Revise Lecture 1 1

Framework of Financial Reporting 1. The regulatory system 2. A conceptual framework 2

A Concept and Regulatory Framework The regulatory system 3

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 4

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. 5

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. 6

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. 7

A Concept and Regulatory Framework Principles-based and Rules-based framework 8

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 9

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. 10

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 11

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 12

A Concept and Regulatory Framework Harmonisation of accounting standards – Advantages For 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. 13

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 14

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 15

A Concept and Regulatory Framework The Standard Setting Process IFRS Foundation IASB IFRS Interpretations Committee IFRS Advisory Council 16

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 17

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 18

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 19

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 20

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 21

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 22

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 23