Introduction to Corporate

Reporting

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 Learning Outcomes
At the end of this lesson the students should be
able to:
• Describe the regulatory framework in Sri Lanka;
• Identify Role of ethics and corporate governance in
financial reporting
• Identify the legal requirements on corporate financial
reporting;
• Describe the accounting standards setting process;
and
• Explain the structure of International and Local
Accounting Standard Committees
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 What is 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 stressed 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.

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 Types of Financial Reports

Financial Voluntary
Disclosures
Reports

Financial
Accounting
Conceptual Statements
Standards
Framework (Mandatory
(AS)
Disclosures)

Addresses Issues in
Financial Reporting 4
 Means of Financial Reporting

• General purpose financial Statements

• Corporate social responsibility/ sustainability
reports/Integrated reporting
• Corporate governance reports (the way by which the
entity is controlled)
• Auditor’s reports
• Management discussions and analysis
• SEC Filings

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 Need for Regulating Financial Reporting

• Financial reporting is considered as the means to reduce the

information asymmetry between managers and stakeholders
of an organization.

• Regulations are usually introduced on financial reporting to

ensure the required amount of disclosures is received in
required quality by the stakeholders of organizations.

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 Financial Reporting Environment

• Company Act and other Regulations

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

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 The Regulatory Framework of FR

That signifies all of the rules

and principles that govern the accounting.

-
GAAP is different in every country, but in most it is a combination of:
• National companies legislation
• Local stock exchange requirements
• Accounting standards

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 Sri Lankan GAAP

In Sri Lanka , the mandatory sources of GAAP are the

following
a) Companies' Legislation
b) SEC Regulations and Rulings
c) Accounting standards as issued by CASL

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Overview of Regulatory Framework in Sri Lanka
• The main legislations and regulations governing corporate
financial reporting in Sri Lanka are
– Accounting and Auditing Standards Act No. 15 of 1995
– Companies Act No. 07 of 2007
– Securities and Exchange Commission Act of 1987
Continuing Listing Requirements of the CSE
– Other Statutes
• Banking Act No. 30 of 1988 subsequently amended.
• Finance Companies Act No. 78 of 1988 subsequently amended
• Industry Act No. 43 of 2000 subsequently amended

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 Overview of Regulatory Framework in
Sri Lanka (Contd.)
Accounting and Auditing Standards Act No. 15 of 1995
• The Act applies mainly to the preparation, presentation
and audit of financial statements of Specific 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.
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
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 Specific Business Enterprises (SBE)

Activity

• What are the specific business enterprises and

their duties?

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Overview of Regulatory Framework in Sri
Lanka (Contd.)
Companies Act No. 07 of 2007
• The principal legislation governing financial reporting
in Sri Lanka is laid down in the Companies Act No. 07
of 2007
• The Companies Act sets out minimum reporting
requirements for companies (ex, maintain accounting
records as set out in section 148 of the Act)
• The duty to prepare financial statement has been
stressed in Section151 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 13
 Overview of Regulatory Framework in
Sri Lanka (Contd.)
Other Statutes
• Other Statutes mean laws that have been imposed
exclusively to govern particular industry including of
its accounting aspects. For an instance Banking Act
No. 30 of 1988 subsequently amended.
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. Such aa
• 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 14
 Conceptual Framework of
Financial Reporting
• A sound conceptual framework is essential to ensure the
production of high quality financial reports that meet the
needs of their users.
• The framework is a coherent system of interrelated objectives
and fundamentals that prescribes the nature, function, and
limitations of financial reporting.
• The Conceptual Framework by the International Accounting
Standards Board (IASB) describes the basic concepts that
underlie the preparation and presentation of financial
statements for external users

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IASB Conceptual Framework

1st Level

2nd Level

3rd Level

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 Conceptual Framework of
Financial Reporting
The components of conceptual framework are as
follows:
• the objective of financial reporting;
• the qualitative characteristics of useful financial
information;
• the definition, recognition and measurement of the
elements from which financial statements are
constructed; and
 Objective of Financial Reporting

• Provide financial information about the

reporting entity that is useful to existing and
potential investors, lenders and other
creditors in making decisions about providing
resources to the entity. (As per Revised IASB-
FASB Framework)
 Fundamental Qualitative Characteristics
• Relevance: capable of making a difference in users’
decisions
– predictive value
– confirmatory value
– materiality (entity-specific)
• Faithful representation: faithfully represents the
phenomena it purports to represent
– completeness (depiction including numbers and
words)
– neutrality (unbiased)
– free from error (ideally)
• faithful representation replaces reliability
 Enhancing Qualitative Characteristics
• Comparability: like things look alike; different
things look different
• Verifiability: knowledgeable and independent
observers could reach consensus, but not
necessarily complete agreement.
• Timeliness: having information available to
decision-makers in time to be capable of
influencing their decisions
• Understandability: Classify, characterize, and
present information clearly and concisely
 Definition of Elements
• Asset: Resource controlled as a result of past events
and from which future economic benefits are expected
to flow
• Liability: Present obligation arising from past events,
the settlement of which is expected to result in outflow
of resources embodying economic benefits
• Equity: Residual interest in assets
• Income (expense): Increases (decreases) in economic
benefits during period from inflows or enhancements
(outflows or depletions) of assets (liabilities) or
decreases (incurrences) of liabilities from in increases
(decreases) in equity, other than contributions from
(distributions to) equity
 Recognition of Elements

• Recognise item that meets element definition when

– probable that benefits will flow to/from the entity
– has cost or value that can measured reliably
 Measurement Concepts

• Measurement is the process of determining

monetary amounts at which elements are recognised
and carried.
• To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions.
• IASB guided by objective and qualitative
characteristics when specifying measurements.
 Measurement Bases
• Historical cost
• Current cost - values assets at their current replacement cost
rather than at the price originally paid for them.
• Net realizable (settlement) value- The value of an asset that
can be realized by a company or entity upon the sale of the
asset, less a reasonable prediction of the costs associated
with either the eventual sale or the disposal of the asset in
question.
• Present value (discounted) - The current worth of a future
sum of money or stream of cash flows given a specified rate of
return.
 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.

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 The standards Setting Process (Contd.)
The due process comprises six stages:
• Setting the agenda
The IASB, by developing high quality accounting standards, seeks to
address a demand for better-quality information that is of value to
all users of financial statements
The IASB evaluates the merits of adding a potential item to its
agenda mainly by reference to the needs of investors.
• Planning the project
Decides whether to conduct the project alone or jointly with
another standard-setter
After considering the nature of the issues and the level of interest
among constituents, the IASB may establish a working group at this
stage.
• Developing and publishing the discussion paper
First publication on any major new topic to explain the issue and
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early comment from constituents
 The standards Setting Process (Contd.)
• Developing and publishing the exposure draft
Publication of an exposure draft is a mandatory step in due process
an exposure draft sets out a specific proposal in the form of a
proposed standard (or amendment to an existing standard)
• Developing and publishing the standard
The development of an IFRS is carried out during IASB meetings,
when the IASB considers the comments received on the exposure
draft.
• After the standard is issued
After an IFRS is issued, the staff and the IASB members hold regular
meetings with interested parties.
to help understand unanticipated issues related to the practical
implementation and potential impact of its proposals.

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 The standards Setting Process (Contd.)
International Financial Reporting Standards
Foundation (IFRSF)

International Accounting
Standards Board (IASB) Develop International Financial Reporting
Standards (IFRS)

International Financial Provide international financial reporting

Reporting Interpretations
Standards Interpretations (IFRSI)
Committee (IFRIC)

Figure: Structure of International Accounting Standards Committee

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 The standards Setting Process (Contd.)
The International Financial Reporting Standards
Foundation
• IFRSF is a nonprofit accounting organization.
• Its main objectives include the development and
promotion of the International Financial Reporting
Standards (IFRSs) through the International Accounting
Standards Board (IASB).
International Accounting Standards Board
• IASB is the independent accounting standards setting
body of the IFRS Foundation
• IASB is responsible for developing IFRS and promoting
the use and application of these standards.
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 The standards Setting Process (Contd.)
International Financial Reporting Interpretations
Committee
• IFRIC was constituted with the aim of reviewing
accounting issues that are likely to receive
unacceptable treatment in the absence of
authoritative guidance, with a view to reaching
consensus on the appropriate accounting treatment.
• IFRIC provides guidance on issues not specifically
addressed in IFRS and also provides interpretations
of requirements existing within IFRS.
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 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.

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Code of Ethics & Corporate
Governance

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 Code of Ethics & Corporate
Governance
• Corporate Governance & Code of Ethics has
become a vital element/concept within the
overall business environment and profession
of accounting as a whole.
• Corporate Governance basically discusses how
to govern/manage the entity’s overall
activities with best practices while code of
ethics essentially guide professional
accountants to work in an ethical manner.
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 Professional Code of Ethics
• Institute of Chartered Accountants of Sri Lanka
introduced following fundamental principles for its
members.

1. The Public Interest

2. Independence
3. Integrity
4.Objectivity
5.Confidentiality
6. Technical and Professional Standards
8. Ethical Behaviour
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7. Professional Competence and Due Care
8. Ethical Behaviour

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• Following are some of the emergent topics
due to unethical business practices.
Insider dealing/Trading
• Simply, Insider dealing is the buying and/or
selling of entity’s stock (shares) based on
inside knowledge.
• This occurs a responsible officer within the
organization disclose the confidential
information which are not yet published by
the entity.

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Whistle blowing
• Whistle blowing is the term used to describe
the act of an employee exposing an entity’s
unethical practices.
Fraud
• Fraud is an acting deceptively and dishonestly
usually with the financial motive in mind.
Forensic Accounting
• Forensic Accounting is a new dimension of
accounting profession in which investigation
of money trails for the purpose of reporting to
the law courts will be a main task/duty. 37
 Corporate Governance
The system by which companies are directed and controlled.

• Corporate Governance is all about good governance.

• This means directions/control and management of the entity
with good motive by the members of the Director Board.

• Generally, Directors owe the following duties/tasks (legal) to

their company.
 To act in good faith, in the best interest of the company.
 To act with care and diligence.
 To avoid improper use of information or position.
 To avoid complex between their role as a director and
any of their personal interests. (agency theory)

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 Agency Relationship and Problems

Other Shareholders Directors/

Stakeholders Managers

Corporate Governance Practices and Procedures

Rules Principles

Focus on

Controlling the Role and rights of

Transparency and
directors and shareholders and
accountability39
managers other stakeholders
• The chief executive officer and the chief financial officer
should state in writing to the board that the company’s
financial reports present a true and fair view in all
material respects of the company’s financial
condition/position and operational results and are in
accordance with relevant accounting standards
• The board should establish an audit committee and such
audit committee should consist of:
1. only non-executive directors
2. a majority of independent directors
3. an independent chairperson, who is not chairperson
of the board
4. at least three members
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• Though the corporate governance basically
deals with the rights and obligations of
companies’ key management (Directors), It
also considers the duties & rights of
shareholders and other various stakeholders.

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• The practice of corporate governance is vary
from one country to another. Commonly,
following structure could be seen in corporate
governance

Every entity must establish suitable

policies/procedures and applications of corporate
social responsibility along with the corporate
governance 42
 Corporate Social Responsibility &
Stakeholder Theory
• A corporation usually has a large number of
“stakeholders” who are individuals or groups that have
an interest in the entity’s affairs. They include share
holders (the owners), employees, creditors, suppliers,
governments and other interested parties ( such as
unions and environmental groups
• It is the shareholders who vote at the annual general
meeting, and the shareholders who choose the
directors. In fact, it is commonly accepted that a central
part of corporate governance is to ensure the
maximization of shareholders’ wealth.
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• Stakeholder theory holds that the purpose of
the entity is to work for the good of all
stakeholder groups, not just to maximize
shareholders’ wealth. Employees, governments,
customers and communities all have an interest
in the affairs of the entity.

• Corporate Social Responsibility (CSR) refers the

responsibility of an entity towards all
stakeholders, including society in general and
the physical environment within which it
operates.
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• CA Sri Lanka provides guidance on ethical behaviour in its
Code of Ethics 2016, for Professional Accountants.
• The Code is mandatory for all members of CA Sri Lanka and
requires that professional accountants comply with the
following principles:
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professionalism
• Similarly, many businesses are required to comply with
professional codes of ethics that are specific to the profession
in which they operate.
• Businesses can also devise their own sets of codes of business
ethics, which set the standards of behaviour required by their
employees and members. 45
 Summary

• Understanding the term ‘financial reporting’

• Role of corporate governance and ethics in financial reporting
• The conceptual framework for preparation and presentation
of financial reporting
• The main legislations and regulations governing corporate
financial reporting in Sri Lanka.
• The due process follow in accounting standards setting

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