Unit 2 The regulatory and statutory frameworks of financial reporting

The Development of accounting standards                                                Top

Why Accounting Standards are needed?

Background:

Various business entities operate in the complex environment, different accounting bases are acceptable in dealing with a particular item.

• Judgment is required to determine which accounting base should be used.
• Due to subjectivity, different accounting bases can be used.

Accounting standards:

A set of rules for measuring and reporting of financial data.

• To compel the evaluation of existing accounting methods and stimulation of the development of the setting of new standards.
• The choice of accounting bases is limited.
• Improve the quality and credibility of financial statements.
• More effective comparisons between business entities.
• Recognized as being the "best practice" for the preparation of financial statements.

Arguments:

• Flexibility of accounting system and professional judgment may be restricted.
• Too general to be useful in specific circumstances.
• Based on compromises between different interest groups. Not necessarily represent the best practice.

Compliance with accounting standards

• Sometimes a departure from certain accounting standards may be necessary in order for financial statements to give a true and fair view.
• Proper disclosure of any material departure from accounting standards should be made in the financial statements
• The reasons and financial effects of the departure should be disclosed.

Accounting Policies (HKSSAP 2.101, Items 21-23.)

• Specific bases, rules and practices a company adopted to prepare and present its financial statements.
• Management should select and apply appropriate accounting policies in compliance with the applicable accounting standards and to present a true and fair view.
• Specific accounting policies should be disclosed in the notes to the financial statements.

Standard setting around the world                                                                                Top

• US
  Financial Accounting Standards Board (FASB): establish and improve accounting standards.
  Financial Accounting Standards Advisory Council (FASAC)
• UK
  • Financial Reporting council (FRC): oversee and guide the standard setting process.
    • Accounting Standards Board (ASB): develop and publish accounting standards.
    • Financial Reporting Review Panel (FRRP)
  • Issued before 1990: SSAP; issued after 1990: FRS (Financial Reporting Standards)

Standard setting process in the US and the UK

• Identify an area/issue
• Discussion Paper/memorandum
• Publish an exposure draft followed by an exposure period
• Redraft the exposure draft (if necessary)
• Publish and distribute the final approved Accounting Standard

Factors for selecting topic or issue:

• The pervasiveness (普遍性) of the problem
• Technical feasibility
• Practical considerations

The International Accounting Standards Committee (IASC)

Objectives

• to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance, and
• to work generally for the improvement and harmonization of regulators, accounting standards and procedures relating to the presentation of financial statements.

Setting the IAS

• International Accounting Standards Board (IASB)

Standard setting in Hong Kong                                                                Top

Hong Kong Society of Accountants Council

• Financial Accounting Standards Committee (FASC)
• Accounting Standards Advisory Panel (ASAP)
• Professional Standards Monitoring Committee (PSMC)

Standards setting procedures:

• Identification of topics and technical drafting (mainly based on the existing IAS): once topic is agreed by FASC , Technical Director of HKSA will draft the technical paper.
• Exposure drafts (EDs): ED prepared and approved by the Council of HKSA. Then distributed to members of HKSA and other parties for comments. ED may be refined and reissued if necessary.
• Approval of standards: Council of HKSA approve the final draft of SSAP. Once approved, SSAP will be issued & become mandatory.

Why accounting profession takes an active role in the setting of accounting standards?

• If not, other user parties, e.g. the government might step in and regulate accounting methods in a way that is impractical to practitioners.
• Accounting standards may be dictated or influenced by different users bringing in unwarranted bias.
• To prevent this, accounting bodies develop standards which they believe to be "the best accounting practice".

The Listing Rules of Hong Kong Stock Exchange                                    Top

Types of companies

• "Company": a company formed and registered under Companies Ordinance of Hong Kong or and existing company.
• "Limited company": a company which is limited by shares, any 2 or more persons may form an incorporated company with or without limited liability.

• "Private company":
  • defined in S.29 of Co. Ordinance.
  • restricts the right or transfer its shares.
  • limits the numbers of its shareholders to 50.
  • prohibits the offer of shares or debentures to the public.
• "Public company":
  • not defined in the Ordinance.
  • it is public if it is not a private.
• "Listed company": a company has any of its shares listed on the Stock Exchange of Hong Kong (SEHK).
• "Unlisted company": a company does not have any shares listed.
• A company with over 50 shareholders does not list its shares for trade on the Stock Exchange, it remains a public but unlisted company.

Regulatory control of listed companies

• Securities Review Committee (SRC)
• Securities and Futures Commission (SFC)

Disclosure Requirement under the Listing Rules

• Appendix 16 of the Listing Rules specifies certain financial statements and information needed in interim and annual reports
  • Balance sheet
  • Income statement
  • Cash flow statement
  • Statement of movement in equity
  • Comparative figures for the statements
  • Accounting policies and explanatory notes
• Visit SEHK website: www.hkex.com.hk for more details

Notifiable transactions

• the material transactions that involve a listed issuer,
  • e.g. listing of new shares, minor share transactions of less than 15% of a company's equity, major share transactions which will result in gain of control of a company.
• require publication in the newspaper and the SEHK including:
  • Disclosable transaction - acquisition or disposal or assets with value of at least 15% of the asset of the acquiring group.
  • Major transactions - such as purchase or disposal of major assets.
  • Very substantial acquisitions - where a listed issuer purchases another business, co. or assets which results in change of control. Shareholders’ approval has to be obtained.
  • Share transactions - shares issued in exchange for assets acquired with a value of at least 15% of the asset of the acquiring group.
  • Connected transactions - securities transactions between a co. and its directors, chief executives, substantial shareholders or an associate.
• Disclose particulars of beneficial owners who have substantial shareholdings (>10%)
• Disclose the shareholdings of directors and chief executives.

Statutory requirements: The Companies Ordinance　                                            Top

Disclosure requirements (Companies Ordinance & Tenth Schedule)

• Keeping of books of accounts - s.121(1)
• Preparation of published accounts -s.129C, approved by the board of directors and signed by 2 directors.
• The Tenth Schedule - disclosure requirements of accounting information
• Directors' reports - s.129D & s.129E, contains:
  • the principal activities
  • details of any issue of shares or debentures during the year
  • particulars of significant changes in fixed assets
  • the recommended amount of dividend
  • the total amount of donations (>=$1,000)
  • name of directors at any time during the year, directors' right to acquire shares of debentures and any interest of a director in a contract
• Exemption for private companies - s.141D, the accounts of private companies can be prepared in accordance with the Eleventh Schedule if all shareholders agree in writing.