4.1 The regulatory environment & International financial reporting standards

Question 1

Need for regulation

Answer 1

• Financial statements will be used by shareholders and other users to make decisions
• Published financial statements are subject to regulation so that they can be reliable to users
• Regulation can also promote consistency and comparability to assist users in interpreting financial statements

Question 2

Elements of a regulatory environment

Answer 2

• local law
• local accounting standards
• international accounting standards
• conceptual frameworks (eg: Statement of Principles in UK, IASB’s Conceptual Framework
• requirements of international bodies (eg: EU, IOSCO)

Question 3

GAAP (Generally Accepted Accounting Practice)

Answer 3

• Covers the conventions, rules and procedures necessary to define accepted accounting practice at a particular time
• It includes broad guidelines of general application and also detailed practices and procedures
• It includes local legislation requirements, accounting standards and any other local regulations
• This will vary from country to country as each have different regulations (eg: UK GAAP, US GAAP)

Question 4

There are two main approaches to accounting standards

Answer 4

• Principles based approach - a set of principles are established from which accounting standards are drawn (eg: UK, the Framework)
• Rules based approach - a set of detailed and specific rules are set down in accounting standards which must be followed to the letter (aka cook-book / tick list approach) (eg: US)

Question 5

IFRS (International Financial Reporting Standards) Foundation (established in March 2001)

Answer 5

• is an independent, non-profit-making organisation, made up of 22 trustees
• it is overseen by the IFRS Foundation Monitoring Board
• the Trustees are responsible for governance and fundraising and will publish an annual report on the Board’s activities, including audited financial statements and priorities for the coming year
• Trustees will decide on operating procedures of the committees in the Board’s family but will be excluded from technical matters relating to accounting standards

Question 6

The trustees of the IFRS Foundation are responsible for

Answer 6

• Appointing the members of the Board, the IFRS Interpretations Committee and IFRS Advisory Council
• Reviewing annually the strategy of the Board and it’s effectiveness
• Approving annually the budget and determining the funding of the Board
• Reviewing broad strategic issues affecting accounting standards
• Promoting the Board and it’s work and the application of international accounting standards
• Establishing and amending operating procedures for the Board, IFRS Interpretations Committee and IFRS Advisory Council

Question 7

Recently the IFRS Foundation role has been developed to have two arms (November 2021):

Answer 7

• The accounting standards (as per original)
• Sustainability reporting (ISSB)

Question 8

International Sustainability Standards Board (ISSB)

Answer 8

• launched as sister body to the IASB
• ISSB has international support with it’s work to develop sustainability disclosure standards

Question 9

ISSB four key objectives:

Answer 9

• To develop standards for a global baseline of sustainability disclosures
• To meet the information needs of investors
• To enable companies to provide comprehensive sustainability information to global capital markets
• To facilitate interoperability with disclosures that are jurisdiction specific and/or aimed at broader stakeholder groups

Question 10

International Accounting Standards Board (IASB, The Board)

Answer 10

• Consists of a number of members who are appointed for a term of five years, renewable once
• It has complete responsible for all international standard setting technical matters, including the preparation and publication of:
  
  • IFRS standards
  • Exposure drafts
  • withdrawal of IFRS standards
  • final approval of interpretations by the IFRS Interpretations Committee

Question 11

IFRS Advisory Council

Answer 11

• Has approximately 30 members from various backgrounds appointed by the trustees, for a renewable term of three years, and meet a number of times a year
• It provides a forum for organisations and individuals to participate in the standard setting process

Question 12

IFRS Advisory Council objectives:

Answer 12

• To give advice to the Board on agenda decisions and priorities in it’s work
• To inform the Board of the views of organisations and individuals on the Council on major standard setting projects
• To give other advice to the Board or the Trustees

Question 13

IFRS Interpretations Committee

Answer 13

Assists the Board by reviewing accounting issues that are likely to, in the absence of guidance, receive wide ranging or unacceptable treatment, with a view to reaching consensus on most appropriate accounting treatment

Question 14

IFRS Interpretations Committee - two main responsibilities

Answer 14

• Provide timely guidance on the application and interpretation of IFRSs (including new financial reporting issues not specifically addressed in IFRS)
• Provide clarification on complex accounting issues that could, in the absence of guidance, produce wide ranging or unacceptable accounting treatments.

Question 15

International Organisation of Securities Commissions (IOSCO)

Answer 15

• Is the representative body of the worlds securities markets regulators
• Financial information is vital to operation of markets and differences in financial information from entities in different countries can reduce the efficiency of markets

Question 16

IOSCO main roles

Answer 16

• IOSCO works with the Board to promote the improvement of International Standards, and worked on a programme of “core standards” which can be used by listed companies who offer securities abroad
• IOSCO issued a report to members recommending they use IFRS Standards when preparing financial statements
• IOSCO representatives also sit as observers on the IFRS Interpretations Committee

Question 17

IFRS standard setting process

Answer 17

• Establishment of an advisory committee to give advice on the issues arising on the project (The Board will consult with this committee and IFRS Advisory Committee throughout process)
• On major projects, the Board develops and publishes a Discussion Paper for public comment (overview of issue, possible approaches to address issue, views of authors or Board and invitation to comment)
• An Exposure Draft is produced for public comment (based on Discussion Paper and Boards review of feedback from public), it is the draft reporting standard made available for final review and can still be amended before final approval
• After receipt and review of comments, the approved IFRS will be published, including a date from which it will become effective
• When the Board publishes a standard it also publishes a Basis of Conclusions to explain publicly how it reached it’s conclusion and provide background information that may help users apply the standard in practice

Question 18

The Boards interaction with local frameworks on IFRS

Answer 18

• The Board invites comments from national standard setters on Exposure Drafts
• This enables them to contribute to the development of IFRS as well as encourages them to apply IFRS
• If IFRSs are similar to national standards this makes it easier for entities to adopt them

Question 19

The IFRS Advisory Council’s interaction with local frameworks

Answer 19

• The IFRS Advisory Council also consults national standard setters and coordinates the agendas and priorities of the Board and national standard setters

Question 20

A country choosing to adopt international standards can apply them in a number of ways:

Answer 20

• Adoption of international standards as local GAAP - usually in countries where accounting profession isn’t well developed and they adopt with little amendment (quick and cheap to implement but doesn’t take specific requirements of country into account)
• International standards used as model to create local GAAP - international standards are taken and amended to reflect country’s needs (Adv - more relevant to country’s needs with still compliant with IS / Disadv - longer to implement and will require expertise)
• International standards used as persuasive influence in preparing local GAAP - where a country has it’s own standards but may differ to IFRS standards, they will use these to update their local standards to comply in material aspects (Adv - relevant to countrys needs but costly and lengthy to create, won’t be compliant with IS and will require expertise)