Write an essay of no more than 1,500 words that identify and explain the different sources for the rules and regulations that a UK company has to comply with in order to produce its annual report.
The purpose of creating annual report for companies is to keep the shareholders and others informed with the company's activities, progress and the future plans of the company, beside that it also shows the company's financial position and performance. Lenders, suppliers and other trade creditors, customer, employees, governments and their agencies, general public and even accountant students however are interested in annual report. It is normally produced annually and has to comply with the laws and regulations. The financial reporting regulations could be made in relation to any class of business entity.
Company accounts need to comply with the Companies Act 2006 legislation which received Royal Assent on 8 November 2006 and effectively replaced existing company legislation by re-writing, updating and modernising company law."1 The Companies Act 2006 is a piece of primary legislation that largely applies to UK companies directly. A number of provisions are currently being set out in secondary legislation, mainly through regulations or orders made by statutory instrument. Companies Act 2006 contain rules relating to such matters as the accounting records which companies must keep, also the requirement to prepare annual accounts and these accounts must give a "true and fair view", furthermore, accounts must be prepared in according to accounting standard and of cause an audit is required.
Companies use to comply with companies Act 1985 but have been changed in order to meet four key objectives, firstly, to enhance shareholder engagement and a long term investment culture, secondly, to ensure better regulation and a 'Think Small First' approach, thirdly, to make it easier to set up and run a company and to provide flexibility for the future. The main changes in the Companies Act 2006 are a clear statement of directors' general duties clarifies the existing case law based rules and Companies will no longer be required to specify their objects on incorporation. If annual accounts are approved by the directors which do not comply with requirement of the companies Act (CA2006), every directors of the company who knows that they do not comply or reckless as to whether they comply commit an offence and is liable to a fine. "Companies Acts have been around for the last 150 years"2, and are designed to set the framework in which companies with limited liability must work. Companies that have a full listing on the London stock exchange are required to comply with additional rules set by the Financial Service Authority (FSA) , companies listed on (LSE) and Alternative Investment Market (AIM) are required to comply with (IFRS), Other than that, companies have a chance to choose either UK GAAP or IFRS. UK is applied to Accounting Standard Board (ASB).
What is UK GAAP (Generally Accepted Accounting Practise)? It is a rules or regulations and guidance statement used by most of the UK companies to determine what disclosures must be given in the company's financial statement or annual report. Due to the rules and regulations currently differ from one country to another; therefore, it's better to use the term such as UK GAAP or US GAAP. The term "Big GAAP" refers to the accounting regulations which apply to a large companies, the financial affair of these companies might be very complex, whereas, the term "little GAAP" refer to smaller companies, in UK smaller companies are likely to adopt Financial Reporting Standard for Smaller Entities(FRSSE). Financial statements under UK GAAP basically included, profit and loss account, balance sheet, cash flow statement and directors' report, etc, those are mandatory parts of annual report accept directors' report, information for financial position is provided in balance sheet, income statement provide information of financial statement, information about changes in financial position is provided in cash flow. The main components of UK GAAP Statement of principles for financial reporting, Financial reporting standard and Reporting standard they are issued by ASB, Moreover, UK GAAP is also issued and develops by ASB (Accounting Standard Board).
IFRS and IASs (some books refer it as "international standard") are rapidly gaining acceptance around the world due to the increasing globalisation of business. International Standards are developed by International Accounting Standards Board (IASB), standards published by the IASB are known as IFRS. "In June 2003, the IASB issued IFRS1 First-time Adopted of International Financial Reporting Standards."10 Its to provide a suitable starting point for accounting under international standards, also can be generated at a cost that does not exceed the benefits to users. The purposes of the IASB Framework are stated to assist in the development of future international standards and in the review of existing standards, also to assist national standard-setters in developing national standards. The main elements of financial statement are assets, liabilities, equity, income and expenses. Each of these elements is defined in the IASB framework. Elements may be measured at their historical cost, current cost, realisable value or present value.
The IASB (International Accounting Standards Board) is the standard-setting body of the IASC (International Accounting Standard Committee) foundation. The SAC (Standards Advisory) offers advice to the IASB (International Accounting Standards Board) with regard to its agenda and priorities. IFRIC (IFR Interpretations Committee) is responsible for the interpretation of international standards and for providing timely guidance on matters not specifically addressed in the standards. The constitution of the IASC foundation states that its objective is to promote the use and rigorous application of those standards, and to bring about convergence of national accounting standards and IAS and IFRS to high quality solution. The main purpose of accounting standards is to reduce or eliminate variations in accounting practice and to introduce a degree of uniformity into financial reporting; and the advantages of this standardisation are Faithful representation and Comparability, it's important for users to compare financial statement of an organisation so as to identify trends in its financial performance and position. The objective of SAC is to offer advice to the IASB with regard to its agenda and priorities. International Financial Reporting Interpretations Committee (IFRIC) does play a role, is to interpret the application of international standards. IFRIC also provides timely guidance on financial reporting matters which are not specifically addressed in the standards.
There are three types of companies in the business, firstly, fully-listed companies, secondly, Unlisted companies and finally, Alternative Investment Market (AIM)-listed companies. For fully-listed companies, the first set of consolidated accounts which had to be prepared under IFRS was for the first period that commenced on or after 1 January 2005, and for those ended with December the first IFRS accounts were for the year ended 31st December 2005. A number of unlisted companies have already adopted IFRS, the overwhelming majority still continue to adopt UK GAAP until the regulators force them to adopt IFRS. AIM-listed companies were permitted (but not required) to adopt IFRS for account periods beginning on or after 1 January 2005. AIM companies are required to produce their consolidated financial statement under IFRS for periods beginning on or after 1 January 2007.
However, for those smaller entities within its scope that have chosen to adopt Financial Reporting Standard for Smaller Entities (effective April 2008) FRSSE, for preparing and presenting their financial statement. The definitions and accounting treatments are consistent with the requirements of companies' legislation and for the generality of small entities, are the same as those required by other accounting standards or simplified version of those requirements. Reporting entities that apply the FRSSE are exempt from complying with other accounting standards, such as SSAP, FRS and UITF. FRSSE are intended to reflect company law, including the Companies Act 2006 and amendments and Regulations issued there under which are effective from 6 April 2008. This does not affect directors' responsibilities regarding compliance with company law and in all matters regarding interpretation of the legal requirements reference should be to the relevant legislation. Furthermore, the FRSSE may be applied to all financial statements intended to give a true and fair view of the financial position and profit or loss/income statement of all entities
The objective of the FRSSE is to ensure that reporting entities falling within its scope provide in their financial statements information about the financial position, performance and financial adaptability of the entity that is useful to users in assessing the stewardship of management and for making economic decisions, recognising that the balance between users' needs in respect of stewardship and also economic decision-making for smaller entities is different from that for other reporting entities.
Limited Companies need to file their accounts at Companies House. The main functions of Companies House are firstly, incorporate and dissolve limited companies. Secondly, examine and store company information delivered under the Companies Act and related legislation. Thirdly, make this information available to the public. Some history of company house, "The United Kingdom has enjoyed a system of company registration since 1844. Today, company registration matters are dealt with in law, by the Companies Act 2006.
All limited companies in England, Wales, Northern Ireland and Scotland are registered at Companies House, an Executive Agency of the Department for Business, Innovation and Skills (BIS). There are more than 2 million limited companies registered in Great Britain, and more than 300,000 new companies are incorporated each year."15
In conclusion, the regulatory framework which applied to financial reporting by companies consists of legislation (companies Act2006), accounting standards and stock exchange regulations. The IASB framework states that there are four "qualitative characteristics" which make the information provided in financial statement more useful, firstly, understandabiliy, it's essential to provide a clear and understandable financial report to client. Secondly, relevance, information should be relevant to users' decision-making needs. Thirdly, reliability which is very important, unreliable information would be misleading. Lastly, comparability, users should be able to compare the financial statements of an entity through time.
