1. The regulatory framework and the role of IFRS Flashcards
What is the role of the regulatory framework in the preparation of financial statements?
The role of regulatory frameworks for the preparation of financial statements is:
to ensure financial reporting is regulated through financial reporting
standards such as UK and US GAAP and IFRS;
to ensure financial information is reported objectively to provide relevant,
reliable and faithfully represented information that enable users to make
financial decisions;
to provide an adequate minimum level of information for users of financial statements;
to ensure financial information is comparable and consistent in the
relevant economic arena (this is especially important with the growth in
multinational companies and global investment);
to ensure and improve transparency and credibility of financial reports,
promoting users’ confidence in the financial reporting process;
to regulate the behaviour of companies and directors through the corporate governance framework; and
to achieve desired social goals through environmental and CSR reporting.
List the key objectives of accounting standards
The key objectives of financial accounting standards are to:
improve the transparency of financial reporting and make financial information reliable, relevant and easier to understand;
reduce the risk of creative accounting;
make the financial statements of different period or of different entities
comparable;
increase the credibility of financial statements by improving the uniformity
of accounting treatment between companies; and
provide quality financial reports and accounting information which can be
relied upon for consistency, commonality and overall transparency.
What are the key arguments for adopting harmonisation of accounting standards across the world?
What are the key arguments for adopting harmonisation of accounting
standards across the world?
Financial statements presented under IFRS make global comparisons easier.
Cross-border listing is facilitated, making it easier to raise funds and make investments abroad.
Multinational companies with subsidiaries in foreign countries have a
common, company-wide accounting language.
Foreign companies can be more easily appraised for mergers and
acquisitions.
Multinational companies benefit for the following reasons:
1. preparation of group financial statements may be easier;
2. a reduction in audit costs might be achieved;
3. management control would be improved; and
4. transfer of accounting knowledge and expertise across national
borders would be easier.
Why is there an ever-growing need for business to account for and report on environmental issues?
Environmental reporting allows organisations to account for and report on the environmental effects of an organisation’s economic actions. It has economic implications, some of which are listed below.
1. Risk management: financial, legal and reputation implications.
2. Marketing advantages: public image and brand enhancement by
demonstrating its environmental responsibilities. Businesses that are
considered environmentally irresponsible are likely to lose market share.
3. Legal needs: a business may be legally required to provide environmental reports. It is a legal requirement for quoted companies and those that carry on insurance market activity.
4. Competitive advantage: it can improve relationships with key
stakeholders such as investors, suppliers and the wider community.
Improved environmental performance should lead to cost savings.
5. Ethics: showing a commitment to accountability and transparency.
6. Compliance and accounting requirements: the annual review is
expected to include environmental matters, including the company’s
impact on the environment.
7. Green (ethical) investors: companies with environmental disclosures are
in a better position to be considered in investment decisions by trustees.
For example, UK pension fund trustees must disclose how they have
considered social, economic and environmental matters.
8. Employee interests: applicants increasingly look at the environmental
performance of a business.
9. Value-added reporting: environmental key performance indicators are
now used to report on environmental matters to add value to corporate
reports and communicate to a wider range of stakeholders.
10. Integrated reporting: a move towards integrated reporting on CSR and environmental issues that allows interactivity on web-based publication of such reports. Standalone environmental reporting is primarily web-based disclosure that is usually separate from a company’s annual report.
Chapter summary
The role of a regulatory framework is to ensure financial information
is reported consistently and objectively to provide relevant, reliable
and faithfully presented information which enables shareholders and
other stakeholders to make financial decisions. Financial reporting and
accounting standards allow the framework to evolve in a structured way in response to changes in economic conditions.
A principles-based system with an underlying conceptual framework works within a set of laid-down principles, as opposed to a rules-based system that regulates issues as they arise.
A typical regulatory structure includes:
– National or company law
– Financial reporting and accounting standards
– Market regulations such as SOX
– Industry-specific or securities exchange rules
– Corporate governance frameworks
Agency theory suggests that the modern corporation is based on the
principal–agent relationship, where the owner (shareholder) is the principal and the manager is the agent. Corporate governance frameworks can play an important role in helping boards gain a better understanding of their oversight role. It seeks to enhance financial reporting by providing a degree of confidence to the users of accounting information.
The role of financial reporting and accounting standards has been
amplified after the high-profile collapse of corporates in recent years. This has necessitated the need for transparency in financial reporting through standardisation, harmonisation and convergence of accounting regulation.
Financial reporting and accounting standards require companies to disclose the accounting policies they have adopted as well as additional information that they might not disclose if the standards did not exist.
Arguments against accounting regulation includes the following criticisms:
– accounting regulations are too rigid
– standardisation is not suitable for those on the margins
– they remove the need for accountants to exercise their judgement
– they provide an illusion of precision and comparability
– there are too many standards of increasing complexity
National or company law sets out the requirements to prepare financial statements and follow financial reporting and accounting standards.
The IFRS framework provides a platform for accounting and financial
reporting on the basis of IAS and IFRS.
The increasing use of global accounting and financial information has
made it necessary to reduce the accounting differences of financial
information prepared and reported in different countries. Standardisation is the process by which rules are developed to set standards for similar items on a global basis. Harmonisation reconciles national differences and achieves a common set of accounting principles.
The barriers to global harmonisation include the following five external environmental and institutional factors:
– legal systems
– business and financial practices
– tax systems
– level of inflation
– political and economic relationships
Despite efforts towards global harmonisation, national differences in
financial reporting practices continue, including between UK GAAP and
IFRS.
Environmental reporting is the process of communicating the
environmental effects of an organisation’s economic actions through the corporate annual report or a separate environmental report. The demand for environment-related information has led to pressure on corporations as a plethora of disclosures need to be made. The EMAS and EMS are voluntary environmental management tools specifically designed to implement, maintain and manage policy for environmental protection.
Corporate social responsibility is a commitment by business to behave ethically and contribute to economic development while remaining sensitive to the needs of all of the stakeholders. Stakeholders include the workforce and their families as well as the local community and society at large.
What is the purpose of regulatory framework?
Provide structure for regulatory bodies for producing Financial Reporting and Accounting Standards
What is the objective of financial reporting?
To provide useful financial information about the reporting entity to shareholders, and other stakeholder (users of financial statements) who use the information to make financial decisions
Outline the role of regulatory frameworks for the preparation of financial statements:
To ensure financial reporting is regulated through financial reporting standards such as IFRS
Objectivity – to ensure financial info is reported objectively to provide relevant reliable and faithfully represented info that enables users to make financial decisions.
Adequate MINIMUM level of information for users of financial info
To ensure financial info is comparable and consistent in the relevant economic arena
TRANSPARENCY and Creditability of financial reports – promoting confidence
Regulate the Behaviour of companies and directors
Achieve desired goals through environmental and CSR reporting
