2(1) - 2) The Framework of International Accounting...

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2) The Framework of International Accounting Regulation. Standard Setting and Harmonisation Benefits of the Regulation of Financial Reporting 1. Overcome market failure – Without regulation, companies do not have enough incentive to release very much information. Regulation somewhat mitigates information asymmetries which is particularly important in big companies which have a separation of ownership and control. Regulation can also go some way to prevent scandals from occurring. 2. Greater consistency in reporting – Financial reports become more comparable which enables investors to see which companies are doing better than others. Regulation prevents companies from selecting their own accounting policies which would allow them to hide bad results. 3. Markets become more efficient – When more information is disclosed, the financial markets become more efficient as the share price of companies can fully reflect their true value. 4. Market confidence – Regulation protects investors and makes them more confident in the market so they are more willing to provide capital. 5. Stimulation of accounting thought – What regulation is necessary promotes academic accounting thought which leads to innovation and improvement in quality of accounting practices. Costs of the Regulation of Financial Reporting 1. Regulatory capture – The lobbying of standard setters can result in regulation that benefits those with most power rather than the public interest. If powerful corporations can influence standards setting, it defeats the whole purpose of having regulation in the first place. 2. Effectiveness of enforcement – International co-operation on regulation and standards may be difficult which would mean that standards wouldn’t be well enforced. 3. Costs to the producers of information – The more regulation there is, the more costly it is to prepare information, however these costs will be passed on to shareholders who are likely to be more than happy to pay for it. 4. Innovation may be inhibited – Rather than stimulating thought, regulation may stifle it as it limits what room there is for improvement. 5. Regulatory arbitrage – Companies may migrate to areas where the burden of regulation is lower which would be bad for the economy. Why Might Companies Want to Disclose Information? Lower cost of capital Justify management compensation Avoid or reduce the possibility of litigation Signal ‘good’ management performance to shareholders Note however that the extent to which companies actually want to disclose information would be largely dependent on their needs. There will be more disclosure if the company needs external finance or wants to reward its managers better.
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Why Do Standards Differ Between Countries? 1.
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2(1) - 2) The Framework of International Accounting...

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