The Regulatory Framework - Lecture 2b Flashcards
Benefits of regulation:
- to reduce the need for subjective judgements
- to enable consistency and comparison
- to aid clarity and consensus of meaning amongst profession/ students
- to encourage compliance with rules
- to encourage confidence in the efficiency of markets
- to encourage the public to invest
Arguments against regulation
Laissez Faire approach - if things (markets, businesses) are left alone and not tampered or interfered with, then any adverse or undesirable situation that might arise will eventually correct itself through the laws of economics.
How does mis-information become manifest?
Managers of entities are keen to have financial performance and position shown in a favourable light – typically this might
involve:
- unjustified capitalisation of expenditure
- unjustified deferral of expenditure
- taking credit early for incomes
- abuse of provisions
Main sources of regulation:
- Financial Conduct Authority (FCA)
- Statutory Regulation
- GAAP: generally accepted accounting practice.
Financial Conduct Authority (FCA)
Oversee the Stock Exchange Listing Requirements - concerned
mainly with the shareholders’ (and other investors’) protection. Specifically these
regulations place duties and responsibilities on directors of listed companies.
Financial Conduct Authority (FCA) rules concern:
- the timing and method of disclosure of price sensitive information
- publication of interim accounts 6 months before the year – end
- disclosure of directors’ shareholdings
Why does the FSA “City Code on Take-overs and Mergers” prescribe such
a “30% rule”?
If the Board decides the bid is “hostile”, a bidding-war may erupt. This is therefore price sensitive information.
The FSA wishes to standardise the timing of the release of this information in order to try to ensure, as far as is reasonably practical, that same information is given to the same players at the same time.
The same ‘City Code’ also provides that once a party has acquired 14.9% of the
equity of another (listed) company there has to be formal declaration if there is to
be a full take-over bid.
The Companies Acts make compulsory for limited liability companies:
- prescribed ‘formats’ for Income Statements / Balance Sheets
- the disclosure of supplementary information in the form of ‘notes’ to the accounts
- requirement for independent external auditor to check whether
the accounts show a true and fair view.
What is GAAP
“Generally accepted accounting practice”
This means accounting practices that are regarded as permissible by the
accounting profession and regulators. In the UK at the moment two separate
GAAP ‘codes’ are being observed:
- UK GAAP - Regulatory body: ASB
- International GAAP- Regulatory body: IASB
What is IASC
International accounting standards.
Period of issue: 1973-2001
What is IASB
International Financial Reporting Standards IFRS’s
Period of Issue: 2001- present
What does IAS1 Presentation of accounts insist on?
“Fair represenaation”
What does IAS17 Leasing contain?
rules for recognising leased items as assets
What does IAS 12 Taxation force companies to provide?
forces companies to provide for tax charges on Premises that are re-valued upwards
What is the true and fair override?
The WPP accounts for 2009 depart from the specific requirement…… to amortise
goodwill over a finite period in order to give a true and fair view. The directors consider
this necessary…..because of the indefinite life of the intangible assets.
The auditors of WPP would then consider whether the directors decision (to
depart from the standard) was a reasonable one, and would voice their opinion in
their report.
