Role and Formation of Financial Accounting Standards Mr. BarryA-level Accounting Year13.

A-level Accounting Year13

Role and Formation of Financial Accounting

Standards

Mr. Barry


Outline

• The Regulatory System of Accounting• Why accounting standards are required• Harmonisation of Standards (UK +

International)• International Accounting Standards Board

(IASB)• List of IAS / IFRS• US GAAP• IASB Framework (within which new

standards are formulated)Mr. Barry


THE REGULATORY SYSTEM OF ACCOUNTING

• Limited Liability companies most affected. • Local / National legislation• Accounting concepts (acctg assumptions

/conventions) & individual judgement (eg value of property)

• Accounting standards (national and intern’l)• Other International influences (EU, UN, World

Bank, Stock Exchanges etc)• Generally accepted accounting practices

(GAAP)• True and Fair View

Mr. Barry


WHY THERE IS A NEED FOR MANDATORY STANDARDS

Mandatory standards needed to define the way in which accounting numbers are presented in financial statements.

Aim is that their measurement and presentation are less subjective.

Until the 1960s thought that the accountancy profession could obtain uniformity of disclosure by persuasion BUT difficult to resist management pressures.

During the 1960s confidence in the accountancy profession lost when internationally known UK-based companies were seen to have published financial data that were materially incorrect.

Mr. Barry


Creative accounting

Companies try and show their financial statements in the best possible light to attract potential investors or avoid paying taxation

Accounting standards help minimise this unethical practice and allows sufficient comparability of financial statements between years and companies

Mr. Barry


INTERNATIONAL ACCOUNTING STANDARDS BOARDS (IASB)

It uses a framework that deals with:• The objective of financial statements, to provide

information about the financial position, performance and changes that are useful to users

• Qualities that financial information should have for it to be useful

• Definitions of the elements of its financial statements and their recognition and measurement

Mr. Barry


DIFFERENT SET OF TERMS1. Ireland and UK standards

– First SSAP : Statements of standard accounting practice

– FRS : Financial reporting standards

2. International Standards– IAS : International accounting standards– IFRS : International financial reporting

standards

3. US Standards – US GAAP (Generally accepted accounting practices)

Mr. Barry


TWO APPROACHES TO REDUCE NATIONAL DIFFERENCES

• Standardisation approach– Rules to account for similar items in all

countries

• Harmonisation approach– Allows for some different national approaches– Provides a common framework

• Benefit from reducing national differences – Reduces training costs for profession– Permits greater comparability

Mr. Barry


INTERNATIONAL BODIES STANDARDISING AND HARMONISING

• IASC– IASs– IFRSs

• European Union– Directives– Adopting IASs

• IOSCO (International organisation of securities commissions – represent securities markets regulators)

Mr. Barry


IASB

• International Accounting Standards Board (IASB)

• Independent ,privately funded Accounting Standard setter based in London

• IASC (IAS Committee) based in USA• IASB – 14 members from 9 different

countries. Auditors, preparers of Fin Stmts, users of F.Stmts and an Academic

Mr. Barry


OBJECTIVES OF IASB

• To develop IAS (International accounting Standards)

– a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information

– to promote the application and use of those Standards

• To co-operate with national accounting standard setters to achieve convergence in acc stds around the world

Mr. Barry


STRUCTURE OF IASB

• IASC : appoint IASB members, raise funds

• IASB : set accounting stds (IAS)• Standards Advisory Council (advise

IASc and IASB)• International financial reporting

interpretations Committee. (Advise on IFRS - International Financial Reporting standards)

Mr. Barry


PROCEDURE WHEN SETTING NEW STANDARD

1. Issue arises and Advisory board is consulted2. IASB develops and publishes a “discussion

document”, to get feedback from members of profession and public.

3. IASB reviews comments. Publishes an Exposure Draft for public comment

4. IASB reviews comments on the ED and finally issues a new IFRS.

Whole process can take time !

Mr. Barry

A-level Accounting Year13Mr. Barry

IAS Relevant UK standard(s) Effect of any substantial differences

IAS 2 Inventories SSAP 9 Stocks and long-term contracts

IAS 7 Cash Flow Statements

FRS 1 Cash flow statements

Under IAS 7, the statement must report change in cash and cash equivalents (rather than cash, as in FRS 1).

IAS 8 Accounting policies, changes in accounting estimates and errors

FRS 18 Accounting policiesFRS 3 Reporting financial performance

Under IAS 8, all material errors must be adjusted for (FRS 3 only requires restatement for fundamental errors).

IAS 10 Events after the balance sheet date

FRS 21 Accounting for post balance sheet events

FRS 21 issued in May 2004 (apart from the exemption for entities applying the FRSSE) implements IAS 10.



IAS 11 Construction contracts

SSAP 9 Stocks andlong-term contracts

IAS 12 Income taxes FRS 16 Current taxFRS 19 Deferred tax

Under IAS 12, deferred tax must be recognised on all liabilities, including gains on revaluation (not required under FRS 19).

IAS 14 Segment reporting

SSAP 25 Segmental reporting

IAS 14 additionally (to SSAP 25) requires separate identification of segments with different risks, returns or expectations.

IAS 16 Property, plant and equipment

FRS 15 Tangible fixed assets

Under IAS 16, fair values must be used where one asset is obtained in exchange for another. The depreciation charge for each year has to reflect any increase in assets’ residual value ascertained at the balance sheet date. (Under FRS 15 increases in residual value are generally reflected in profits on disposal in the final year of the assets’ lives rather than in reduced depreciation.)



IAS 17 Leases SSAP 21 Accounting for leases and hire purchase contracts

Under IAS 17, leases of land and buildings are split into one operating lease for the land and another lease (finance or operating, depending on the terms) for the buildings. (Under SSAP 21 long-term property leases are generally treated as operating leases.)IAS 17 requires disclosure of total minimum lease payments (rather than SSAP 21’s requirements of commitments within one year).

IAS 18 Revenue SSAP 9 Stocks and long-term contracts

IAS 19 Employee benefits

FRS 17 Retirement benefits

Some differences in detail of measurement approach.‘Corridor’ approach to recognising actuarial gains and losses in IAS 19 means that recognition may be deferred.



IAS 20 Accounting for government grants and disclosure of government assistance

SSAP 4 Accounting for government grants

IAS 21 The effects of changes in foreign exchange rates

FRS 23 The effects of changes in foreign exchange rates

FRS 23 issued in December 2004 implements IAS 21

IAS 23 Borrowing costs FRS 15 Tangible fixed assets

IAS 24 Related party disclosures

FRS 8 Related party disclosures

Related party transactions must be disclosed by type of related party, but names do not have to be given under IAS 24. There is no exemption equivalent to that in FRS 8 for intra-group transactions with 90% subsidiaries whose accounts are publicly available.

IAS 26 Accounting and reporting by retirement benefit plans

SORP Financial reports of pension schemes


M.R

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IAS 27 Consolidated and separate financial statements

FRS 2 Accounting for subsidiary undertakings

Profits should be recognised in the P&L.

IAS 28 Investments in associates

FRS 9 Associates and joint ventures

IAS 28 requires a parent to recognise only the obligations or payments made on behalf of a loss making associate. This is a stricter definition of when liabilities should be recognised than under FRS 9.

IAS 29 Financial reporting in hyperinflationary economies

FRS 24 Financial reporting in hyperinflationary economies

FRS 24 issued in December 2004 implements IAS 29.



IAS 31 Interests in joint ventures

FRS 9 Associates and joint ventures

Proportionate consolidation of joint ventures (prohibited by FRS 9) is the benchmark treatment under IAS 31.

IAS 32 Financial instruments: Disclosure and Presentation

FRS 25 Financial Instruments: Disclosure and Presentation

FRS 25 also has the effect of withdrawing FRS 4 ‘Capital Instruments’, except for material on the measurement of debt and gains and losses on the repurchase of debt. This material is withdrawn for entities applying the measurement requirements in FRS 26, but remains applicable for other entities.

IAS 33 Earnings per share

FRS 22 Earnings per share FRS 22 issued in December 2004 implements IAS 33.

IAS 34 Interim financial reporting

ASB statement on interim financial reporting



IAS 36 Impairment of assets

FRS 11 Impairment of fixed assets and goodwill

IAS 37 Provisions, contingent liabilities and contingent assets

FRS 12 Provisions, contingent liabilities and contingent assets

Definitions in IAS 37 are more strictly associated with definite legal obligations.

IAS 38 Intangible assets

FRS 10 Goodwill and intangible assetsSSAP 13 Accounting for research and development

Under IAS 38, goodwill can stay on the balance sheet indefinitely (subject to impairment reviews) whereas FRS 10 has a rebuttable presumption of a maximum life of 20 years.Rules for capitalising research and development expenditure differ – more will be capitalised under IAS 38.

IAS 39 Financial instruments: recognition and measurement

FRS 26 Financial Instruments: Measurement

FRS 26 issued in December 2004 implements the measurement and hedge accounting requirements of IAS 39.



IAS 40 Investment property

SSAP 19 Accounting for investment properties

Under IAS 40, companies can choose between depreciated cost and fair value (with gains or losses going through the income statement). In contrast, SSAP 19 requires market value with gains and losses going through STRGL.Leased investment properties on leases can be accounted for as investment properties under IAS 40 and the present value of the minimum lease payments is recognised as a separate liability at the start of the lease.

IAS 41 Agriculture No equivalent standard

No equivalent standard Financial reporting standard for smaller entities (FRSSE)

Companies claiming compliance with IFRS must follow all standards in full, regardless of their size.


What we need to know!!

IAS 2 InventoriesIAS 7 Statement of Cash flowsIAS 8 Accounting Policies, Changes in Accounting Estimates and ErrorsIAS 10 Events After the Reporting PeriodIAS 16 Property, Plant and EquipmentIAS 18 RevenueIAS 36 Impairment of AssetsIAS 37 Provisions, Contingent Liabilities and Contingent AssetsIAS 38 Intangible Assets

Mr. Barry


IAS 1 Presentation of Financial Statements

Overall requirements for the presentation of financial statements

Mr. Barry

A-level Accounting Year 12

IAS 1 Presentation of Financial Statements • “Sets out the overall requirements for financial

statements, including how they should be structured, the minimum requirements for their content…”

• The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.

Mr. Barry

A-level Accounting Year 12

IAS1 Context

Mr. Barry

https://www.youtube.com/watch?v=YueTPNM371A


• Prudence convention– Recognise revenues only when they are realised– Recognise expenses as soon as they are known

even if they have not yet actually incurred.

• Matching convention– Provides guidance concerning the recognition of

expenses– Expenses should be matched to the revenues that

they helped to generate (i.e. expenses must be taken into account in the same income statement in which the associated sale is recognised).

Mr. Barry


Matching convention and the recognition of expenses

Mr. Barry

2727

When the amount paid during the year is more

than the full expense for the period

PREPAID EXPENSE

When the expense for the period is more than the cash paid during the

period

ACCRUED EXPENSE


Format of the balance sheet recommended by IAS 1

• Assets – Definition – Economic resources that are controlled

by an enterprise and whose cost can be objectively measured:• An asset is acquired in a transaction• An asset is an economic resource as it provides future

benefits to the enterprise• The resource is controlled by the enterprise• Its cost (or fair value) at the time of acquisition is objectively

measurable.

Mr. Barry



• Assets – Classification – Non-current assets are held with the

intention of being used to generate wealth rather than being held for resale.

– Current assets are • not held on a continuing basis. • They are held primarily for trading purposes • They are expected to be converted to cash at

some future point in time in the normal course of trading (normal operating cycle).

• If any portion of an asset / liability is to be settled or recovered after more than 12 months – then must disclose separately

Mr. Barry



• Liabilities – Definition – Present obligation of the enterprise arising from

past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits

Mr. Barry



• Liabilities – Classification – Non-current liabilities represent those

amounts due to other parties that are not liable for repayment within the twelve-month period following the B/S date (i.e.bank loan)

– Current liabilities represent amounts due for repayment to third parties within 12 months of the B/S date (i.e. bank overdraft, trade payables, etc.), • They are expected to be settled within normal

operating cycle. • They are held primarily for trading purposes.

Mr. Barry



• Equity– Amount of finance owners have provided to the

enterprise– The equity section of a balance sheet normally

contains:• Issued capital• Reserves• Retained earnings.

• IAS 1 Specific disclosure requirements re Share Capital.

Mr. Barry


Published Accounts

• Regulated by the Companies Act 1985, amended 1989 and 2006 and IAS 1

• Annual returns must be completed and filed with the Registrar and kept at Companies House in Cardiff

• Published accounts are used by shareholders and potential investors to allow them to make decisions

Mr. Barry

Role and Formation of Financial Accounting Standards Mr. BarryA-level Accounting Year13.

Documents

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