Accounting, Purchasing, & Cost Control (CH 13) PDF

Accounting, Purchasing, & Cost Control T E A C H E R : WA R D I S S A BROWN Recap / Announcements CH 13 The Regulatory Framework of Accounting  ❑Abuse in the provision of financial statements in the latter part of the last century has brought about the need to enforce...

Accounting, Purchasing, & Cost Control T E A C H E R : WA R D I S S A BROWN Recap / Announcements CH 13 The Regulatory Framework of Accounting  ❑Abuse in the provision of financial statements in the latter part of the last century has brought about the need to enforce more rigorous regulation of business practices. ❑Regulation implies the imposition of rules and regulations. In the accounting world, this relates to the preparation and presentation of reports and statements for third parties. Introduction ❑This level of regulation in financial reporting relates primarily to limited liability companies (LLC) as they are legally required to prepare and present their accounts to the Registrar of Companies or other regulatory bodies for public inspection. ❑The objective of an accounting regulatory framework is to ensure adequate and relevant disclosure, objectivity and comparability of accounting information for external users of financial reports. ❑Accounting and the preparation of financial statements and reports are regulated by the following:  1. The government through the relevant legislation. For e.g. the Companies Act 2. Regulation through the European Union (EU) (SEC – US). The EU issues directives to its merchant states to help ensure greater harmony in the presentation of financial statements. Introduction 3. The stock exchange listing requirements (BISX) for listed, publicly traded companies. 4. The accounting standards issued by the professional accountancy bodies, in particular the Financial Reporting Committee (FRC) and the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB).  Role of Accounting Standards Accounting standards were created to reduce the level of subjectivity in the preparation of financial statements. In 1971, the Accounting Standards Committee(ASC) was created. The committee consisted of members from the accountancy bodies. The committee issued a total of 25 Statements of Standard Accounting Practices dealing with a variety of topics in an attempt to reduce the level of subjectivity and variety in accounting practice. The financial statements of companies are required by the Companies Act to give a ‘true and fair view’. (International Basis) and ‘presents fairly’ (US standards). In 1990, the ASC was replaced by the Accounting Standards Board (ASB). The accounting standards issued by the ASB is known as Financial Reporting Standards (FRS) In November 1997, the ASB issued a third category for smaller businesses called Financial Reporting Standards for Smaller Entities International Financial Reporting Standards ❑The FRC has jurisdiction over the UK and Ireland. ❑Other jurisdictions have their own regulatory bodies. ❑Thus the International Accounting Standards Board, formerly known as the International Accounting Standards Committee. The Board was created to harmonise the accounting standards worldwide. ❑The IASB issues International Financial Reporting Standards (IFRS’s) which replaces its earlier International Accounting Standards (IAS’s) ❑Since 2005 all listed companies are required to comply with IFRS’s. From 2007, now all private companies are required to comply with IFRSs Key Terms Accounting Concepts and Their Role Modern accounting is based on certain concepts and conventions that have developed over the years. These concepts are a collection of broad basic assumptions that form the basis of financial accounting. Review of Accounting Concepts, The Business Entity Concept, The dual aspect concept, The money measurement concept, The realization concept, The historic cost concept, the going concern concept, the accruals concept, The prudence concept, the consistency concept, the materiality concept, substance over legal form concept. SSAP published in 1971 identified four fundamental accounting concepts, (i.e. accruals, prudence, consistency, and going concern. Accounting Standards The ASB issued the statement of principles in December of 1999. The Statement of Principles is not an accounting standard but underpins all of the accounting standards issued and to be issued in the future. It lays out the objectives of financial statements and the qualitative characteristics of financial information. It focuses on the elements of financial statements and how these elements are recognized and measured and how the information should be presented. It is an accounting framework which lays the basis for all other accounting standards. Accounting Policies – Accounting policies are those specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements Statement of Principles for Financial Reporting ❑Issued in 1999. It sets out the principles that the ASB believe should underlie the preparation and presentation of financial statements that are required to give a true and fair view. ❑The statement has a total of 8 chapters dealing with the following areas: ❑The Objectives of Financial Statements – Which is to provide information about the financial performance and financial position of an enterprise that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions. ❑The Reporting Entity – Identifies two main; single entity and group. It states that an entity should prepare and publish financial statements if there is a legitimate demand for that information and if the entity is a cohesive economic unit Statement of Principles for Financial Reporting ❑The Qualitative Characteristics of Financial Information – Four Characteristics ❑Relevance – Is the information useful for making decisions? ❑Reliability – Is the information reliable and does it reflect the substance of transactions? ❑Comparability – Is the information presented in such a way that ensures it can be compared with similar information about the entity in other periods and with similar information from other entities. ❑Understandability – Can the information be understood by the users of financial statements. ❑The Elements of Financial Statements ❑Assets ❑Liabilities ❑Ownerships interests ❑Gains ❑Losses Statement of Principles for Financial Reporting ❑Recognition in Financial Statements – Focuses on what is required to recognise a transaction that creates or increases assets and liabilities, gains and losses. ❑Measurement – Relates to how transactions are measured ❑ The measurement basis of historic cost or current value needs to be selected for each category of asset or liability ❑ Historic cost is measured at the initial transaction cost. If measured on current value basis at the time it is acquired. ❑ Re-measurement will only be recognized if there is sufficient evidence that the monetary value of the asset or liability has changed and that the new value can be measured with sufficient reliability ❑Presentation of financial statements ❑ The presentation of information on financial performance should focus on the components of that performance and the characteristics of those components ❑ Should focus on the type and function of assets and liabilities held and the relationship between them. ❑ Information on cash flows should be presented in such a way that distinguishes between those that are as a result of operating activities, and those that are from other activities such as capital ❑Accounting for Interests in Other Entities – focuses on how interests in other entities should be presented FRS 18 ❑Deals with how accounting policies are selected, applied, and disclosed. ❑Ensures that ❑An entity adopts the accounting policies most appropriate to the particular circumstances ❑The accounting policies adopted are reviewed regularly to ensure that they remain appropriate to the entity’s particular circumstances ❑Sufficient information is disclosed in the financial statements to enable users to understand the accounting policies adopted and how they have been implemented ❑Any material item must be: ❑Recognised in the financial statements ❑The measurement basis for the transaction must be selected. (i.e. historic or current value) ❑The measurement of the information in the financial statements must enable the users to understand the policies adopted FRS 18 ❑Should there be any change to any one of the above, this is deemed as a change in an accounting policy and the effect of the change should be reflected in the financial statements. This is in contrast to a change in an estimate or estimation technique. This is not reported in the financial statements. ❑Eg – Change in estimate – change in the depreciation method ❑Change in accounting policy – loan interest charged to the income statement is now added to the cost of an asset ❑FRS 18 only recognizes two concepts – accruals and going concern for their persuasive impact on the financial statement