need for standards in terms of its significance and the extent of the problem being identified and then issue accounting standards only when the benefits are greater than cost (Black,G.2002).
London Stock Exchange issues number of rules in the preparation of their financial statements for companies whose shares are listed on the stock exchange. The obligation require listed companies to publish a summary of the income statement over the last ten years where as the law is only concerned with the figures. The London Stock Exchange makes sure that that the British listed companies should regularly follow the ASB's standards. The stock Exchange is the venue for the capital market and it also encourages large companies to adopt new methods for financial reporting. Professional Accountants of UK give recommendations on such issues which are not covered by the law and Accounting Standard Board because they have been conditioned by their training for many years of working as professional accountants (Flower and Ebbers, 2002).
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The International Accounting Standard Board publishes its standards in a series of pronouncements called International financial Reporting Standards (IFRS). Preparers of financial statements apply IFRS in dealing with topics that have not been formed yet. Auditors use IFRS to conform whether financial statements are according to the IFRS and they also give their own opinion. However the users of financial statements interpret information in conformity with IFRS (IFRS, 2009).
In recognizing and measuring the requirements for entity's statement of financial position, the board first refers to the objective of financial statement which is set out in the framework for the preparation and presentation of financial statements. The framework identifies qualitative characteristics of information in the financial statement so that it can be useful for its users in making economic decisions. The information is readily understandable for users and it is relevant to the needs of users for decision making. Users of financial statement get reliable and faithful information about their transactions according to the economic reality which is free from any biasness. The information provided by the entity in its financial statement is comparable with other entity's financial statement which can be helpful for users so that they can assess financial position and performance of a company (International Financial Reporting Standards, 2004). The disadvantage of IFRS for users is that the framework provides description in very general terms; they provide no guidance on such long standing, troublesome issues as classification within the statement of financial position and detailed appropriateness of subtotals like operating earnings, net income, other comprehensive income, other amounts and what should or should not be included in them within the income statement. The framework briefly describes disclosure in notes, in supplementary schedules, and in other means of financial reporting but gives only a few sort of information disclosed in present practice. It does not provide useful conceptual guidance about what information should or should not be disclosed (Bullen and Crook, 2005).
Maintaining a large and complex set of accounting rules can create problems for standard setters and preparers of financial statements. Principles which are only supported by the guidance necessary to make the standard operational, places an obligation on preparers of financial statements to exercise professional judgements. Preparers need to apply professional judgment in more circumstances, while regulators, users and other stakeholders need to accept the use of professional judgment. The fear of lawsuits by regulators has resulted in preparers requesting more rules and reluctance to exercise their judgement. A rules based approach makes it difficult for preparers to understand the volume of rules and constant changes (ICAS, 2006). The preparers have an authority to guide the most appropriate method of accounting for the important activities undertaken by companies. This allows comparison of a company's results with other companies and between one year with another (Collis and Hussey, 2007). The disadvantage of IFRS for standard setters is that it is implementing new standards from time to time and it has brought up many changes in to the system but still there are countries that are reluctant to change their traditional method of financial reporting and want to continue using those methods which are in practice in their country. Since more and more countries are converting their financial reporting system to international GAAP so there is a constant need of updating standards to meet the international requirements and acceptability.
In today's environment the companies should apply rules and regulation in making financial information because it will be easier for users to compare one company with another and it will also save time for companies if they will follow certain standards in disclosing their accounts. The users of financial statement will have a considerable amount of trust on company's accounts if they will adopt those standards which are accepted globally and it will also create disclosures of financial statement more reliable.