Table 1: Financial Reporting Authority in the UK
There are several rules to constrain the financial reporting. Because of information Asymmetry and comparability that management should not be given complete freedom to determine what accounting information should be included in the published financial statements.
In that case, managers do not have access to information about all aspects of the organization’s activites, which also helps the user accounts to compare the performance of an organization either through time or with the performance of other organizations.
The external users of accounts would be unlikely to receive the information necessary to make rational decisions, if managers were given complete freedom to determine the content of published financial statements.
Over the years, regulators have acted on behalf of shareholders, creditors, employees and others, to develop a number of rules, which govern financial reporting. Most of these rules seek to alleviate the problems of information asymmetry and lack of comparability. They determine what information is to be included in published financial statements, and how it is to be presented. The greater the scope for misleading external participants, and the greater the need of those participants for comparable information, the more rules are required. Thus, the financial reports of stallholder are subject to far fewer rules than are those of a public limited company.
- Who are the regulators who determine the form and content of published accounts, and how do they arrive at their decisions?
- The main sources of the regulations which govern the financial reporting of companies in the UK.
The prepares of the published financial statements of UK companies must comply with specific rules governing the form and content of company accounts. The principal sources of such regulation are the law and the accountancy profession.
- The Law
The companies Act 1985 is essentially a consolidation of law which had previously been included in the older versions. The companies Act 1989’s accounting provisions are substitutions for, and amendments to , the Companies Act 1985. All financial statements drawn up under the Act must present a true and fair view. The requirement is fundamental and overrides all the detailed rules on content and format of financial statements.
The Act provides a framework for general disclosure that resolve some of the problems associated with the asymmetry of information between the directors and some user groups by requiring that certain financial statements should be prepared and presented to the shareholders, and requires the specific disclosure of certain items. They also enable user groups to compare the level of their inducements with those received by other groups. The Act requires that the directors are not only present the financial statements to the shareholders each year at a general meeting, but also that independent auditors are appointed who will examine the financial statements and report their findings to the shareholders.
- The accountancy profession
The accountancy profession has published statements recommending the disclosure of specific data, however, in its role as regulator, the accountancy profession has been even more influential in achieving a significant increase in the comparability of financial statements. Many of the profession’s regulations limit the number of alternative accounting treatments available to management. Thus, whereas the law provides the general framework for what is to be accounted for in financial reports, the accountancy profession has traditionally provided rules, in the form of accounting standsards, about how items and transactions are to be accounted for.
The standards covered a whole range of issues including disclosure of earnings per share information and the accounting treatment of stocks and long-term contracts.
- The role and usefullness of accounting standards
The standards covered a whole range of issues including disclosure of earnings per share information and the accounting treatment of stocks and long-term contracts.
The standards setters should be aware of the information needs of all user of accounts, and should appreciate the impact of different accounting methods on those needs. They also should be able to resolve the conflicts which exist between the needs of different users. Clearly they are in a position of power and ideally they would exercise this power by choosing those accounting treatments which best satisfy all user needs. This might be achieved by choosing between alternative accounting treatments on the basis of enhancing social welfare rather than the welfare of individual decision makers. They should have some accounting knowledge as well apart from all the above
The standardization is to ensure as far as possible that different entities apply similar transactions. This aim could be achieved simply by prohibiting the use of all but one accounting treatment of each transaction, issue or event. This would be standardization based on uniform accounting practice, and could be achieved with little more than the random selection of one accounting treatment from the range available.
Financial reporting regulators in the UK responded to the diversity in reporting of barter of advertising transactions with official rulings, EITF 99-17[] and UITF 26, respectively. The consensus opinions of the two bodies are essentially the same. The primary guideline put forward by the EITF is that barter transactions should only be recorded when the fair value of the advertising space can be determined. Determination of fair value is governed by the recent history of cash sales to separate parties for similar advertising. In the case where similar advertising has been sold for cash, recorded barter transactions are limited to the amount of those prior cash sales. Therefore, the guidelines prohibit a firm from using one cash sale for space to determine fair value for multiple subsequent barter transactions. The regulations also prohibit a cash swap between parties as determination of fair value when the transaction is in substance barter.
The UITF provisions require that barter transactions only be formally recognised when the advertising would have been sold for cash if it had not been exchanged. A company has evidence that the space could have been sold for cash when it has a history of selling similar space for cash, and when substantially all other advertising revenues for the period are from cash sales. Both the EITF and UITF call for disclosure in the notes to the financial statements of barter transactions recorded in current revenues and other barter transactions that were not recorded. Therefore, fewer barter transactions can be recorded as revenues and investors must be clearly informed about the barter transactions.
- Other sources of regulation in the UK
Accounting standards together with the companies Acts 1985 and 1989 contain most of the regulations governing company financial reporting in the UK. However, some companies must also comply with regulations laid down in other legislation. Thus, companies must comply with the accounting requirements set out in the International Stock Exchange’s Continuing Obligations in order to help their shares to be listed on the International Stock Exchange of the UK and Republic of Ireland,
Summary
From all the above , we can see that the importance of the regulations of finance reporting and it has be consummating constantly as required.
Bibliography:
Financial Accounting Second Edition (John Arnold, Tony Hope, Alan South Worth, Linda Kirkham)