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Regulatory Framework for Financial Reporting

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45 views5 pages

Regulatory Framework for Financial Reporting

Uploaded by

gomojeg137
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

1

University of Dhaka
Department of Accounting and Information Systems
EMBA Program
Course name: Corporate Financial Accounting
Course Code: 6101
Assignment On
“Regulatory Framework of Financial
Reporting in Bangladesh”

Submitted to:
Amirus Salat
Professor
Department of Accounting & Information Systems
Faculty of Business Studies
University of Dhaka

Submitted by:
Samantha Rezoana
2nd Batch
ID No. 230102043
Department of Accounting & Information Systems
Faculty of Business Studies
University of Dhaka

Date of Submission:
27th Oct,2023
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Introduction:

All financial statements are prepared in accordance with a financial reporting


framework. The term financial reporting framework is defined as a set of criteria
used to determine measurement, recognition, presentation, and disclosure of all
material items appearing in the financial statements, the Companies Act of
1994 provides basic requirements for financial reporting by all companies in
Bangladesh. It is silent about either Bangladesh Financial Reporting Standards
(BFRS/BAS) or International Financial Reporting Standards (IASs/IFRSs). In One
Word Regulatory reporting is the process of documenting information about a
company's activities and operations. It includes everything from internal audits to
external reports.
Regulatory frameworks are legal mechanisms that exist on national and international
levels. They can be mandatory and coercive (national laws and regulations,
contractual obligations) or voluntary (integrity pacts, codes of conduct, arms control
agreements). The capital market is regulated by Bangladesh Securities and Exchange
Commission (BSEC). Foreign Exchange Market: Towards liberalization of foreign
exchange transactions, a number of measures were adopted since 1990s.

Description:

Financial reporting the communication of financial information to external and


internal stakeholders is most often achieved by the core financial statements: balance
sheet, income statement and statement of cash flows. But it can also come in many
other forms, depending on the information needs of the reader
 Listed companies. The Securities and Exchange Commission of Bangladesh
regulates financial reporting by listed companies. SER 1987 requires
compliance with IASs/IFRSs as adopted in Bangladesh (these are known as
Bangladesh Financial Reporting Standards and include Bangladesh
Accounting Standards).
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 Banks. The Bank Company Act of 1991 mandates reporting formats and
disclosures based on BAS 30, which is similar to IAS 30. The Act is silent
about other BAS/BFRS, and compliance with BAS/BFRS by banks is mixed.
 Insurance companies. The Insurance Act 1938 does not mandate compliance
with BAS/BFRS. In practice, insurance companies often do not follow
BAS/BFRS.
 Other companies. Neither the law nor the by-laws of the Institute of Chartered
Accountants of Bangladesh mandates compliance with BAS/BFRS by unlisted
companies. Actual compliance varies widely and the ICAB has published
the Bangladesh Financial Reporting Standard for Small and Medium-sized
Entities (BFRS for SMEs) (see below).

Legal Regulatory Frameworks in Bangladesh:

the Securities and Exchange Commission of Bangladesh regulates financial


reporting by listed companies. SER 1987 requires compliance with IASs/IFRSs as
adopted in Bangladesh (these are known as Bangladesh Financial Reporting
Standards and include Bangladesh Accounting Standards). But The IFRS are
deliberate to be used for the preparation of general-purpose financial statements.
However, IFRS-based financial statements could be also required to be prepared for
statutory purposes as well. However, while extending the use of IFRS for such
purposes might appear to be cost-efficient, it may create confusion between reporting
entities and regulators, particularly in situations where the regulator for a given
sector has specific financial reporting requirements that diverge from IFRS. The
legal, Regulatory Framework for Financial Reporting and Audit of Corporate
Entities in Bangladesh are governed by the Companies Act 1994 and Securities
Exchange Rules 1987. The professional responsibilities and conduct of Chartered
Accountants are governed by the Bangladesh Chartered Accountants Bye-laws 1973.
The enforceability status for compliance with the accounting and auditing standards,
adopted by the ICAB, emanates from these sources – being legally compulsory
(force of Law) or professionally obligatory (Bye-law’s requirement). The
Companies Act 1994 does not hold any provision for the compulsory observance of
the adopted IAS in practice. The Chartered Accountants Bye-laws 1973 have also
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not been amended to entail compulsory compliance of the adopted standards by


ICAB members. Hence in the absence of any broad statutory or professional
requirements, the implementation of the adopted IAS/IFRS is regarded as
pinpointing of good, standard accounting practices. Despite the adoption of IAS by
ICAB, there was no legal enforceability of these standards till the end of 1997.
Implementation of the adopted standards was neither backed by Law nor
professionally obligatory (as in India, Pakistan, Nepal, and Sri Lanka). The SER
1987 (Rule 12, Sub-rules 2&3) were amended in 1997, whereby all listed entities are
required to comply mandatorily with the requirements of all applicable IAS/IFRS,
(as adopted by ICAB), in the preparation and presentation of their Financial
Statement (FS); and all audit practices are required to ensure compliance with
relevant ISA, (as adopted by the ICAB), in the conduct of and reporting on the audit
of FS of listed entities. Hence the IAS and ISA duly adopted by the ICAB as the
BAS and BSA, now have a legally enforceable mandatory implementation status for
all listed companies in Bangladesh. The ICAB Council intends to amend its Bye-
laws in the immediate foreseeable future to mandate “professional enforceability” of
BAS and BSA (adopted IAS and ISA) among its members irrespective of whether
engaged in the profession, service, business, and academia or otherwise. 4.
According to IFRS, financial statements consist of the
► Statement of financial position,
► Statement of comprehensive income,
► Cash flow statement, a statement of changes in equity, and
► Explanatory notes. Note disclosures must include: • Accounting policies followed
• Judgments made by management in applying critical accounting policies • Key
assumptions about the future and other important sources of estimation uncertainty.
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Conclusion:

The concerned regulators should take proper action to make the adopted accounting
standards as mandatory by incorporating them in all the legislations. Most of the
empirical studies show that the compliance rate of disclosure is very poor in
Bangladesh. The primary legislations should be more comprehensive, considering
different stakeholders’ need for information. Disclosure requirements in the primary
legislation should be consistent with the adopted IAS/IFRS. To avoid repetition
other legislations should refer to the primary one. In order to minimize non-
compliance the regulators should monitor the disclosure levels very strictly. If
companies do not prepare them corporate annual reports in accordance with the
legislations, the authority should take necessary actions against the directors of
respective companies. On the other hand, the companies which are complying with
legislation should be rewarded. Though this paper does not observe the extent of
compliance with disclosure requirements, it may help the users to know the
disclosure requirements of different companies.
The existing draft financial reporting act is not a good structure to give an intended
result which is simply an attempt to tighten the mouth of bottle keeping a lot of leaks
on it. We must ensure proper corporate governance, internal control, reporting
framework etc. to get proper accounting ground. Moreover, the proposed Financial
Reporting Council would be a traditional non- professional council rather than a
result oriented professional institution. These are highly technical issues and cannot
be handled by non-experts’ body like the proposed FRC and we believe that a
political led non-professional council can never bring financial reporting
transparency unless ICAB can work with full independence to enrich the profession.
This paper strongly recommends that the ICAB council may be reformed consisting
of 3(three) Board - (i) Accounting Standard Board (ii) Auditing Standard Board and
(iii) Financial Reports Review Board to ensure compliance of international standard
and effective implementation.

Common questions

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IAS/IFRS's non-mandatory status in Bangladesh results in varied compliance levels, particularly among unlisted companies where neither law nor ICAB mandates adherence . This lack of enforceability undermines the uniformity and transparency of financial statements, influencing the credibility and comparability of reports . As a result, there is a call for legislation to adopt these standards as mandatory to ensure consistency in financial reporting practices .

Bangladesh's regulatory frameworks face challenges in integrating with international accounting standards due to sector-specific regulations that conflict with IFRS mandates . Such discrepancies create potential confusion and inconsistent financial reporting practices . To enhance alignment, regulatory bodies should adopt IFRS comprehensively into national legislation to streamline standards across sectors . Additionally, forming collaborative bodies such as an expert-driven ICAB with authority and independence could further support the integration and uniform application of international standards .

Existing legislative gaps in Bangladesh, such as the absence of compulsory observance of IAS by non-listed entities, undermine consistent application of financial reporting standards . These gaps diminish trust in financial statements, affecting economic decisions by stakeholders . To bridge these gaps, incorporating standards into broad legislation and ensuring adherence through strict regulatory oversight is essential, alongside aligning primary legislation to stakeholders' information needs . Creating incentives for compliance and penalties for non-adherence could further reinforce these standards .

The 1997 amendment in the SER marked a significant shift by mandating that all listed entities in Bangladesh comply with ICAB-adopted IAS/IFRS . This change legally bolstered the enforceability of these standards, aiming for enhanced consistency and transparency in financial reporting . However, its impact has been undermined by continued regulatory challenges and varied enforcement levels, particularly outside the listed sector . This necessitates further legislative and professional adjustments to ensure comprehensive compliance across all sectors .

The Bangladesh Securities and Exchange Commission (BSEC) regulates financial reporting for listed companies by enforcing compliance with the IAS/IFRS adopted by Bangladesh as BFRS/BAS . BSEC requires these standards for transparency and consistency in financial reporting, working alongside the legal frameworks established by the SER 1987 . This regulatory interaction ensures that listed entities produce financial statements in line with international norms, enhancing investor confidence .

The application of IFRS in Bangladesh for statutory purposes poses challenges due to potential confusion arising from sector-specific regulatory requirements that may diverge from IFRS . While extending IFRS use could be cost-efficient, it risks misalignment between entities and regulators . To address these issues, regulators should incorporate accounting standards into legislation to ensure mandatory compliance . Furthermore, clear regulatory oversight to monitor adherence and enacting consequences for non-compliance could enhance alignment and clarity .

Disclosure requirements play a crucial role in enhancing accountability and governance by providing transparency in a company’s financial health and management decisions . In Bangladesh, poor compliance rates suggest inadequate legislative and regulatory enforcement . Strengthening disclosure laws, coupled with strict monitoring and penalties for non-compliance, could enforce greater accountability and better governance . Moreover, rewarding compliant companies may incentivize adherence to disclosure norms .

A financial reporting framework offers a structured set of criteria for recognition, measurement, and disclosure of financial data within statements, thus ensuring consistency and clarity in financial reporting . In Bangladesh, such a framework is shaped by national laws like the Companies Act of 1994 and guidelines from BFRS/BAS . This framework aids accountants and auditors by providing a standardized approach, reducing discrepancies and enhancing comparability of financial information .

The financial reporting for listed companies in Bangladesh is governed by the Securities Exchange Rules (SER) 1987, which mandates compliance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as adopted by Bangladesh (BFRS/BAS). In contrast, the Bank Company Act of 1991 regulates banks, requiring compliance based on BAS 30, similar to IAS 30, but it does not enforce other BAS/BFRS, leading to mixed compliance . For insurance companies, the Insurance Act of 1938 does not mandate adherence to BAS/BFRS, resulting in many insurance companies opting not to follow these standards .

The proposed Financial Reporting Council (FRC) is criticized for its non-professional structure, which lacks the technical expertise required to handle complex financial reporting issues . The document argues that such a council, especially if politically led, would struggle to improve transparency without full independence and support from the ICAB . A more effective approach may involve reforming the ICAB to include specific boards for accounting, auditing, and reviewing financial reports, ensuring adherence to international standards .

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