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Accounting and Regulation: Some Observations

Emerging Business Paradigms. Accounting and Regulation: Some Observations. Organisations: Relevant Issues. Forms of Organisation Ownership of Organisation Management of Organisation. Forms of Organisation. Sole Proprietorship Partnership Joint Stock Company Corporation Society.

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Accounting and Regulation: Some Observations

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  1. Emerging Business Paradigms Accounting and Regulation: Some Observations DVRamana XIMB

  2. Organisations: Relevant Issues • Forms of Organisation • Ownership of Organisation • Management of Organisation DVRamana XIMB

  3. Forms of Organisation • Sole Proprietorship • Partnership • Joint Stock Company • Corporation • Society DVRamana XIMB

  4. Conceptual Clarity of Corporate Form Conceptual Clarity of Corporate Form • Separation of ownership from management and Dispersed Ownership • Limited liability of the owners and Unlimited life or perpetuity • Responsibility to make profit DVRamana XIMB

  5. Separation of ownership from management and Dispersed Ownership • Principal and Agent Problem • Asymmetry of Information So appropriate governance structures are needed in the large corporation to safeguard the interests of shareholders DVRamana XIMB

  6. Limited liability of the owners and Unlimited life or perpetuity • Managers may be tempted to take extra risk and more liabilities • Shareholders may not object those decisions. • Enterprise becomes riskier So appropriate governance structures are needed in the large corporation to safeguard the interests of other stakeholders DVRamana XIMB

  7. Responsibility to make profit • The directors of the company are expected to achieve profit maximization objective using the resources at their disposal. Dodge v. Ford Motor Company, (Mich.S.C. 1919). • Who can stop/question the mangers from unscrupulous use of resources in the pursuit of profit maximization? DVRamana XIMB

  8. Corporate Entity: Some Questions • Will there will be a congruency between the goals of the owners (principal) and the managers (agents)? • Will it be possible that the managers and shareholders are not just guided by the profit maximisation objective? • How to make the mangers recognise the needs of other stakeholders? DVRamana XIMB

  9. Listed Companies NSE BSE Regional Stock Exchanges Unlisted Companies Private sector Public sector Multinational How to get the financial information from the unlisted companies? Corporate Sector DVRamana XIMB

  10. Corporate Sector in India: Some Observations In crores Can the Financial Statements Capture the volatility? DVRamana XIMB

  11. Equity market dwarfs banks • BETWEEN April and October 2005, Indian companies mobilised Rs 51,459 crore through public offers, rights issues and private placements. • In contrast, through financial year 2005, Banks lent Rs 42,976 crore to medium and large industries as a whole. Not all of them are listed, too. DVRamana XIMB

  12. Financial Statements and Investors • Are the shareholders really interested in understanding the financial statements? • Do the financial statements have the ability to fulfill the needs of the shareholders? • Are the financial statements relevant for the shareholders? DVRamana XIMB

  13. GAAP • GAAP are concerned with • the measurement of economic activity, • the time when such measurements are made and recorded, • the disclosures surrounding these activities, • the preparation and presentation of summarised economic information in the form of financial statements. DVRamana XIMB

  14. GAAP • Indian GAAP: • The Companies Act 1956 • 29 Accounting Standards issued by ICAI • Relevant Statutes • Indian Standards: ASB of ICAI (1977) • Formulated on the basis of laws, customs, and business environment of India. DVRamana XIMB

  15. Deviation from Accounting Standards The Companies Act requires that in case the profit and loss account and balance sheet deviate from AS, then disclosure should be made stating: • Deviations from the accounting standards; • The reasons for such deviations; and • The financial effect, if any, arising due to such deviations DVRamana XIMB

  16. Not Available in the Financial Statements! • Time value of money • Cost of capital • Future cash flows • Replacement value of assets • Product Price • Market Price of shares • Number and nature of employees’ unions DVRamana XIMB

  17. Some Questions to Think! • Whose Purpose is being served by the financial statements? • Shareholders (external need) • Managerial Requirements (internal need) • Both require real time data. DVRamana XIMB

  18. Paradigm Shift • A paradigm shift is taking place in accounting: • From Historical Accounting to Fair Value Accounting • Recognizing the concept of cost of capital • ROI to EVA DVRamana XIMB

  19. Some more questions • Is it possible to bring in the fair value into the books of accounts? • Can the books of accounts be able to capture the cost of capital? • Is the accounting community ready to absorb such a shift? DVRamana XIMB

  20. Work to do Select a listed company and find the following right of the first issue of share • Book value of share (networth/ Number of shares) as on the balance sheet date • Market value of share (price) DVRamana XIMB

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