Overview of
REGULATORY
FRAMEWORK
How are financial statements prepared?
• The financial statements of all businesses in a particular country/region
will follow a standard format and standard accounting principles.
• This enables consistency and helps in effective comparison of the
financial statements and financial position of different companies.
• The accounting principles that an organization follows depends on the
regulatory and reporting requirements of the region and audience to which
a business caters.
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● Indian companies follow Indian Accounting
Standards (IND AS),
● The companies operating in the US follow
the Generally Accepted Accounting
Principles (GAAP) (i.e. IAS)
● Companies with international exposure
follow International Financial Reporting
Standards (IFRS).
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Types of Financial Statements
INCOME STATEMENT INCOMES
BALANCE SHEET EXPENSES
ASSETS
CASH-FLOW STATEMENT LIABILITIES
OPERATING
STATEMENT OF CHANGES IN EQUITY INVESTING
FINANCING
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1 PREPARATION
FRAMEWORK
“
‘Framework for the Preparation and Presentation of
Financial Statements’ issued by the Accounting
Standards Board of the Institute of Chartered
Accountants of India.
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PURPOSE
● Assist preparation of financial statements in applying Accounting Standards and in
dealing with topics that have yet to form the subject of an Accounting Standard
● Assist the Accounting Standards Board in the development of future Accounting
Standards and in its review of existing Accounting Standards
● Assist the Accounting Standards Board in promoting harmonization of regulations,
accounting standards and procedures relating to the preparation and presentation
of financial statements by providing a basis for reducing the number of alternative
accounting treatments permitted by Accounting Standards
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PURPOSE . . . Cont.
● Assist auditors in forming an opinion as to whether financial statements conform
with Accounting Standards
● Assist users of financial statements in interpreting the information contained in
financial statements prepared in conformity with Accounting Standards; and
● provide those who are interested in the work of the Accounting Standards Board
with information about its approach to the formulation of Accounting Standards
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SCOPE . . The Framework deals with:
(a) (b) (c) (d)
the objectives of the qualitative definition, concepts of
financial characteristics recognition and capital and
statements; that determine measurement of capital
the usefulness of the elements maintenance.
information from which
provided in financial
financial statements are
statements; constructed;
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USERS & THEIR
INFORMATION NEEDS
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GOVT.
EMPLOYEES CREDITORS
AGENCIES
INVESTORS
2 4 6
1 3 5 7
LENDERS CUSTOMERS PUBLIC
OBJECTIVES . . Of Financial Statements:
(1) (2) (3)
The objective of financial Financial statements prepared for Financial statements also show the
this purpose meet the common results of the stewardship of
statements is to provide management, or the accountability of
needs of most users. However,
information about the management for the resources entrusted
financial statements do not provide
financial position, to it. Those users who wish to assess the
all the information that users may stewardship or accountability of
performance and cash flows need to make economic decisions management do so in order that they
of an enterprise that is useful since (a) they largely portray the may make economic decisions; these
to a wide range of users in financial effects of past events, and decisions may include, for example,
(b) do not necessarily provide non- whether to hold or sell their investment
making economic decisions. in the enterprise or whether to reappoint
financial information.
or replace the management.
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Underlaying Assumptions . . .
03 CONSISTENCY
In order to achieve comparability of
the financial statements of an
ACCRUAL BASIS enterprise through time, the
accounting policies are followed
In order to meet their objectives, consistently from one period to
financial statements are prepared on another; a change in an accounting
the accrual basis of accounting. Under policy is made only in certain
this basis, the effects of transactions exceptional circumstances.
and other events are recognized when
they occur and they are recorded in the
accounting records and reported in the
financial statements of the periods to 01 02
which they relate. GOING CONCERN
The financial statements are normally
prepared on the assumption that an
enterprise is a going concern and will
continue in operation for the
foreseeable future.
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2 QUALITATIVE
CHARACTERISTICS
UNDERSTAND- FAITHFUL
ABILITY MATERIALITY REPRESENTATION
1 3 5
2 4 6
RELEVANCE RELIABILITY SUBSTANCE
OVERFORM
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NEUTRALITY COMPLETENESS TIMELINESS
8 10 12
7 9 11
PRUDENCE COMPARABILIT COST-BENEFIT
Y BALANCE
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Role
of SEBI
What is SEBI ?
• SEBI is a statutory regulatory body established on the 12th of
April, 1992.
• It monitors and regulates the Indian capital and securities
market while ensuring to protect the interests of the investors,
formulating regulations and guidelines.
• The head office of SEBI is at Bandra Kurla Complex, Mumbai.
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● SEBI has a corporate framework comprising
of various departments each managed by a
department head.
● There are about 20 departments under SEBI.
Such as . . .
• corporation finance, • investment management,
• economic and policy analysis, • commodity derivatives market
• debt and hybrid securities, regulation,
• enforcement, • legal affairs etc.
• human resources,
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Constitution of SEBI
The chairman of SEBI is nominated by the Union Government of India
Two officers from the Union Finance Ministry will be a part of this structure.
One member will be appointed from the Reserve Bank of India.
Five other members will be nominated by the Union Government of India.
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Role of SEBI . . .
• When it comes to stock exchanges, SEBI has the power to regulate and approve any
laws related to functions in the stock exchanges.
• It has the powers to access the books of records and accounts for all the stock
exchanges and it can arrange for periodical checks and returns into the workings of
the stock exchanges.
• It can also conduct hearings and pass judgments if there are any malpractices
detected on the stock exchanges.
• When it comes to the treatment of companies, it has the power to get companies
listed and de-listed from any stock exchange in the country.
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Role of SEBI . . . Cont.
• It has the power to completely regulate all aspects of insider trading and announce
penalties and expulsions if a company is caught doing something unethical.
• It can also make companies list their shares in more than one stock exchange if they
see that it will be beneficial to investors.
• Coming to investor protection, SEBI has the power to draft legal rules to ensure the
protection of the general public.
• It also has the power to regulate the registration of brokers and other middlemen
who will deal with investors in the market.
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PERIODICITY
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• The periodicity assumption states that an organization can report its financial results within
certain designated periods of time.
• This typically means that an entity consistently reports its results and cash flows on a monthly,
quarterly, or annual basis.
• These time periods are kept the same over time, for the sake of comparability.
• For example, if the reporting period for the current year is set at calendar months, then the same
periods should be used in the next year, so that the results of the two years can compared on a
month-to-month basis.
• Once the standard periods have been set up for financial reporting, accounting procedures are
designed to support the ongoing and standardized production of financial statements for the
designated periods. This means that a schedule of activities will mandate when accruals are to
be posted, as well as the standard structure of the resulting journal entries.
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Inconsistent Accounting Periods
• It is also possible to have inconsistent periods. This situation typically arises for the
two reasons noted below.
• Partial Period Start or End: An entity has begun or ended its operations part way
through a reporting period, so that one period has an abbreviated duration.
• Four-Week Periods: A company may report its results every four weeks, which
results in 13 reporting periods per year. This approach is internally consistent, but is
inconsistent when the resulting income statements are compared to those of an entity
that reports using the more traditional monthly period.
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Standard Period Durations
• The main periodicity issue is whether to produce monthly or quarterly financial
statements.
• Most organizations produce monthly statements, if only to gain feedback on
operational results on a fairly frequent basis.
• Publicly-held businesses are required by the Securities and Exchange Commission to
issue quarterly financial statements, which they may issue in addition to monthly
statements that are issued internally.
• From an accounting perspective, it is more difficult to produce reports for large
numbers of reporting periods, because more accruals are needed to apportion
business activities among the various periods.
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FAIR VALUE
ACCOUNTING
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“
Fair value accounting refers to the practice of measuring your
business’s liabilities and assets at their current market value. In other
words, “fair value” is the amount that an asset could be sold for (or
that a liability could be settled for) that’s fair to both buyer and seller.
Fair value accounting was implemented by the Financial Accounting Standards Board
(FASB) in order to harmonize the calculation of financial instruments.
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ASPECTS OF FAIR VALUE
CURRENT MARKET ORDERLY TRANSACTIONS
CONDITIONS Also, fair value is based on orderly
The fair value of an asset is based on the transactions where there isn’t any pressure on
market conditions on the date of the seller to sell, which is why fair value
measurement, rather than historical accounting does not apply to companies that
transactions. are in the process of liquidation.
It’s also important to note that the holder’s
intention should be irrelevant when calculating
Furthermore, fair value is understood to
fair value. For example, if the holder intends to
derive from the sale to a third party, rather
sell the asset immediately, it could lead to a
than a corporate insider or anyone who is
rushed sale, thereby lowering the price of the
related in some way to the seller (as this
asset.
could skew the value of the asset).
INTENTION OF HOLDER THIRD PARTY
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FAIR VALUE ACCOUNTING
03 LEVEL 3
Unobservable inputs, only
LEVEL 1 used when markets are non-
The quoted price of existent or illiquid. Examples
identical items in an active include your company’s own
market (market where data, such as an internally
liabilities and assets are generated financial forecast.
transacted frequently and at
high volumes, giving
ongoing pricing 01 02 LEVEL 2
information).
Observable information for
similar items in active or
inactive markets, rather than
quoted prices. For example,
real estate in similar locations.
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Thanks!
Any questions?
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