Issues in the financial reporting regulatory framework

 

The purpose of financial reporting is to convey financial information to the people who will be reading financial statements in the future. Over many decades, a complete regulatory framework has been built to control the financial reporting process in order to ensure the accuracy, integrity, and consistency of financial information. This structure is now in place. Abuse of the financial reporting regulatory system has resulted in revisions to the framework, which has had an impact on the majority of UK-based enterprises.

 

The accrual concept of accounting is a key accounting principle of the financial reporting framework that governs how financial transactions are recorded and reported. It ensures that turnover and expenses are recorded at the time of the transaction, rather than at the time of payment receipt or payment receipt. The matching principle, which specifies that revenue and expenses should be recognised in the same period, is followed by the approach in question. Because correct double-entry accounting and the application of sophisticated rules and standards are required to ensure that financial information is complete, this style of accounting has some limitations.

 

The qualitative characteristics of financial statements can categorised as:

1. Fundamental

• Relevance is defined as the provision of financial information that is beneficial to the end user. A threshold of materiality can aid in the determination of relevance.

• Honest representation, financial information that is unbiased, complete, and free of errors are all important considerations.

 

2. Enhancing

• Comparability, the ability to make comparisons between different time periods and different enterprises within an industry

• Verifiability and the ability to check accuracy are important considerations.

• Timeliness, and the availability of data in a timely fashion

• Understandability, as well as knowledge presented in a straightforward manner

 

A statement of financial performance, also known as a profit and loss account, is prepared for a specific period of time – typically a 12-month period – and includes information on operational performance such as revenue, cost of sales, gross profit, administrative expenses, finance costs, tax costs, and net profit. A profit and loss account is also known as a profit and loss statement. An important disadvantage of this statement is that corporations can aggregate several different spending kinds and report them all on a single line (for example, administrative expenses), which reduces the transparency of the financial statement.

 

It is widely known as a balance sheet, although it is a statement of financial status that provides an overview of the organization's financial position at a specific point in time. An organisation would typically do this near the conclusion of its fiscal year. There is a risk that this 'point in time' image of the company will be manipulated, which is a restriction of this statement. Management is in a position to ensure that the company's financial reporting position is favourable at this time. Companies can, for example, utilise strategic measures to improve their cash and liquidity positions by deferring payments to suppliers or making purchases towards the end of the financial year, resulting in a more favourable position at the time of reporting.

 

Shareholders can possess a variety of different types of ownership and voting rights in a company, and as a result, they must provide a statement detailing their ownership. The Statement of Changes in Equity (SOCE) summarises how shareholder ownership has changed throughout the course of the financial reporting period in question. In addition to financial performance, there are other components of a company's success which is not included in the statement of financial performance but should be included in an organization's total financial performance. Consequently, these features are reflected in the Statement of Comprehensive Income (SCI) (SOCI). One of the most significant limitations of these statements is that they can be difficult to comprehend for the typical user, and as a result, they are often dismissed as being too complex, despite the fact that they include important and relevant information.

 

A regulatory framework for the preparing financial statements is required for a variety of reasons, including the following:

 

In order to ensure that the needs of users of financial statements are addressed with a bare minimum of information, the following objectives must be met:

To ensure that all information presented in the relevant economic arena is comparable and consistent with one another. Because of the increase in multinational corporations and worldwide investment, this is becoming a more international field to compete in.

To raise the level of trust that users have in the financial reporting process.

To control the conduct of corporations and their directors in relation to their investors.

The adoption of financial reporting standards alone would not be adequate to achieve these objectives. In addition, some form of legal and market-based regulation must be implemented.

 

The accounting regulatory environment is comprised of a number of different components. An example of a regulatory system would comprise the following elements: national financial reporting standards, national law, market regulations, and security exchange rules

 

The Accounting Standards Board (a division of the Financial Reporting Council) is the national financial reporting authority in the United Kingdom, and it is responsible for issuing financial reporting standards in the country. The Companies Act 2006 is the most important piece of law impacting businesses in the United Kingdom. However, there are other other pieces of legislation in the United Kingdom, the European Union, and even the United States (such as the Sarbanes-Oxley Act) that have an impact on accountability. In addition, there are various industry-specific regulatory systems that have an impact on accounting in the United Kingdom, such as the Financial Services Authority, whose mission is to ensure that the financial services industry is accountable to the public. For corporations whose shares are traded on the London Stock Exchange, there is also a set of rules established by the exchange.