Regulatory and Conceptual Framework

Question 1

Why is external reporting regulated?

Answer 1

Accounting numbers are externally reported to decision-makers, accounting is not an exact science - involves subjective judgement, and accounting scandals highlight that financial results are a product of different judgements

Question 2

How is external reporting regulated?

Answer 2

Preparers follow requirements of accounting standards: Companies Act (true and fair view requirement), Section 393 of Companies Act 2006, and UK/IFRS (fair representation

Question 3

What exactly are accounting standards?

Answer 3

Authoritative standards for financial reporting, primary source of GAAP, and specifies how transactions and other events are to be recognised, measured, presented and disclosed in financial statements

Question 4

What are the benefits of accounting standards?

Answer 4

Credibility, discipline, and comparability

Question 5

Why should accounting standards have credibility?

Answer 5

So financial results are not perceived as a product of those producing them

Question 6

Why should accounting standards have discipline?

Answer 6

So financial results are not a product of the picture companies want to present

Question 7

Why should accounting standards have comparability?

Answer 7

So financial results can be compared over time and across companies

Question 8

What are the downsides of accounting standards?

Answer 8

Consensus-seeking, overload (clutter), and potential economic consequences

Question 9

Who are the standard setters in the UK?

Answer 9

Financial Reporting Council

Question 10

When were the FRC set up?

Answer 10

In 1990 as an independent regulator to set and enforce accounting standards

Question 11

What is the structure of the FRC?

Answer 11

3 governance committees, 2 business committees, and 3 advisory committees

Question 12

What are the 3 governance committees of the FRC?

Answer 12

Audit, Nominations, and Remuneration

Question 13

What are the 2 business committees of the FRC?

Answer 13

Codes & Standards, and Conduct

Question 14

What are the 3 advisory committees of the FRC?

Answer 14

Corporate Reporting, Audit & Assurance, and Actuarial

Question 15

What do the FRC do?

Answer 15

Issues accounting standards, issues guidance statements, and reviews SORPs

Question 16

What is the standard setting process?

Answer 16

• Decision to include topic in work program and assign a project director
• Undertake research & identify expertise –create panel of consultants
• Publish a discussion paper
• Consultation period
• Publish FRED (Financial Reporting Exposure Draft)
• Publish Financial Reporting Standard

Question 17

Who are the standard setters in the US?

Answer 17

Financial Accounting Standards Board

Question 18

Why are there differences in financial reporting across nations?

Answer 18

Characteristics of national legal systems, different ways in which industry is financed, relationship between tax and reporting systems, influence and status of the accounting profession, development of accounting theory, accidents of history, and language

Question 19

What is the foundation of the IFRS?

Answer 19

A 3 tear structure: IFRS Foundation Monitoring Board (Public Accountability), IFRS Foundation Trustees (Governance and Oversight), and IFRS Foundation - IASB & IFRS Interpretations Committee (independent standard setting and related activities)

Question 20

What are the advantages of global standards for publicly accountable entities?

Answer 20

It reduces cost of reporting under different standards, easier to raise cross-border finance, decrease in cost of capital - increase in share price, and enables investors to compare performance

Question 21

What are the disadvantages of global standards for publicly accountable entities?

Answer 21

Complexity, impact on net profit and equity, volatility in the accounts, and lack of familiarity

Question 22

What is included in the new UK GAAP?

Answer 22

FRS 100 (Application of Financial Reporting Requirements), FRS 101 (Reduced Disclosure Framework), and FRS 102 (Financial Reporting Standard applicable in the UK and Ireland)

Question 23

Which accounting standards will UK companies use?

Answer 23

UK listed companies continue to produce consolidated (group) accounts in accordance with IAS, individual listed companies can use FRS 102 or adopt FRS 101, unlisted companies use current UK standards, small/medium sized companies use FRS 102, and micro entities use FRS 105

Question 24

Why do we need accounting standards?

Answer 24

Needed for profession itself (reactive process), existing best practice, developed by individual countries (variety of standards with national enforcement), and growth of global economy (need for global standards)

Question 25

What is the financial accounting theory?

Answer 25

Empirical Inductive Approach (prior to 1970s), Deductive Approach (1970s), and Conceptual Framework (promoted in the 1980s and continues in the present day)

Question 26

What is a conceptual framework?

Answer 26

A statement of principles which provides guidance when developing new accounting standards and challenging evaluating existing standards

Question 27

What are the benefits of conceptual framework?

Answer 27

Principles vs rules, sound consistent theoretical basis, avoids ad hoc approaches and ‘fire fighting’, avoids contradictions in standards, may limit lobbying, may limit creative accounting but difficult to gain consensus

Question 28

What is FRS 100?

Answer 28

Withdrawal of the Statement of Principles for Financial Reporting

Question 29

What is FRS 102?

Answer 29

Section 2: Provides concepts and pervasive principles which include - objectives of financial statements, qualitative characteristics, recognition and measurement of assets, liabilities, income and expenses, and presentation of financial statements

Question 30

What framework is used internationally?

Answer 30

1989 IASC Framework for the Preparation and Presentation of Financial Statements, and 2010 IASB Conceptual Framework for Financial Reporting

Question 31

What are the qualitative characteristics of useful financial information?

Answer 31

Relevance, faithful representation, enhancing qualities, and prudence