REGULATORY AND CONCEPTUAL FRAMEWORK

Question 1

REGULATORY FRAMEWORK

Answer 1

Legal basis for accounting

Question 2

CONCEPTUAL FRAMEWORK

Answer 2

Theoretical basis for accounting
conceptual framework usually embedded within the regulatory environment.
“… a conceptual framework will form the theoretical basis for determining which events should be accounted for, how they should be measured and how they should be communiated to the users.”

Question 3

Why do we need a conceptual framework?

Answer 3

1. Without a CF standards are set without considering:
   - Objectives of reporting
   - Users
   - Information needed
   - What type of report will best satisfy user needs.
2. Fire fighting vs. Architecture
   - Standards without a framework are set in haphazard manner and there is a great danger of inconsistency between standards.

Question 4

What is the purpose of a conceptual framework?

Answer 4

To have a theoretical basis/principles on which to base our accounting standards and practice.
Not an accounting standard.
It does not prescribe recognition, measurement or disclosure requirements for specific transactions.
Provides guidance at a general level.
It should be followed when specific guidance is not covered by an accounting standard.
Assists board in the development of future IFRS and in review of existing IFRS.
Promotes harmonisation
To assist national standard setting bodies in developing national standards.
To assist preparers of financial statements
To assist auditors in forming an opinion in whether financial statements comply with IFRS.
To assist users in interpreting th information.

Question 5

Steps to consider when preparing a CF

Answer 5

1. Identify users/groups.
2. Determine desirable qualitative characteristics of information included.
3. Define elements of FSs (assets etc)
4. Specify recognition criteria
5. Specify measurement basis
6. Specify Display & disclosure in the accounts & notes

Question 6

What is an exposure draft?

Answer 6

A practical tool that:

a) assists the IASB to develop standards that are based on consistent concepts.
b) Assists preparers to develop consistent accounting policies when no standard applies to a particular transaction or event, or when a Standard allows a choice of accounting policy.
c) Assists others to understand and interpret the standards.

Question 7

Structure of IASB framework

Answer 7

CHAPTER 1: The objective of general purpose financial statements (from FASB/IASB joint project)
CHAPTER 2: The reporting entity
CHAPTER 3: Qualitative characteristics of financial statements
CHAPTER 4: All original material, now part of the current exposure draft.

Question 8

QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

Answer 8

Relevance - capable of making a difference to the decisions of users
Faithful representation: Complete, neutral, free from error

Question 9

FAITHFUL REPRESENTATION

Answer 9

Provides information about the substance of an economic phenomenon instead of merely providing information about its legal form.

Question 10

NEUTRALITY

Answer 10

Supported by the exercise of prudence.

Question 11

PRUDENCE

Answer 11

The exercise of caution when making judgements under conditions of uncertainty.

Question 12

ENHANCING QUALITATIVE CHARACTERISTICS

Answer 12

COMPARABILITY: Aided by consistency but is not the same
VERIFIABILITY: Knowledgeable and independent observers could reach consensus, although not necessarily complete agreement on accounting treatment.
TIMELINESS: Information is available in time to influence decisions.
UNDERSTANDABILITY: presenting information clearly and concisely helps make it understandable. Cannot exclude information on the grounds that it is too difficult.
OFTEN CONFLICT. Sometimes one enhancing characteristics may have to be diminished to maximise another qualitative characteristic.

Question 13

MEASUREMENT OF FINANCIAL POSITION

Answer 13

• Assets
• Liabilities
• Equity

Question 14

MEASUREMENT OF FINANCIAL PERFORMANCE

Answer 14

• Income

- Expenses

Question 15

ASSET

Answer 15

A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow from the entity.

Question 16

LIABILITY

Answer 16

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 17

EQUITY

Answer 17

The residual interest in the assets of the entity after deducting all its liabilities.

Question 18

Recognition of elements of financial statements

Answer 18

An element that meets the criteria of the definitions will be recognised if:

• it is probable that any future economic benefit associated with the item will flow from the enterprise.
• the item has a cost or value that can be measured with reliability

Question 19

MEASUREMENT

Answer 19

The process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement.

Question 20

MEASUREMENT BASES

Answer 20

Historical cost
Current cost
Realisable value or settlement value
Present value.

Question 21

Problems with measurement

Answer 21

Which method to use.

Normally a combination of methods is employed

Question 22

What user should we focus on and what are their needs?

Answer 22

Current framework focuses on investors, lenders and other creditors.

Question 23

Wider reach of IFRS.

Answer 23

Transition to IFRS occurring in EU and Asian Pacific Region but different national editions are appearing:
IFRS equivalents (Australia), fully compliant with IFRS but are not identical.

Question 24

IMPACT OF NATIONAL DIFFERENCE ON IFRS APPLICATION

Answer 24

How GAAP is implemented is influenced by national characteristics such as

• degree of investor protection
• the degree of enforcement of financial accounting standards
• risk of litigation and the legal system.

Question 25

CULTURAL DIFFERENCES

Answer 25

• Individualism versus collectivism: do people in society tend to think of themselves only or more widely of society.
• large versus small power distance: extent to which people in society accept that power is distributed evenly.
• Strong versus weak uncertainty avoidance: Level of comfort with deviation from normal behaviour/rules
• Masculinity (preference for heroism, assertiveness, material success) versus femininity (preference for modesty, relationships, quality of life):

Question 26

ACCOUNTING VALUES

Answer 26

• Professionalism (linked to individualism and small power distance) v statutory control (linked to large power distance and strong uncertainty avoidance)
• Uniformity (Linked to strong uncertainty, large power distance and collectivism) v flexibility (Weak uncertainty avoidance, small power distance and individualism)
• Conservatism (linked to strong uncertainty avoidance) v optimism (weak uncertainty avoidance)
• Secrecy (Linked to uncertainty avoidance and large power distance) v transparency (transparency linked to small power distance)

Question 27

IMPLEMENTATION OF IFRS

Answer 27

Harmonisation is a worthy goal but:
Translation of standards can cause problems
AND
National differences influence the implementation of the accounting standards in a country.

Question 28

UNEQUAL EFFICACY OF INCENTIVE MECHANISMS

Obradovic 2014

Answer 28

• Need effective mechanisms

- Uneven incentives could lead to uneven reporting quality

Question 29

ISSUES OF INTERPRETATION/JUDGEMENT AND PREVAILING NATIONAL POLICIES

Answer 29

Partly due to cultural differences. Interpretation of issues where professional judgement is required may differ in different countries.
Difficult to avoid because IFRS are principle rather than rules based standards.
hidden options
Imprecise criteria

Question 30

Why do we need financial reporting standards?

Answer 30

Standards are needed because accounting numbers are important when defining contractual entitlements.
Contracting parties frequently define rights between themselves in terms of accounting numbers.
There is a risk of irresponsible behaviour by directors and managers if it appears that earnings will not meet performance targets.
Would not preclude companies from taking typical steps such as deferring discretionary expenditure (research, advertising, training expenditure, etc), deferring amortisation (e.g. making optimistic sales projections in order to classify research as development expenditure which can be capitalised).
The introduction of a mandatory standard that changes management’s ability to adopt such measures affects wealth distribution within the firm.

Question 31

Why are mandatory standards necessary?

Answer 31

Needed to define the way in which accounting numbers are presumed in financial statements, so that their measurement and presentation are less subjective.
It has been thought that the accountancy profession could obtain uniformity of disclosure by persuasion but, in reality, the profession found it difficult to resist management pressures.

Question 32

ARGUMENTS FOR STANDARDS

Answer 32

CREDIBILITY; The accountancy profession would lose all credibility if it permitted companies experiencing similar events to produce financial reports that disclosed markedly different results simply because they could select different accounting policies.
Uniformity was seen as an essential of financial reports were to disclose a true and fair view.
However it has been a continuous view in the UK and IASB that standards should be based on principles and not be seen as rigid rules - they were not to replace the exercise of informed judgement in determining what constituted a true and fair view in each circumstance.

DISCIPLINE: Directors are under pressure to maintain and improve the market valuation of their company’s securities. There is a temptation therefore to influence.any financial statistic that has an impact on the market valuation, such as the trend in earnings per share, gearing.

COMPARABILITY: In addition to financial statements allowing investors to evaluate the management’s performance, they should also allow investors to make predictions of future cash flows and make comparisons with other companies.
In order to be able to make valid inter company comparisons of performance and trends, investors need relevant and reliable data that have been standardised.

Question 33

ARGUMENTS AGAINST STANDARDS

Answer 33

CONSENSUS SEEKING: Can lead to the issue of standards that are over influenced by those who fear that a new standard will adversely affect their SoFP.

OVERLOAD:
Standard overload:
-Too many standard setters with differing requirements.
-Standards are too detailed if rule based and not sufficiently detailed if principle based leading to the need for yet further guidance from the standard setters.
-Too many notes to accounts to satisfy regulatory requirements.
-Too many notes to accounts put in by the companies themselves. Clutter.
-No definition of a note by standard setters.

Question 34

Standard setting in the UK

Answer 34

Financial Reporting Council (FRC) was set up in 1990 as an independent regulator. Under the FRC the Accounting Standards Board (ASB) issed standards and the Financial Reporting Review Panel (FRRP) reviewed compliance to encourage high quality financial reporting.
The FRC directs its reviews towards those sectors most likely to experience difficulties at the time. It also pays particular attention to the reports and accounts of companies whose shareholders have raised concerns about governance or where there have been specific complaints.

Question 35

IASB

Answer 35

The International Accounting Standards Board has responsibility for all technical matters including the preparation and implementation of standards.
In addition the IASB co-operates with national accounting standard setters to achieve convergence in accounting standards around the world,
ISSUES IFRS

Question 36

IMPACT OF ADOPTING IFRS

Answer 36

Multinationals see a reduction in the cost of capital and easier access to international equity markets.
Investors see shares in companies adopting IFRS becoming more liquid and have greater confidence in earnings per share figures when making investment decisions.
National standard setters see an advantage in the shared development of standards.