There is a need for regulation in financial reporting because of a
number of reasons. There are several major user groups of financial
reporting, some of which include equity investor groups, employee
groups, analyst adviser group, the government, the public and other
stakeholders. These different stakeholders however, need to be able to
interpret and use financial information in a systematic way in order
to make the necessary financial decisions. If these different user
groups created financial reports, it will be prepared in diverse ways
which would suit their various requirements. If this is the case, then
different groups will interpret different financial reports in
different ways. There are international differences in accounting
practices. Accounting practices differ from country to country and so
do the regulatory frame work and the balance between the public and
private regulation. Over the years, bodies like the EU have been
formed. There is need for accounting regulation as all these different
countries coming together may have different accounting standards,
thus there will be the need for financial reports regulation. In the
UK, the accountancy profession dominates the regulatory framework.
There are at least two main reasons why financial report regulation is
needed both within a country and internationally.
The first reason is that of information asymmetry. Assuming managers
are responsible for preparing financial information. Whereas managers
have access to information about all aspects of the firm’s activities,
other participants do not. Managers therefore, could exploit their
position within the firm to further their own goals at the expense of
others. For instance, some companies might adjust their liability
figures in order to secure a loan or reduce their profit figures in
order to pay less corporate tax. For this reason, there is a need for
The second reason is that of comparability. Supposing the managers
could be relied upon to provide accounting information on items and
transactions of interest to other participant groups. What is the best
or right way in which the information could be reported? Let us assume
that the managers of B&Q and Homebase decide to buy a motorvan. If the
manager of B&Q decides to depreciate it...
... middle of paper ...
...riod recognises that profit occurs over the time and can only be
defined as profit depending on the accounting period. Other
conventions include the materiality convention the realisation of
revenue convention and objectivity.
There are several criteria and objectives which are useful when
choosing your accounting method. The choice of accounting method must
always be relevant, reliable, comparable and understandable to all
parties involved. If these are met then the accounting method will be
favourable to all accounting users.
Accounting standards may however have some undesirable consequences.
This may limit the extent to which the preparers of accounts are able
to prepare the financial statements to meet both the needs of
different user groups. It may also discourage the preparers of account
from experimenting new ways of describing accounting transactions.
There is no assurance though that a standard procedure will provide
the information required by the various financial user groups.
Nevertheless there is the need for financial reports being regulated
because it would be comparable and it would save both time and money
adjusting them to a common format.
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