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Company Law and Financial Reporting Standards - Assignment Example

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This assignment "Company Law and Financial Reporting Standards " presents different accounting standards, a company has to change or modify their items using for the financial projection of their company but the overall idea of conveying the company performance and financial condition is the same…
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Company Law and Financial Reporting Standards
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? Running Head: FINANCIAL REPORTING STANDARDS Over recent decades, developments in Company Law and Financial Reporting Standards have impacted significantly on the reporting of the financial performance of companies in the UK [Name] [Course] [Professor’s name] [Date] A country follows a particular standard to report their companies’ financial performance. Accounting standards for financial reporting are set by the government or by the regulatory authorities. These standards are created to bring uniformity in accounting policies. Financial reporting is used to measure the growth, performance and position of various companies for a particular country in a same parameter (Accounting Standards, n.d., p.1). This paper focuses on the requirements of U.K. companies for representing financial statement while maintaining some accounting standards and company laws as well as the comparison of financial reporting standards of U.K with that of USA. The current requirements for the reporting of the financial performance of companies in the U.K. In June 2002 the European Union adopted the International Accounting Standards (IAS). For this reason the listed companies in European Union (EU) security market including banks and insurance companies have to prepare their financial statements in accordance with International Financing Reporting Standards. United Kingdom is one the members of EU. For that the U.K. companies have been following the rules and regulation of IFRS since 2005 (Delloitte, 2012). Under the U.K. Companies Act 2006, the directors of the company have to prepare financial statement according to the International Financial Reporting Standard (IFRS). Under this company law the directors have to approve their financial statement by considering that, the statements give the exact and original value (Harthorn & King, 2011, p.70). Director’s report should include the analysis using the key performance indicators and these things indicate the information’s of environmental and employee matters (Elwin & Hirst, 2006, p. 2). There are various operating and regulatory bodies like Financial Reporting Council, Accounting Standard Board, Auditing Practice Board, Accounting and Actuarial Discipline Board. These are involved in setting up the requirements for financial reporting of a company. Financial reporting exposure draft (a document released by Financial Accounting Standard Board) indicates the presentation of information about the company’s financial performance in both the primary statement and supporting notes. It was a proposal, issued in the year of 1992. When the new proposal implemented, it has changed some existing requirements of financial reporting for the companies of U.K. The proposal was made for the advancement of financial reporting standards in some below mentioned field (Accounting Standard Board, 2000, pp. 3-7). 1. The profit and loss account and the total gain & loss statement are combined to form a single financial indicator. 2. The above mentioned statement will indicate all the gains and losses during the time period in which the statement was made. 3. The company should divide the statement in to three parts a. Operating b. financing and treasury c. Other gains and losses 4. While preparing the performance statement for a particular period the amount of dividend paid to the share holders does not get included in that. (Accounting Standard Board, 2000, pp. 11-12) 5. Balance sheets, income statements, retain earning statements and cash flow statements are the four types of primary statement. Primary statement should consider the ownership interest (Primary Financial Statement). Financial Reporting Exposure Draft (FRED) proposes that Earning Per Share (EPS), dividends for a particular period should be mentioned as a memorandum items. These items are shown in the balance sheet but these things are not added in the final total. A letter note including reserves note and note of gains and losses in past days are made optional for the companies of U.K. This note is mainly a single performance note. Single performance note helps the users of account to view the company’s financial performance very easily. To represent the financial performance the companies have to show their exceptional items over the last five years. Exceptional items are those items, which have a negative impact on financial performance. Company has to include their unusual tax implications for certain gains and losses in their financial representations. These are the new proposal of Accounting Standard Board to implement some new features in the financial representation of U.K. companies through Financing Reporting Exposure Draft. (Accounting Standard Board, 2000, pp. 3-7) Generally Accepted Accounting Practices (GAAP) has some features, which the companies of U.K. have to consider as an important thing while representing their financial statements. The Companies Act made the framework for the enforcement of GAAP in the year of 1985. From the parameters of GAAP, the statement of total gains and losses must be represented separately. GAAP gives some important guidance to report their transactions according to their risk and reward basis. In case of settlement of cash, only cash is considered. There is no involvement of cash equivalents. Negative goodwill is recognized under the profit and loss account to match the depreciation or sale of the non monetary assets and internal transaction cost should not be utilized while representing the financial conditions. The charges for reconfiguring the entity are included in the profit and loss account. Provisional fair values of accusation may be adjusted in the first financial year following the accusation. In case of converting the functional currency in to foreign currency the closing rate is used in the profit and loss accounts. According to the GAAP the dividends are declared at the end of the year and it will record as liability. These are the few features, which UK companies need to maintain while representing their financial statement. While representing the financial statement Companies have to deal with the different items of the balance sheet in accordance with the GAAP regulations. In the valuation of the properties, U.K. companies must involve a revaluation method by an external valuer. No development costs of the intangible assets are required. Last in first Out (LIFO) is used very rarely in case of inventories and there is no requirement for biological assets in balance sheet. Equity is considered as a share holders fund and deferred tax is not utilized on asset valuation. GAAP also have some rules regarding revenue, employee benefits, interest expense and income tax. So as a whole this accounting standard has set the guidance by which U.K. companies can understand their requirements for representing the financial statements (KPMG International, 2003, pp. 5-18). Comparisons between the requirements for financial reporting in U.K. with other countries There are many financial standards followed by different companies in different nations such as in U.S the companies mainly maintained their financial reporting procedure in accordance to U.S GAAP. IFRS accounting standards are followed in Australia, Canada, India and many countries of European Union. In U.K. the companies follow the instruction of U.K. GAAP though many other standards are available (Price Water House Coopers, 2005, pp. 3-4). In case of IFRS, the historical cost is used, derivatives, biological assets and some of the securities must be revalued but there is an optional for the revaluation of properties and plants. In U.S.GAAP revaluation is not much required except some few cases of securities and derivatives at their fair value. U.K. GAAP is almost similar to IFRS in this prospective (Price Water House Cooper, 2005, pp. 3-4). If one takes the format of the balance sheet then there are some differences may bay be found between these three standards. IFRS does not suggest a particular format for balance sheet. An entity uses liquidity presentation for an asset or liability, when the company has relevant information about that. According to the U.S. GAAP the items of the balance sheet are presented in a decreasing manner of liquidity. In U.K. GAAP the company law indicates two formats for structuring balance sheet. The items are similar to IFRS but the shareholders funds are required to be analyzed into equity and non equity elements (Price Water House Cooper, 2005, pp. 3-4). IFRS does not provide any standard format for an Income statement but expenditure may be presented in two formats, either in functional or in natural format. In accordance to the U.S. GAAP single or multi-step format followed. Expenditure must be presented by function. Company law specifies four alternative formats for representing income statements (Price Water House Cooper, 2005, pp. 3-4). There are different dealings in terms of exceptional items and extraordinary items in the following three different standards. An IFRS standard does not involved the exceptional items and inclusion of extraordinary items is prohibited. U.S. GAAP has a kind of similar approach with IFRS but it allows significant items to be presented in the income statement. While introducing the extraordinary items it seems to be very unusual and rare according to the U.S. GAAP. In U.K. GAAP exceptional items are disclosed by way of notes and extraordinary items are considered to be the non existence items (Price Water House Cooper, 2005, pp. 3-4). In case of cash flow statements format IFRS include standard heading but the flexibility of the contents are limited. U.S. GAAP and U.K. GAAP having similarities with IFRS but in U.S. GAAP there is more guidance for items included in each category. (Price Water House Cooper, 2005, pp. 3-4) According to IFRS the statement of all recognized gains and losses can be presented in notice or in primary statement separately. The total gains and losses can be separately disclosed or can be displayed within the income statement in U.S. GAAP. But in U.K. GAAP these things included in the primary statement. (Price Water House Cooper, 2005, pp. 3-4) Conclusion- So one can come into the conclusion that, the guidance of all accounting standard are same but their applications are different. While maintaining the different accounting standards, a company has to change or modify their items using for financial projection of their company but the overall idea of conveying the company performance and financial condition is same. References Accounting Standard Board (2000), Financial Reporting Exposure Draft, retrieved on June 21, 2012 from: http://www.frc.org.uk/images/uploaded/documents/FRED%2022.pdf Accounting Standards, (n.d.), retrieved on June21 ,2012 from: http://www.indiastudychannel.com/attachments/communities/142__All%20Accounting%20Standards.pdf Delloitte, (2012) United Kingdom, IAS Plus, retrieved on June 21, 2012 from: http://www.iasplus.com/en/jurisdictions/europe/country55 Elwin, P & R. Hirst (2006), Price Water House Cooper, Guide to key performance indicator, retrieved on June 21, 2012 from: http://www.pwc.com/gx/en/corporate-reporting/assets/pdfs/UK_KPI_guide.pdf Harthorn, D & King, A (2012), Director’s responsibility Statement, retrieved on June21, 2012 from: http://www.mondigroup.com/microsite/AR2010/files/directors-responsiblility-statement.pdf KPMG International (2003), Implementing IAS, extract from IAS compared with US GAAP and UK GAAP, retrieved on June 21, 2012 from: http://www.kpmg.co.uk/pubs/ias_comp_ukusgaap.pdf Primary Financial Statements, (n.d.), retrieved on June 21, 2012 from: http://finance.mapsofworld.com/financial-report/statement/primary-financial-statements.html Price Water House Cooper (2005), Similarities and Differences, A comparison of IFRS, US GAAP and UK GAAP, retrieved on June 21, 2012 from: http://pwc.blogs.com/finance_and_treasury/files/simsdiffs_ifrsusuk_aug05.pdf Read More
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