sources of authority

8/14/2019 Sources of Authority

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Chapter 2

Sources Of Authority


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LegislationThere is a large and increasing body of rules with which

accountants need to be familiar when preparing orinterpreting a set of financial statements. In some countries

most of the rules are laid down in the law while, in other

countries, the law contains principles only with the major

rules being laid down in accounting standards.Companies must comply with both the relevant law and

applicable accounting Standards , although the sanctions that

will be applied for non-compliance with each may differ.

Companies that have their shares publicly traded on a StockExchange must also comply with the rules of that Stock

Exchange.


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In Chapter 1 we explained that there is no general theory of

accounting in existence to guide us in the preparation of financial

statements. We explored the attempts of several bodies to build

conceptual frameworks of accounting and concentrated on the workof the ASB in developing its Statement of Principles for Financial

Reporting. In spite of the lack of theory, there are many rules which

govern the preparation of financial statements.

Rule setters affecting the United Kingdom come in three main forms,

each of which has different powers and sanctions available to it:

1- Government at both the United Kingdom and European Union

levels. These operate through legislation.


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2- Securities markets. In the United Kingdom the Stock Exchange

imposes rules which must be complied with by companies that have

their shares and other securities traded on the Exchange.

3 -Standard setting bodies in the private sector. In the United

Kingdom, standard setting takes place nationally through the work of

the ASB. The European Union Regulation which requires all

European companies that have their shares publicly traded onsecurities markets in Member States to prepare their consolidated

financial statements in accordance with International Accounting

Standards by the year 20051 raises the status of those international

standards as well as raising a number of questions about futurerelationships between national standard setters and the IASB.


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The current position

The law requires that accounts shouldbe preparedin accordance with five accounting principles:

1-Going concern

2-Consistency3-Prudence

4-Accruals

5-Separate determination of each asset and liability


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Stock

Exchange

Rules


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Establishment of the Amman Financial

Market

Public shareholding companies were set up and their shares weretraded in, long before the setting up of the Jordanian SecuritiesMarket. In the early thirties, the Jordanian public alreadysubscribed to and traded in shares; the Arab Bank was the firstpublic shareholding company to be established in Jordan in 1930,

followed by Jordan Tobacco and Cigarettes in 1931, JordanElectric Power in 1938, and Jordan Cement Factories in 1951. Thefirst corporate bonds were issued in the early sixties.

As a result, an unorganized securities market has emerged in theform of non specialized offices. This prompted the government to

contemplate the idea of setting up a market to regulate issuanceof and dealing in securities, in a manner that would ensure safe,speedy and easy trading, and protect small savors, through amechanism that would define a fair price based on supply anddemand. Successive economic plans called for the establishmentof such a market, and various parties started to prepare, with thegovernment's support, for setting up .an organized securities


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In 1975 and 1976, the Central Bank conducted intensive studies, in

cooperation with the World Bank's International Finance

Corporation (IFC), and it became clear there from that the size of

the national economy and the share of the private sector in itthrough public shareholding companies and its broad investor base

justified such a step. Such a market was perceived as a creator of

and caterer for much needed opportunities for economic growth

which would stimulate and spurt economic activity. These joint

efforts bore their fruit, and Temporary Law No. 31 of the year

1976 was promulgate, and what was known as Amman Financial

Market was consequently established. A Cabinet resolution of

March 16, 1977 set up an AFM Administration Committee, which

immediately went into action; and operation on AFM started on the1st of January, 1978.


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The Law laid out the objectives of AFM as follows: to mobilize savings by

encouraging investment in securities; thereby channeling savings to serve

the interests of the national economy; to regulate issuance of and dealing

in securities in a manner that would ensure the soundness, ease and speed

of transactions to safeguard national financial interests and to protect small

savers; and to provide the necessary data and statistics to achieve AFM

objectives.

As of its inception, AFM was entrusted with a dual task, namely the role of a

Securities and Exchange Commission (SEC) and the role of a traditionalStock Exchange.

Since then and up to the founding of Amman Stock Exchange, a lot has been

achieved. Trading on the Secondary Market rose from JD 9.7 million in

1978 to JD20.9 billion in 2008; market capitalization of subscribed shares

is currently around JD24 billion, as compared to around JD286 million bythe end of 1978; and the number of listed companies went up from 66

in 1978 to 272 at present.


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Major developments of the Jordanian Capital

Market

The Jordanian government adopted a comprehensive capital market

reforming policy, which aimed at building on the previous 20 years'

experience, boosting the private sector, expanding and diversifying

the national economy, and improving regulation of the securities

market to reach international standards. Among the most importantfeatures of the new orientation were institutional changes in the

capital market, use of international electronic trading, settlement and

clearance systems, elimination of obstacles to investment, and

strengthening capital market supervision to reach optimum

transparency and safe trading in securities, in line with globalizationand openness to the external world.


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The enactment of the Temporary Securities Law, No. 23 of the year

1997, was a landmark; indeed, it was a qualitative leap and a

turning point for the Jordanian capital market. Its aim was to

restructure and regulate the Jordanian capital market, and tocomplete its infrastructure in consistence with international

standards, in order to secure transparency and safe trading in

securities. The central feature of this restructuring effort was the

separation of the supervisory and legislative role from the

executive role of the capital market. The latter was left to the

private sector, whereby Amman Stock Exchange/ Securities

Market (ASE) and the Securities Depository Center (SDC) played

the executive role, and the supervisory and legislative role was

entrusted to Jordan Securities Commission (JSC). The Lawprovided for setting up three new institutions to replace AFM,

namely:


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1-Jordan Securities Commission (JSC)

2-Amman Stock Exchange (ASE) : It is a non-profit legal entity, with

financial and administrative autonomy, and it is authorized to act as

an organized market for trading in securities in the Kingdom. Its

membership is made up of financial brokers, and it is managed by

the private sector. It has started its operations on March 11, 1999.

3-Securities Depository Commission (SDC)

Recently, a new Securities Law number 76 for the year 2002 has been

issued, which authorized setting up other stock exchanges and

allowed forming an independent investor protection fund, stricterethical and professional codes, and a more stringent observance of

the rule of law.


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The Amman Stock Exchange has two separate tiers of stocks that are

traded. The two-tier system was established, so that an investor can

readily know the status of the company he wants to invest in and

the requirements it has fulfilled. It also promotes the transparencyof the ASE and the companies traded on the stock exchange.

There are certain strict requirements that must be met before a

company can be listed in the first market of the ASE. Those

requirements include the company must have made a pre-tax profitfor at lest two out of the three years before being listed. Also the

company must fulfill certain requirements concerning the free-float

and no. of shareholders in the company. In addition, investors must

be able to easily sell their stocks through the stock exchange.


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Companies can list their shares at the Second Market as soon as

they obtain the right to start their operations from the Ministry

of Industry and Trade.

Securities are electronically traded on the ASE. With a

capitalization of more than JD24 billion, the ASE is one of the

largest stock markets in the region that permits foreign

investment. The exchange currently has 825,875 shareholders,

46.3% of the shares are held by Jordanian corporate andindividual investors, foreign investors account for 48.3% of

share ownership, and the government through the Jordan

Investment Corporation holds 5.4%.


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Jordan Securities Commission

It aims at supervising the issuance of and dealing in securities, regulating and

monitoring the activities and operations of those organs falling under its

supervision. It also aims at regulating and supervising the disclosure of

information related to securities, issuers, insider trading and major

shareholders.

JSC has financial and administrative autonomy, and is directly attached to the

Prime Minister, which would enhance it future role, and would enable it to

effectively assume its supervisory role over the capital market. It has a Board

of Commissioners, composed of five full-time members, which is entrusted

with the following functions: drawing up draft laws and regulations on

securities; approving the by-laws and regulations of the SDC and ASE;granting licenses issued under the Law; setting limits for commissions of

financial services companies and members of the SDC; and adopting

accounting and auditing standards for the organs falling under its supervision

as well as standards for their qualified auditors.


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Securities Depository Center

SDC was established on May 10, 1999 with the aim of ensuring

safe custody of ownership of securities; registering and

transferring ownership of securities traded on ASE; and

settling the prices of securities among brokers. It is a non

profit legal entity, with financial and administrative autonomy,and is managed by the private sector


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Accounting concepts

Users of the accounts were entitled to assume that the concepts

have been applied in the preparation of a set of accounts

unless warning is given to the contrary.

The four concepts were as follow:

1-Going concern.

2-Accruals.

3-Consistency.

4-Prudence.

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