2 The regulatory framework Flashcards
Define a principles and rules based approach
A principles-based system works within a set of laid down principles. A rules-based system regulates for issues as they arise.
Explain each one of the principles and rules based approach
The Conceptual Framework provides the background of principles within which standards can be developed. This system is intended to ensure that standards are not produced which are in conflict with each other and also that any departure from a standard can be judged on the basis of whether or not it is in keeping with the principles set out in the Conceptual Framework. This is a principles-based system. In the absence of a reporting framework, a more rules-based approach has to be adopted. This leads to a large mass of regulation designed to cover every eventuality, as in the US. As we have seen over the past few years, a large volume of regulatory measures does not always detect or prevent financial irregularity. One presumed advantage of rules-based systems is that the exercise of judgement is minimised. Auditors who fear litigation tend to prefer rules-based systems. It could be that a rules-based approach is appropriate for controversial areas in accounting.
The advantages and disadvantages of adopting IFRS have to be considered by each adopting country and are being widely debated in the US at the moment.
(a) A business can present its financial statements on the same basis as its foreign competitors, making comparison easier (b) Cross-border listing will be facilitated, making it easier to raise capital abroad (c) Companies with foreign subsidiaries will have a common, company-wide accounting language (d) Foreign companies which are targets for takeovers or mergers can be more easily appraised.
The disadvantages are perceived to be: The cost of implementing IFRS The lower level of detail in IFRS
The overall agenda of the IASB will initially be set by discussion with the IFRS Advisory Council. The process for developing an individual standard would involve the following steps:
Step 1 During the early stages of a project, the IASB may establish an Advisory Committee to give advice on issues arising in the project. Consultation with the Advisory Committee and the IFRS Advisory Council occurs throughout the project. Step 2 IASB may develop and publish Discussion Papers for public comment. Step 3 Following the receipt and review of comments, the IASB would develop and publish an Exposure Draft for public comment. Step 4 Following the receipt and review of comments, the IASB would issue a final International Financial Reporting Standard.
IFRS Interpretations Committee (IFRSIC). The duties of the Interpretations Committee are
(a) To interpret the application of International Financial Reporting Standards and provide timely guidance on financial reporting issues not specifically addressed in IFRSs or IASs in the context of the IASB’s Framework, and undertake other tasks at the request of the Board.
(b) To have regard to the Board’s objective of working actively with national standard setters to bring about convergence of national accounting standards and IFRSs to high quality solutions
(c) To publish, after clearance by the Board, Draft Interpretations for public comment and consider comments made within a reasonable period before finalising an Interpretation.
(d) To report to the Board and obtain Board approval for final Interpretations.
Any limitation of the applicability of a specific IFRS is made clear within that standard. IFRSs are ___
not intended to be applied to immaterial items, nor are they retrospective. Each individual IFRS lays out its scope at the beginning of the standard.
Accounting standards and choice It is sometimes argued that companies should be given a choice in matters of financial reporting on the grounds that accounting standards are detrimental to the quality of such reporting. There are arguments on both sides. In favour of accounting standards (both national and international), the following points can be made.
They reduce or eliminate confusing variations in the methods used to prepare accounts. They provide a focal point for debate and discussions about accounting practice. They oblige companies to disclose the accounting policies used in the preparation of accounts. They are a less rigid alternative to enforcing conformity by means of legislation. They have obliged companies to disclose more accounting information than they would otherwise have done if accounting standards did not exist, for example IAS 33 Earnings per share.
Many companies are reluctant to disclose information which is not required by national legislation. However, the following arguments may be put forward against standardisation and in favour of choice
A set of rules which give backing to one method of preparing accounts might be inappropriate in some circumstances. For example, IAS 16 on depreciation is inappropriate for investment properties (properties not occupied by the entity but held solely for investment), which are covered by IAS 40 on investment property. Standards may be subject to lobbying or government pressure (in the case of national standards). For example, in the US, the accounting standard FAS 19 on the accounts of oil and gas companies led to a powerful lobby of oil companies, which persuaded the SEC (Securities and Exchange Commission) to step in. FAS 19 was then suspended. Many national standards are not based on a conceptual framework of accounting, although IFRSs are. There may be a trend towards rigidity, and away from flexibility in applying the rules.
