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Revise Lecture 1

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Framework of Financial Reporting

1. The regulatory system

2. A conceptual framework

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A Concept and Regulatory Framework

• The regulatory system

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A Concept and Regulatory Framework

• The regulatory framework of accounting in each country which uses IFRS is affected by a number of legislative and quasi-legislative influences as well as IFRS

• National company law• EU directives• Security exchange rules

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A Concept and Regulatory Framework

• Why a regulatory framework is necessary?

Regulation of accounting information is aimed at ensuring that users of financial statements receive a minimum amount of information that will enable them to make meaningful decisions regarding their interest in a reporting entity.

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A Concept and Regulatory Framework

• Why a regulatory framework is necessary?

A regulatory framework is required to ensure that relevant and reliable financial reporting is achieved to meet the needs of shareholders and other users.

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A Concept and Regulatory Framework

• Why a regulatory framework is necessary? Accounting standards on their own would not

be a complete regulatory framework. In order to fully regulate the preparation of

financial statements and the obligations of companies and directors, legal and market regulations are also required.

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A Concept and Regulatory Framework

• Principles-based and Rules-based framework

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A Concept and Regulatory Framework

Principles-based framework

• Based upon a conceptual framework such as the IASB’s framework

• Accounting standards are set on the basis of the conceptual framework

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A Concept and Regulatory Framework

Rules-based framework

• ‘Cookbook’ approach

• Accounting standards are a set of rules which companies must follow

In the UK there is a principles-based framework in terms of

the statement of principles and accounting standards and a rules-based framework in terms of the companies Acts, EU directives and stock exchange rulings.

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A Concept and Regulatory Framework

Harmonisation of accounting standards There are a number of reasons why the

harmonisation of accounting standards would be beneficial.

Businesses operate on a global scale and

investors make investment decisions on a worldwide basis. There is thus a need for financial information to be presented on a consistent basis

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A Concept and Regulatory Framework

Harmonisation of accounting standards - Advantages For Multinational companies;• Access to International finance would be easier

as financial information is more understandable if it is prepared on a consistent basis.

• There would be greater efficiency in accounting departments

• Consolidation of FS would be easier

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A Concept and Regulatory Framework

Harmonisation of accounting standards – AdvantagesFor Investors;• If investors whish to make decisions based on the

worldwide availability of investments, then better comparisons between entities are required.

• Harmonisation assists this process, as financial information would be consistent between different entities from different region.

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A Concept and Regulatory Framework

Harmonisation of accounting standards – Advantages

Tax authorities – Tax liabilities of investor’s

should be easier to calculate Large International accounting firms –

Accounting firms would benefit as accounting and auditing would be easier if similar accounting practices existed on a global basis

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A Concept and Regulatory Framework

Harmonisation of accounting standards – Disadvantages

• Difficult to introduce, apply and maintain or enforce in different countries, each of which has a range of social, political, economic and business factors to consider

• Different legal systems may prevent the application of certain accounting practices and restrict the options available

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A Concept and Regulatory Framework

The Standard Setting Process

• IFRS Foundation

• IASB

• IFRS Interpretations Committee

• IFRS Advisory Council

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A Concept and Regulatory Framework

IFRS Foundation The IFRS foundation (Formely known as the

International Accounting standard committee foundation IASC)

• Is the supervisory body for the IASB• Is responsible for governance issues and

ensuring each body is properly funded

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A Concept and Regulatory Framework

The objectives of the IFRS foundation are to;

• Develop a set of global accounting standards which are of high quality, are understandable and are enforceable

• Which require high quality, transparent and comparable information in FS to help those in the world’s capital markets and other users make economic decisions

• Promote using and applying these standards

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A Concept and Regulatory Framework

International Accounting Standard Board (IASB)

• Is solely responsible for issuing International Accounting Standards

• Standards now called International Financial Reporting Standards (IFRSs)

• Has the same objectives as the IFRS foundations

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A Concept and Regulatory Framework

IFRS Interpretations Committee• Issues rapid guidance on accounting matters

where divergent interpretations of IFRSs have arisen

• Issues interpretations called IFRIC 1, IFRIC 2 etc

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A Concept and Regulatory Framework

IFRS Interpretations Committee• The IFRIC addresses issues of reasonably widespread

importance, not issues that are of concern to only a small minority of entities. The interpretations cover both;

• Newly identified financial reporting issues not specifically dealt with in IFRSs or

• Issues where unsatisfactory or conflicting interpretation have developed or seem likely to develop in the absence of authoritative guidance, with a view to reaching a consensus on the appropriate treatment

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A Concept and Regulatory Framework

The IFRS Advisory Council• The IFRS advisory council (formely known as

the standards advisory council) provides a forum for the IASB to consult a wide range of interested parties affected by the IASB’s work, with the objective of;

• Advising the board on agenda decisions and priorities in the board’s work

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A Concept and Regulatory Framework

The IFRS Advisory Council

• Informing the board of the views of the organisations and individuals on the council on major standard-setting projects

• Giving other advice to the board or to the trustees