Regulatory Control

Question 1

What are depreciation charges viewed as by companies?

Answer 1

1. Depreciation charges are viewed as an expense
2. Expenses reduce the net profit, so the choice of depreciation method affects the net profit.

Question 2

What are the two methods of calculating depreciation

Answer 2

1. Straight-line method, depreciation expense is evenly distributed over the useful life of the asset.
   Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life
2. Reducing balance method, depreciation expense is calculated based on a fixed percentage of the remaining book value of the asset.
   Depreciation Expense = Book Value of Asset × Depreciation Rate

Question 3

What are the arguments in favour of accounting regulation?

Answer 3

1. Reduces the need for subjective judgement
2. Enables consistency and comparison
3. Encourages confidence in the efficiency of markets to encourage the public to invest

Question 4

What is the argument against accounting regulation?

Answer 4

Laissez-faire, the undesirable situation would eventually correct itself as their stock price would fall and the managers would be punished.

Question 5

How does misinformation become manifest?

Answer 5

1. Unjustified capitalisation of expenditure
2. Unjustified deferral of expenditure
3. Taking credit early for incomes
4. Abuse of provisions

Question 6

What are the main sources of regulation?

Answer 6

1. The Financial Conduct Authority (FCA).
2. Statutory Regulation
3. ‘GAAP: “Generally accepted accounting practice”

Question 7

What is the role of the FCA and how do they regulate financial services?

Answer 7

The FCA oversee the Stock Exchange Listing Requirements concerned mainly with the shareholders’ protection. They do this by:
1. Regulating the timing and method of disclosure of price sensitive information
2. Ensuring the publication of interim accounts 6 months before the year end
3. Ensuring the disclosure of directors’ shareholdings.

Question 8

How does the state regulate financial services?

Answer 8

The Companies Acts make it compulsory for limited liability companies to:
1. Prescribe ‘formats’ for Income Statements / Balance Sheets
2. Disclose supplementary information in the form of ‘notes’ to the accounts
3. Have an independent auditor express whether the accounts show a ‘true and fair view’

Question 9

What are examples of accounting standards?

Answer 9

1. Presentation of accounts, insists on ”fair representation”
2. Leasing , contains rules for recognising leased items as assets
3. Taxation, forces companies to provide for tax charges on premises that are re-valued upwards

Question 10

How tightly prescriptive are the standards of the GAAP?

Answer 10

There is some flexibility
E.g. GAAP stipulated that non current assets should be depreciated, but does NOT stipulate straight line or reducing balance, leaving companies to choose.

Question 11

How do companies manipulate their income statements?

Answer 11

1. Changing the valuation of closing inventory
2. Restating provisions