Companies that sell its stocks through the stock exchange are called listed companies and they enter the stock exchange through initial public offer. After the initial public offer, the stocks of the company are sold freely through the stock exchange and their prices are determined by the market forces of demand and supply. Due to the complexity of transactions that takes place in the stock exchange, there are many regulations that determine the reaction of every company in the stock exchange (Watts, 2003, 288).
The United Kingdom company law has a framework that regulates the functioning of the listed companies which is contained in the company’s Act. These laws are important as they help in protecting the interest of all the people that have interest in the listing of the company in the stock exchange. They are regulated in order to ensure that they do not mislead people in trading in their stocks ( Griffin, 2006, 20). Persons having interest in the stocks of the company must have full information of the company so that they can make informed investment decisions.
The company is therefore required to communicate to the existing and the prospective shareholders and other investors about their financial status (IASB, 2007, 1). This will help the investors to determine whether the company’s stocks are undervalued or overvalued and make speculation on their future performance. The company communicates to the shareholders through the financial statements that are prepared according to the requirements of the International Financial Reporting Standards or any other recommended accounting standards.
The objectives of this essay is to describe the key elements of the regulatory framework for listed companies in the UK and evaluate the advantages and disadvantages of globally harmonizing financial accounting standards generally, as well as the advantages and disadvantages of IFRS specifically.
The listed companies in the United Kingdom are under strict regulation of the law in order to safeguard the interest of the shareholders, both the existing and the prospective. The listed companies that do not follow the laws governing their operations and financial reporting requirements risk stiff penalties that culminate from that (Macmillan, 2000, 9). The regulatory framework of the listed or public traded companies touch the issues related to financial reporting and corporate governance rules within the company.
The UK Company’s Act 2006 contains directives about how the financial statements should be reported to the members of the company. The reporting regarding the financial statements is done by qualified and recognized auditors and they are required by the law to give a true and fair view of the financial position of the company. The report for the balance sheet must indicate the state of affairs of the company which is in the interest of the members (APB, 2009, 1).
The profitability level of the company must also be clearly explained in the profit and loss account. The auditors are also required by the Act 2006 (CA 2006) to give qualified or unqualified report regarding the financial statements according to his findings. In the United Kingdom international standards on audit (ISA), require the auditors to disclose any material misstatements that they may detect in the course of audit assignment (APB, 2009, 2). ISA also requires that auditing be made in a professional manner recognizing the circumstances that may arise and culminate in to material misstatements in the financial statements ( Dean, 2001, 26).
The auditor for the listed companies is required to scrutinize the director’s report to ensure that it is written according to the specifications stated by the law and must be in keeping with those for the financial statements. It is also a requirement of the CA 2006 for the directors to write a remuneration report which must be vetted by the auditor for consistency with the requirement.
For the corporate governance, there are listing rule that apply to listing of companies. It is requirement of the financial services authority that the auditors review the director’s opinion relating to the going concern of the company and the statement concerning preparation responsibility for financial statements (APB, 2009, 1).
Harmonization of financial accounting standards: advantages and disadvantages
The accounting standards have been harmonized globally as facilitated by different accounting bodies like the International Accounting Standards and the current International IFRS that replaced some IAS. This harmonization has made reporting of financial statements easier especially for companies with subsidiaries in different companies (Norris, 2009, 12).
Harmonizing is aimed at removing any obstacles that are encountered in preparation of consolidated accounting statements locally as well as making them more flexible to changes that are occurring globally. This brings harmony in performance of the accounting practices as well as presentation globally. This being an approach that is cost effective, it reduces the expenses of translation along with fraud cases that have been on the increase.
With the vibrant expansion of the markets in the entire globe, there has been a great need to harmonize the way of financial presentation of which IFRS has offered a great solution (Ghosh, 2010, 14). This is because; companies that have other subsidiaries in other countries can be in a position to present their financial statements in a uniform manner hence. This being a world widespread format, it offers good information to the competitors to review the performance of the different companies for analysis purposes. In terms of the details required by the IFRS, they are less as they have few specifications
According To Orrell (2006, 18), the conversion to IFRS will require an refresher course training of the accountants, auditors, valuers and financial statement preparers will need to be knowledgeable about the new rules, hence a lot of cost is incurred in an effort to educate them concerning the new accounting rules (Deloitte, 2008, 1). Although this depends on the company’s size and nature, this additional cost will eventually affect in the short term course.
The use of IFRS will benefit the companies that make quick radical decision based on long term benefit analysis; whereas the others will be on the verge on losing out if they do not make appropriate decision. Some countries will feel discriminated if they font adopt IFRS which will be used globally hence they will tend to feel inferior as they don’t meet the expected standards internationally.
Advantages and disadvantages of IFRS
International financial reporting standards have been wide spread due to several reasons that have made it a great success in business globally. One of he main reason of its widespread is because it uses one step method in for impairment the write-downs and this help to save time as compared to the double step method for impairment write-downs (Ball, 2006, 1). In addition fewer details are required in order the meet the required standards while reporting which help to ease the workload.
By use IFRS, the presentation of financial statements is made easier and can be accessed easily by the competitors which helps in comparing the performance analysis since the presentation is in the same format. This goes a long way in helping the countries that have their company located in different countries or else their subsidiaries are in different location thus they can use the same language for comparisons and analysis purposes.
For the purposes of financial assistance or borrowing from abroad this is crucial in presentation as it is more internationally recognized which offers a great benefit in case they wish to raise capital from abroad. IFRS has an added advantage since it does not use last in, first out (LIFO) method which helps in reducing the cost
By providing a uniform reporting method for the entire financial statements, this offers a great value and benefit to the shareholder in making decision concerning the company in which to invest in. IFRS helps to give clear information to the clients concerning the guidelines to be followed. This help in getting the auditing standard to a higher level of reporting.
By use of IFRS, it is going to put the entire world to a uniform way of presentation of which helps in the entire globe in terms of competition since it concerns the use of one language which is adopted and understood by all.
The use of IFRS, may compromise quality presentation in some instances (Libby, 2008, 7). This is because replacement of GAAP as gold standard will lead to poor operations. One of the major causes of this weakness is that IFRS it supplies fewer details as compared to the use of other accounting standards of which the details are very vital especially in auditing. The removal of certain specifics in the financial statements causes a lot of distrust hence a lot of scandals will be realized due to increase in fraudulent cases.
In the process of converting the accounting standards, this may cause change in the value of the economy since it may lead economic instability if it is initiated but does not succeed. In the same line, the adoption of IFRS by companies with no subsidiaries outside their countries may be considered cost ineffective since most customers are concentrated within their countries hence the cost is considered to outweigh the benefits (Pickrell, 2009, 1).
The listed companies have strict regulations dues to the importance of their financial information to their members (Malcolm, 1985, 4). The regulatory framework directs on how the financial statements of the companies should be prepared in order to ensure that the interest of the member is safeguarded. The reporting of the financial statements in the world has been made easier through harmonization of the financial accounting standards (AICPA, 2008, 1). Despite their disadvantages, International Financial Reporting Standards have played a vital role in this harmonization process.
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