Download as PPTX, PDF, TXT or read online from Scribd
Download as pptx, pdf, or txt
You are on page 1/ 31
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.
2 ● 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).
3 Types of Financial Statements INCOME STATEMENT INCOMES
BALANCE SHEET EXPENSES
ASSETS
CASH-FLOW STATEMENT LIABILITIES
OPERATING
STATEMENT OF CHANGES IN EQUITY INVESTING
FINANCING
4 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.
”6 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 Accounting Standards Board in the development of future Accounting Standards and in its review of existing Accounting Standards ● Assist the Accounting Standards Board 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
7 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 Accounting Standards Board with information about its approach to the formulation of Accounting Standards
8 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;
9 USERS & THEIR INFORMATION NEEDS
10 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.
12 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.
16 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.
18 ● 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,
19 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.
20 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.
21 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.
22 PERIODICITY
23 • 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.
24 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.
25 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.
26 FAIR VALUE ACCOUNTING
27 “ 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.
” 28 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 the seller to sell, which is why fair value measurement, rather than historical accounting does not apply to companies that transactions. 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
29 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.
