Question

Analyze the conceptual and regulatory framaworis for financal eporting?

Answer 1

FINANCIAL REPORTING

The disclosure of financial results and related information to management and external stakeholders (e.g., investors, customers, regulators) about how a company is performing over a specific period of time is known as financial reporting.Financial reporting includes the following: External financial statements (income statement, statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders' equity) .

The regulatory framework

Regulatory Framework means any laws, regulations to ensure users of financial statements receive a minimum amount of information that will enable them to make meaningful decisions regarding their interest in a reporting entity.

    Principles based framework:
1. Based on a conceptual framework such as IASBs framework.
2. Accounting standards are set on the basis of the conceptual framework.

Rules based framework.
1. Cookbook approach.
2. Accounting standards are a set of rules which companies must follow.

IASB

The International Accounting Standards Board (IASB) is organised under an independent foundation named the IFRS Foundation. The Foundation is a not-for-profit corporation which was created under the laws of the State of Delaware, United States of America, on 8 March 2001. The basic purpose of the IASB Framework is to provide assistance and guidance to the IASB in developing new or revised standards in addition to assisting the preparers of financial statements in applying the standards and dealing with issues which are not explicitly dealt with by the standards.The IASB structure has the following main features: The IASC Foundation is an independent organization having two main bodies, the Trustees and the IASB, as well as a Standards Advisory Council and the International Financial Reporting Interpretations Committee.

• IASB : Solely responsible for using IFRSs

Intentions are:

- develop a single set of understandable and enforceable high quality worldwide standards
- IASB cannot enforce compliance with its standards as needs cooperation with national standard setters.

• IFRS Interpretations Committee (IFRS IC) :

  Issues rapid guidance on accounting matters where divergent interpretations of IFRSs have arisen.
  
  Must be approved by the IASB.
  
  The IFRIC addresses issues of reasonably widespread importance.
  - newly identified financial reporting issues not specifically dealt with in IFRISs or
  - issues where unsatisfactory or conflicting interpretations have developed.

• The IFRS Advisory Council (IFRS IC) :

  Provides a forum for the IASB to consult a wide range of interested parties affected by the IASBs work with the objective of:
  
  - advising the board on agenda decisions and priorities.
  - informing the Board of the views of the organisations and individuals on the Council on major standard setting projects.
  - giving other advice to the Board or Trustees.

Regulatory Framework of Financial Reporting in India

1. Legal Requirements

• Sub section 4 of 209: This section requires companies to preserve their books of accounts for a period of at least 8 years.

• Sub section 3 of 209: Books of accounts should be kept on accrual basis and according to double entry system of accounting.

• Section 210: Describes the duty of the board of directors to lay before the annual general meeting the balance sheet and profit and loss account of the company. Income statement should not predate the annual general meeting by more than 6 months. It may be prepared for maximum period of 18 months.

• Section 211: This section deals with the form and contents of the profit and loss account and balance sheets.

• Section 212 to 214: These sections deal with defining of several ways in which a holding and subsidiary relationship can arise.

.2. Accounting Standards and Guidance Notes of the ICAI:

IACI has issued 32 AS along with 30 ASI's and guidance notes, companies while doing financial reporting have to comply with these standards

3. IAS and IFRSs:

At international front also IASB (previously IASC) has issued 41 IAS and 9 IFRSs so as to bring harmonization in divergent accounting practices being followed in different countries. Regulatory framework in every country has to comprise these IAS and IFRSs.

4. Recent Trends and Emerging Issues in Corporate Reporting:

Regulatory framework for support of financial reporting has to comprise recent trends and emerging issues, for instance, corporate governance, social disclosures, environmental issues interim reporting and segment reporting etc. General instructions for preparation of Balance Sheet given in Schedule VI, Part I as per provision of section 211 of Companies Act, 1956.

Conceptual framework

A framework which prescribes the nature, function and limits of financial accounting and financial statements.In a broad sense a conceptual framework can be seen as an attempt to define the nature and purpose of accounting. A conceptual framework must consider the theoretical and conceptual issues surrounding financial reporting.Conceptual frameworks can apply to many disciplines, but when specifically related to financial reporting, a conceptual framework can be seen as a statement of generally accepted accounting principles (GAAP) that form a frame of reference for the evaluation of existing practices and the development of new ones.

The Framework addresses:

• the objective of general purpose financial reporting
• qualitative characteristics of useful financial information
• financial statements and the reporting entity
• the elements of financial statements
• recognition and derecognition
• measurement
• presentation and disclosure

concepts of capital and capital maintenance

  

a) Objectives of financial reporting

1. Provide informations about the rteporting entity that is useful to existing and potential investors , lenders and creditors in making decisions about providing resources to the entity.
2. The users need information about the resources of the entity to assess an entity's prospects for furture net cash inflows .
3. Investors,lenders , other creditors expectation about returns depends on their assessment of future net cash inflow to the entity.

b) Qualitative characteristics of useful financial information

    1. Relevance
Information is relevant if:
- it has the ability to influence the economic decisions of users.
- is provided in time to influence those decisions.

2. Qualities of relevance
Information that is relevant has predictive, or confirmatory value.
- predictive value enables users to evaluate or assess past, present or future events.
- confirmatory value helps users to confirm or correct past evaluations and assessments.

3. Materiality
An entity specific aspect of relevance and depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.

c ) Elements of financial statements

1. Assets
- resources controlled by the entity.
- as a result of past events.
- from which future economic benefits are expected to flow to the entity.

2. Liabilities
- an entity's present obligations.
- to transfer economic benefits.
- as a result of past transactions or events.

3. Equity interest
The residual amount found by deducting all liabilities of the entity from all of the entity's assets.

4. Income
- an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities.
- transactions that result in increases in equity other than those relating to contributions from equity participants.
- this definition follows a statement of financial position approach rather than the profit or loss approach to recognising income.

5. Expenses
- decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or occurrences of liabilities.
- transactions that result in decreases in equity other than those relating to distributions to equity participants.

d ) Recognition

1. Recognition
The depiction of an element.
In words and by monetary amount.
In the financial statements.

2. Recognition of assets
An asset will only be recognised if:
- it gives rights or other access to future economic benefits as a result of past transactions or events.
- it can be measured with sufficient reliability.
- there is sufficient evidence of its existence.

3. Recognition of liabilities
A liability will only be recognised if:
- there is an obligation to transfer economic benefits as a result of past transactions or events.
- it can be measured with sufficient liability.
- there is sufficient evidence of its existence.

4. Recognition of income
Income is recognised in profit or loss when:
- an increase in future economic benefits arises from an increase in an asset (or a reduction in a liability) and
- the increase can be measured reliably.

5. Recognition of expenses
Expenses are recognised in profit or loss when:
- a decrease in future economic benefits arises from a decrease in an asset or an increase in a liability and
- can be measured reliably.

6. Financial position approach to recognition.
- income is an increase in an asset/ decrease in a liability.
- expenses are an increase in a liability/ decrease in an asset.

Why have a conceptual framework?

1. Enables accounting standards and generally accepted accounting practice (GAAP) to be developed in accordance with agreed principles.

2. Avoids 'fire fighting' where accounting standards are developed in a piecemeal way in response to specific problems or abuses.
'Fire fighting' can lead to inconsistencies between different standards and between accounting standards and legislation.

3. Lack of a conceptual framework may mean certain critical issues are not addressed.

4. As transactions become more complex and businesses become more sophisticated it helps preparers and auditors of accounts to deal with transactions which are not the subject of an accounting standard.

5. Accounting standards based on principles are ought to be harder to circumvent.

6. A conceptual framework strengthens the credibility of financial reporting and the accounting profession.

7. It makes it less likely that the standard setting process can be influenced by 'vested interests'.

Regulatory framework v/ s conceptual frame work