'Understanding Financial Reporting\r'

'Financial reports allow the ecesis to communicate information somewhat their performance to the â€Å" impertinent world”. So, fiscal reports win summarized information about an organization”s transactions for external last makers. (e. g. Investors). Financial reports can be used by employees and trade unions, government, creditors and l land upers, customers, sh atomic number 18holders and investment funds analysts. All these users whitethorn enquire distinct parameters of fiscal accounts but the most grievous statements which they read is the balance sheet, profit and loss account, exchange flow account and the income statement.\r\nThe cardinal primary(prenominal) regulative bodies of pecuniary reporting are the â€Å"Law” and the â€Å" report Profession” with the Accounting Standards Board usually cognise as ASB. In UK, most of the legislation connect to the publishing of accounts is embodied in the Companies Act 1985 and 1989 which a re concerned with the accounts of the limited liability companies only. The Companies Act 1989 is the outstanding frame which the companies and accountants find to follow. All the pecuniary statement drawn up under the act 1989 essential present a true and fair tantrum and its function is to protect all the users of the financial reports and statements.\r\nThe assist and the most important regulatory body is the be profession. The standard setters should be aware of the information call for by all users of financial reports and should know the intrusion and the outcome of a different report regularity on the ask of those users. The standard setters should also be able to resolve the conflicts which exist between the needs of different users. So, they have to find an alternative vogue which best satisfy user needs and this could be achieved by choosing the improvement of the â€Å"social welfare” or else of welfare of individuals.\r\nWe know that Accounting Stan dards Board is the of import accounting standard setter. Because the ASB is composed of professional accountants, they whitethorn be unfamiliar with the user needs. So , when on that point is a need for a change in accounting standard the ASB prepare and publish a draft standard called the FRED (Financial Reporting Exposure Draft). after the publishing of these drafts the comments from the public is invited and in the light of these comments the FRED is changed (or unchanged). this instant the FREDs are issued as FRS (Financial Reporting Standard).\r\nThe main disadvantage of this system is the ASB members are unfamiliar with the different user needs and the comments from the general public may not be equally represented. There are four liaisons that standards in financial reporting tag on people using it. The first one is â€Å" correspond”; financial statements must allow people to compare one company with other one and gauge the management”s performance with out spending fourth dimension and money adjusting them to a commonality format and common accounting treatments.\r\nIt is essential that users of financial reports or investment decision makers be supplied with relevant and standard financial reports which have been regulated and hence order. The second intimacy that standards and regulations supply is called â€Å"Credibility”. Because all this standards and regulations exist accountants have to treat every company in the kindred way. If the accountancy profession permitted companies experiencing similar events to produce financial reports that disc dawdled markedly different results simply because of a freedom to select different accounting policies they would lose all of their credibility.\r\nSo, the standards should be composed of rigid rules and should not be broken. The third thing is â€Å"Influence” that means, compass up the standards has encouraged a constructive estimation of the policies being propos ed for individual reporting problems and has been a foreplay for the development of a conceptual framework. The last thing that the standards have to supply is â€Å"discipline”. Companies left to their deliver devises without the need to obey standards will eventually be disciplined by the financial markets.\r\nBut in the short run investors in such companies may suffer loss. The Financial Reporting Council is aware of the need to impose discipline because most of the company failures in recent years are because of obscure financial reporting. Why should the Accounting Standards set? As we argued before, an important role of the regulations is to affix the comparability of accounts by confining the choice of alternative accounting methods and to supply standardized accounts.\r\nThis standardization can be achieved only by uniform accounting practice. If all accounting methods were standardized, two organizations which began the year with said(prenominal) balance sheets and which made the alike transactions during the year, they would report the same balance sheets and the same profit and loss account at the end of the year. In addition to these advantages of regulations in financial reporting, thither are also some more usable functions.\r\nRegulations can help to reduce the influence of own(prenominal) biases and political pressures on accounting judgments. They can increase the level of user confidence in, and understanding of, financial reporting by clarifying the basis on which all accounts are prepared and presented. Finally, they can provide a frame of reference for resolving accounting problems which are not mentioned in legislation or accounting standards. As we argued earlier although the regulations in financial reports have very advantages it has many disadvantages too:\r\n wiz if these disadvantages is the â€Å"Adverse Allocative Effects”, this could occur if the ASB did not drive into account of the economic consequences o f the new standard or regulation they have issued. For example, additional costs could be imposed on preparers of accounts and suboptimal managerial decisions might be taken to avoid any reduction in earning or net assets. â€Å"Consensus-seeking” can be another disadvantage and this means the issuing of standards that are over-influenced by those with easiest access to the standard-setters. Most of the time this could happen with hard subjects.\r\n'