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ACF 1101 Financial Accounting: Week 1: The Institutional and Regulatory Environment of Financial Reporting in Sri Lanka

The document provides an overview of the regulatory environment for financial reporting in Sri Lanka. It discusses that financial reporting serves to inform external users who do not have authority to demand specific information. It then outlines various means of financial reporting such as general purpose financial statements, CSR reports, and auditor's reports. Key aspects of the regulatory framework in Sri Lanka that are covered include the Companies Act, Accounting Standards Act, SEC Act, and other industry-specific statutes. It also discusses the standards setting process and relevant regulatory theories.

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Kogularamanan Nithiananthan
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115 views

ACF 1101 Financial Accounting: Week 1: The Institutional and Regulatory Environment of Financial Reporting in Sri Lanka

The document provides an overview of the regulatory environment for financial reporting in Sri Lanka. It discusses that financial reporting serves to inform external users who do not have authority to demand specific information. It then outlines various means of financial reporting such as general purpose financial statements, CSR reports, and auditor's reports. Key aspects of the regulatory framework in Sri Lanka that are covered include the Companies Act, Accounting Standards Act, SEC Act, and other industry-specific statutes. It also discusses the standards setting process and relevant regulatory theories.

Uploaded by

Kogularamanan Nithiananthan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ACF 1101 Financial

Accounting
Week 1: The institutional and regulatory
environment of financial reporting in Sri
Lanka
Academic Year 2020/21
Semester 1
Department of Business Finance
University of Peradeniya
Financial Reporting
• ‘Activities which are intended to serve 'informational needs of
external users who lack authority to prescribe the financial
information they want from an enterprise and therefore must
use the information that the management communicates to
them’ (FASB)

• The features highlighted by this definition are;


– Financial reporting is to serve information needs of users
– Users cannot prescribe the information they want from an entity
– Consequently, depend on the information they are provided with by
the management.
2

Means of Financial Reporting


• General purpose financial Statements
• Corporate social responsibility/ sustainability reports
• Corporate governance reports (the way by which the entity is
controlled)
• Auditor’s reports
• Management discussions and analysis
• SEC Filings
• Press releases
3

•General purpose financial Statements


Are those intended to meet the needs of users who are not in a
position to require an entity to prepare reports tailored their
particular information needs.
• Corporate social responsibility/ sustainability reports
Organizational report that gives information About economic,
environmental, social & governance performance.
• Corporate governance reports (the way by which the entity
is controlled)
• A report where board of directors inform the shareholders
& capital markets how they practice corporate governance &
applied the codes.
• Management discussions and analysis
Part of the company’s annual report or interim reports in which
management addresses company performance with qualitative
& quantitative measures.
Financial Reporting Environment

• Company Act and other Regulations


• Conceptual Framework and Accounting
Standards
• Corporate Governance
• Ethics of Management
• External Audit

6
Corporate Governance
• The system by which companies are directed
and controlled (Cadbury Report in 1992)
• It influences how the objectives of the
company are set and achieved, how risk is
monitored and assessed, and how
performance is optimized.

7
8
Ethics
• Ethics are the moral principles that an individual uses
governing his or her behavior.

• In short, ethics are the personal criteria by which an


individual distinguishes “right” from “wrong”.

9
External Audit
• External Auditing is ‘the examination of a firm’s
accounting records, by a person qualified to do so, to give
an opinion as to their truth, fairness and accuracy’

10
Why is accounting so regulated?
– Reduce the information asymmetry
– Ensure the required amount of disclosures
– Agency problem
– Reporting needs to be monitored
– Protection of owners and creditors
– Complexity of entities and transactions
What is regulation?
• Regulation is overseeing, according to
predetermined rules, an activity by an entity not
directly involved in the activity.
– The government is deliberately intervening in the
production of general purpose financial statements.
– This control is through a standard setting body (CASL)
which is supposed to be independent of the government.
– In addition, there are several other institutions which
regulate financial reporting of institutions coming under
their purview.
Overview of the regulatory environment –
Who/what regulates accounting?
• See
– Financial Reporting Environment in Sri Lanka which
is uploaded separately.
Overview of Regulatory Framework in Sri Lanka
(contd.)
• The main legislations and regulations governing
corporate financial reporting in Sri Lanka are;
– Companies Act No. 07 of 2007
– Sri Lanka Accounting and Auditing Standards Act
No. 15 of 1995
– Securities and Exchange Commission Act No. 36 of
1987 amended by Act No.26 of 1991 and Act No.18
of 2003
– Continuing Listing Requirements of the CSE
– Other Statutes
• Banking Act No. 30 of 1988 subsequently amended.
14
• Finance Companies Act No. 78 of 1988 subsequently amended
• Insurance Industry Act No. 43 of 2000 subsequently amended

Overview of Regulatory Framework in Sri Lanka


(Contd.)

Companies Act No. 07 of 2007


• The principal legislation governing financial reporting in Sri Lanka is
stated in the Companies Act No. 07 of 2007
• The Companies Act sets out minimum reporting requirements for
companies and auditing of financial statements;
• The duty to keep accounting records are set out in the section 148
of the Act

15
Overview of Regulatory Framework in
• The obligation 1to prepare financial statement has been stated in
the Section150 of the Act
• There is an obligation to prepare (as per section 166 of the Act) and
submit annual report (as per section 167 of the Act) to shareholders
• Appointment of auditors (Section 154) and auditors report (section
163)

Sri Lanka (Contd.)


Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995
• The Act applies mainly to the preparation, presentation and audit
of financial statements of Specified Business Enterprises (SBE).
• Sri Lanka Accounting and Auditing Standards Act No.15 of 1995 has
brought into being following three committees to accomplish its
objectives.
1
Duty

16
a) Accounting Standards Committee
Responsible to make recommendations and otherwise assist the CA Sri
Lanka in the adoption of Accounting Standards
b) Auditing Standards Committee
Responsible to make recommendations and otherwise assist the CA Sri
Lanka in the adoption of Auditing Standards
c) Sri Lanka Accounting and Auditing Standards Monitoring Board
Responsible to monitor and enforce compliance with LKASs and SLAuSs by
SBEs operating in Sri Lanka

17
Overview of Regulatory Framework in
Sri Lanka (Contd.)
Securities and Exchange Commission of Sri Lanka Act (No. 36)
1987 amended by Act (No. 26) 1991 and Act (No. 18) 2003
• Routine and non-routine disclosures; declaration of CEO and
CFO ensuring true and fair view of financial statements
• External Auditing: Criteria in relation to qualifications,
appointment, rotation of partners, and independence of
auditors
•
Sri Lanka (Contd.)
Other Statutes
• Laws that have been imposed exclusively to govern particular industry
including of its accounting aspects. i.e.
Banking Act No. 30 of 1988 subsequently amended.
• Under the part IV of the Act certain provisions have been made for the
preparation and presentation of financial statements.
• As per the Section 27 of the Act, every licensed commercial bank shall prepare— A
balance sheet as at the last working day of each financial year of such licensed
commercial bank; A profit and loss account in respect of such year
• As per the Section 28 of the Act, the Monetary Board may specify the form of the
balance sheet and profit and loss account

18
Overview of Regulatory Framework in
Regulation of accounting practice in Sri Lanka

• Through accounting standards that have government


backing – they guide the preparation of financial
statements
• From January 2012 Sri Lanka fully complies with
International Financial Reporting Standards (IFRSs)
developed by the International Accounting Standards
Board (IASB).
• As a result Sri Lanka Financial Reporting Standards
(SLFRSs) is being operated on financial reporting in
Sri Lanka today.
The standards Setting Process
Source: Regulation Cpt 1 IASB IFRS

The Standards Setting Process


• Since 1st of January 2012, Sri Lanka has aligned its national
accounting standards to that of the International Financial
Reporting Standards (IFRS), consequently Sri Lanka Financial
Reporting Standards (SLFRSs) is being operated on financial
reporting in Sri Lanka today.
• As SLFRSs are based on IFRSs, the procedure which is being
followed on developing IFRSs is being adopted in the case of
SLFRSs.
• IFRSs are developed through an international consultation
process, the "due process", which involves interested
individuals and organizations from around the world.
23
The standards Setting Process (Contd.)
• The CA Sri Lanka, as a member of the IASB is committed to its
broad mission of the development and enhancement of
accounting standards.
• The Accounting Standards Committee that was developed
under the Sri Lanka Accounting and Auditing Standards Act,
No. 15 of 1995 which authorises CA Sri Lanka to issue LKAS,
shall make recommendation and otherwise assist the
Institute in adaptation the Accounting Standards.

24
The theories of regulation relevant to
accounting and auditing

• Managers have incentives to voluntarily


provide accounting information, so why do we
observe the regulation of financial reporting?
• Explanations are provided by:
– theory of efficient markets
– agency theory
– theories of regulation
25
What is behind the regulation of accounting in
Sri Lanka?
• International influences
• Wide reaching effects of accounting
• Government intervention to increase its regulatory
role
• Legal enforcement of financial reporting and auditor
independence
• Corporate failures

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