Overview of

REGULATORY
FRAMEWORK
How are financial statements prepared?
• The financial statements of all businesses in a particular country/region
will follow a standard format and standard accounting principles.

• This enables consistency and helps in effective comparison of the

financial statements and financial position of different companies.

• The accounting principles that an organization follows depends on the

regulatory and reporting requirements of the region and audience to which
a business caters.

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● Indian companies follow Indian Accounting
Standards (IND AS),

● The companies operating in the US follow

the Generally Accepted Accounting
Principles (GAAP) (i.e. IAS)

● Companies with international exposure

follow International Financial Reporting
Standards (IFRS).

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Types of Financial Statements

INCOME STATEMENT INCOMES

BALANCE SHEET EXPENSES

ASSETS

CASH-FLOW STATEMENT LIABILITIES

OPERATING

STATEMENT OF CHANGES IN EQUITY INVESTING

FINANCING

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1 PREPARATION
FRAMEWORK
 “
‘Framework for the Preparation and Presentation of
Financial Statements’ issued by the Accounting
Standards Board of the Institute of Chartered
Accountants of India.

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PURPOSE
● Assist preparation of financial statements in applying Accounting Standards and in
dealing with topics that have yet to form the subject of an Accounting Standard

● Assist the ASB in the development of future Accounting Standards and in its review of
existing Accounting Standards

● Assist the ASB in promoting harmonization of regulations, accounting standards and

procedures relating to the preparation and presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by Accounting Standards

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PURPOSE . . . Cont.
● Assist auditors in forming an opinion as to whether financial statements conform with
Accounting Standards

● Assist users of financial statements in interpreting the information contained in

financial statements prepared in conformity with Accounting Standards; and

● Provide those who are interested in the work of the ASB with information about its
approach to the formulation of Accounting Standards

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SCOPE . . The Framework deals with:
(a) (b) (c) (d)
the objectives of the qualitative definition, concepts of
financial characteristics recognition and capital and
statements; that determine measurement of capital
the usefulness of the elements maintenance.
information from which
provided in financial
financial statements are
statements; constructed;

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USERS & THEIR
INFORMATION NEEDS

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 GOVT.
EMPLOYEES CREDITORS
AGENCIES

INVESTORS
2 4 6

1 3 5 7

LENDERS CUSTOMERS PUBLIC

 OBJECTIVES . . Of Financial Statements:
(1) (2) (3)
The objective of financial Financial statements prepared for Financial statements also show the
this purpose meet the common results of the stewardship of
statements is to provide management, or the accountability of
needs of most users. However,
information about the management for the resources entrusted
financial statements do not provide
financial position, to it. Those users who wish to assess the
all the information that users may stewardship or accountability of
performance and cash flows need to make economic decisions management do so in order that they
of an enterprise that is useful since (a) they largely portray the may make economic decisions; these
to a wide range of users in financial effects of past events, and decisions may include, for example,
(b) do not necessarily provide non- whether to hold or sell their investment
making economic decisions. in the enterprise or whether to reappoint
financial information.
or replace the management.

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 Underlaying Assumptions . . .

03 CONSISTENCY
In order to achieve comparability of
the financial statements of an
ACCRUAL BASIS enterprise through time, the
accounting policies are followed
In order to meet their objectives, consistently from one period to
financial statements are prepared on another; a change in an accounting
the accrual basis of accounting. Under policy is made only in certain
this basis, the effects of transactions exceptional circumstances.
and other events are recognized when
they occur and they are recorded in the
accounting records and reported in the
financial statements of the periods to 01 02
which they relate.
GOING CONCERN
The financial statements are normally
prepared on the assumption that an
enterprise is a going concern and will
continue in operation for the
foreseeable future.

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2 QUALITATIVE
CHARACTERISTICS
UNDERSTAND- FAITHFUL
ABILITY MATERIALITY REPRESENTATION
1 3 5

2 4 6

RELEVANCE RELIABILITY SUBSTANCE

OVERFORM

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 NEUTRALITY COMPLETENESS TIMELINESS
8 10 12

7 9 11

PRUDENCE COMPARABILIT COST-BENEFIT

Y BALANCE

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Accounting
Diversity

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EVIDENCE OF ACCOUNTING DIVERSITY

● Differences in the financial statements included in an annual report.

● Differences in the format used to present individual financial statements.
● Differences in the level of detail provided in the financial statements.
● Terminology differences.
● Disclosures differences.
● Recognition and measurement differences.
REASONS FOR ACCOUNTING DIVERSITY
● Legal System

● Correlation of
Factors ● Taxation

● Political and ● Providers of

Economic Ties Financing

● Inflation
PROBLEMS CAUSED BY ACCOUNTING DIVERSITY

● Preparation of Consolidated Financial Statements

● Access to Foreign Capital Markets
● Comparability of Financial Statements
● Lack of High-Quality Accounting Information

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IFRS &
IASB

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22
NACAS &
NFRA

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Companies Act 1956

● NACAS was set up under Companies act 1956 and NFRA set up under
Companies act 2013 are the bodies for the purpose of advisory and regulation
of compliances with the standards notified in relation to accounting and
auditing.
● The NACAS will no longer be in action after applicability of section 132 of
the Companies act 2013, which deals with NFRA.
Composition of NACAS aka’ NFRA

• 1 Chairperson – Well versed in the field of • 1 Member – Central Govt. Representative

Accountancy, Finance & Economics • 1 Member – RBI Representative
• 2 Members – Chamber of Commerce & • 1 Member – C&AG Representative
Industry • 1 Member – SEBI Representative
• 1 Member – ICAI Nominee • 1 Member – Professor in field of
• 1 Member – ICMAI Nominee Accountancy from any University
• 1 Member – ICSI Nominee
• 1 Member - CBDT Chairperson

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Objectives of NFRA
● The first objective is similar to the objective of NACAS i.e. advice the Central
Government on the formulation and laying down of accounting and auditing policies and
standards for adoption by companies or class of companies or their auditors.
● The second objective is of regulatory nature which aims at monitoring and enforcing the
compliance with accounting standards and auditing standards along with the quality of
service provided by professionals, ensuring compliance with standards, and suggest
measures required for improvement in quality of service of the professionals.

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● NFRA has the power to investigate, either suo moto or on a reference made to it by the Central
Government, for bodies corporate or persons, into the matters of professional or other
misconduct committed by any member or firm of chartered accountants.
● NFRA has the same powers as are vested in a civil court under the Code of Civil Procedure,
1908, while trying a suit
○ discovery and production of books of account and other documents
○ Power to Summon the attendance of persons and examining them on oath
○ Power of inspection of any books, registers and other documents of any person
● Power to impose penalty if misconduct proved
● NFRA has also the power of debarring the member or the firm from engaging himself or itself
from practice as member of the Institute of Chartered Accountant of India for a minimum period
of six months or for such higher period not exceeding ten years.

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Role
of SEBI
What is SEBI ?
• SEBI is a statutory regulatory body established on the 12th of
April, 1992.

• It monitors and regulates the Indian capital and securities

market while ensuring to protect the interests of the investors,
formulating regulations and guidelines.

• The head office of SEBI is at Bandra Kurla Complex, Mumbai.

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 ● SEBI has a corporate framework comprising
of various departments each managed by a
department head.
● There are about 20 departments under SEBI.
Such as . . .
• corporation finance, • investment management,
• economic and policy analysis, • commodity derivatives market
• debt and hybrid securities, regulation,
• enforcement, • legal affairs etc.
• human resources,

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Constitution of SEBI
The chairman of SEBI is nominated by the Union Government of India

Two officers from the Union Finance Ministry will be a part of this structure.

One member will be appointed from the Reserve Bank of India.

Five other members will be nominated by the Union Government of India.

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Role of SEBI . . .
• When it comes to stock exchanges, SEBI has the power to regulate and approve
any laws related to functions in the stock exchanges.

• It has the powers to access the books of records and accounts for all the stock
exchanges and it can arrange for periodical checks and returns into the workings of
the stock exchanges.

• It can also conduct hearings and pass judgments if there are any malpractices
detected on the stock exchanges.

• When it comes to the treatment of companies, it has the power to get companies
listed and de-listed from any stock exchange in the country.

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Role of SEBI . . . Cont.
• It has the power to completely regulate all aspects of insider trading and announce
penalties and expulsions if a company is caught doing something unethical.

• It can also make companies list their shares in more than one stock exchange if
they see that it will be beneficial to investors.

• Coming to investor protection, SEBI has the power to draft legal rules to ensure the
protection of the general public.

• It also has the power to regulate the registration of brokers and other middlemen
who will deal with investors in the market.

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Role of
COMPANIES ACT 2013

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PERIODICITY

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• The periodicity assumption states that an organization can report its financial results within
certain designated periods of time.

• This typically means that an entity consistently reports its results and cash flows on a monthly,
quarterly, or annual basis.

• These time periods are kept the same over time, for the sake of comparability.

• For example, if the reporting period for the current year is set at calendar months, then the same
periods should be used in the next year, so that the results of the two years can compared on a
month-to-month basis.

• Once the standard periods have been set up for financial reporting, accounting procedures are
designed to support the ongoing and standardized production of financial statements for the
designated periods. This means that a schedule of activities will mandate when accruals are to
be posted, as well as the standard structure of the resulting journal entries.

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Inconsistent Accounting Periods
• It is also possible to have inconsistent periods. This situation typically arises for the
two reasons noted below.

• Partial Period Start or End: An entity has begun or ended its operations part way
through a reporting period, so that one period has an abbreviated duration.

• Four-Week Periods: A company may report its results every four weeks, which
results in 13 reporting periods per year. This approach is internally consistent, but is
inconsistent when the resulting income statements are compared to those of an entity
that reports using the more traditional monthly period.

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 Standard Period Durations
• The main periodicity issue is whether to produce monthly or quarterly financial
statements.

• Most organizations produce monthly statements, if only to gain feedback on

operational results on a fairly frequent basis.

• Publicly-held businesses are required by the Securities and Exchange Commission to

issue quarterly financial statements, which they may issue in addition to monthly
statements that are issued internally.

• From an accounting perspective, it is more difficult to produce reports for large

numbers of reporting periods, because more accruals are needed to apportion
business activities among the various periods.

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FAIR VALUE
ACCOUNTING

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 “
Fair value accounting refers to the practice of measuring your
business’s liabilities and assets at their current market value. In other
words, “fair value” is the amount that an asset could be sold for (or
that a liability could be settled for) that’s fair to both buyer and seller.
Fair value accounting was implemented by the Financial Accounting Standards Board
(FASB) in order to harmonize the calculation of financial instruments.

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ASPECTS OF FAIR VALUE
CURRENT MARKET ORDERLY TRANSACTIONS
CONDITIONS Also, fair value is based on orderly
The fair value of an asset is based on the transactions where there isn’t any pressure on
market conditions on the date of measurement, the seller to sell, which is why fair value
rather than historical transactions. accounting does not apply to companies that
are in the process of liquidation.

It’s also important to note that the holder’s

intention should be irrelevant when calculating
Furthermore, fair value is understood to
fair value. For example, if the holder intends to
derive from the sale to a third party, rather
sell the asset immediately, it could lead to a
than a corporate insider or anyone who is
rushed sale, thereby lowering the price of the
related in some way to the seller (as this
asset.
could skew the value of the asset).
INTENTION OF HOLDER THIRD PARTY

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 FAIR VALUE ACCOUNTING
03 LEVEL 3
Unobservable inputs, only
LEVEL 1 used when markets are non-
The quoted price of existent or illiquid. Examples
identical items in an active include your company’s own
market (market where data, such as an internally
liabilities and assets are generated financial forecast.
transacted frequently and at
high volumes, giving
ongoing pricing 01 02 LEVEL 2
information).
Observable information for
similar items in active or
inactive markets, rather than
quoted prices. For example,
real estate in similar locations.

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Thanks!
Any questions?

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