REGULATORY FRAMEWORK FOR FINANCIAL REPORTING

Regulatory Framework For Financial Reporting



Regulatory Framework For Financial Reporting

Introduction

Objective of IASB (International Accounting Standard Board) is to work out an international system of measures that will be accepted all the countries of the world. It is important that all Stock Exchanges of the world should accept the new measures otherwise there is no use in working out the new system.

In the USA the SEC (Security and Exchange Commission) won't accept IFRS as the official accounting standards, but IFRS will be an alternative way to use in the USA as well. This can be a beginning of the integration process.

For the present USA think their system is better than IFRS, and if the world needs the huge capital market of the USA, they have to accept US GAAP as well. This is partly understandable if you have a look at the capitalisation of NYSE (New York Stock Exchange) that is $15,000 billion. The two biggest European Stock Exchanges (FTSE and DAX) don't even reach the half of the capitalization of NYSE.

On the other hand in Europe they think IFRS is better to use than US GAAP, because IFRS is more safer, and reliable than the its 'American competitor'. (They say in Europe Enron case could have never happened) (Spencer 1998).

What are The Advantages and Disadvantages of Making Accounting Rules by Law?

What are the advantages and disadvantages of principles-based accounting? Perhaps the primary benefit of principles-based accounting rests in its broad guidelines that can be applied to numerous situations. Broad principles avoid the pitfalls associated with precise requirements that allow contracts to be written specifically to manipulate their intent. A 1981 study sponsored by FASB found evidence that managers purposefully try to structure leases as operating leases to avoid incurring additional liabilities. Providing broad guidelines may improve the representational faithfulness of financial statements.

In addition, principles-based accounting standards allow accountants to apply professional judgment in assessing the substance of a transaction. This approach is substantially different from the underlying “box-ticking” approach common in rules-based accounting standards. FASB Chair Robert Herz has stated that he believes the professionalism of financial statements would be enhanced if accountants are required to utilize their judgment instead of relying on detailed rules.

Another advantage of a principles-based system is that it would result in simpler standards. Herz has claimed that a principles-based system would lead to standards that would be less than 12 pages long, instead of over 100 pages. Principles would be easier to comprehend and apply to a broad range of transactions. Harvey Pitt, former SEC chairman, explained this as follows: “Because standards are developed based on rules ... they are insufficiently flexible to accommodate future developments in the marketplace. This has resulted in accounting for unanticipated transactions that is less transparent.”

Advantages

· Faster and efficient in processing of information;

· Automatic generation of accounting documents like invoices, cheques and statement of account;

·With the larger reductions in the cost of hardware and software and availability of user-friendly accounting software package, it is relatively ...