Regulatory Framework Flashcards
What are the 3 Key Sources of Regulation?
Law
Accounting Standards
Stock Exchange Regulations
Why do we need Regulation?
Ensures modern businesses are effective and efficient.
Deterrent for non-supply and misleading info.
Downsides of Accounting Regulation:
- Vulnerability of regulatory process to lobbying and group-thinking.
- Effectiveness of enforcement may be questioned.
- Impose costs on producers of information.
- Regulatory arbitrage – companies migrate to areas where burden of regulation is lower (de-list).
What are the Pro-Regulation Approaches?
- Agency Theory – counter failure of a free market in accounting info to overcome informational asymmetries.
- Lower cost of capital results from market confidence being supported.
- Level Playing Field – markets encouraged to be more efficient.
What is GAAP?
Generally Accepted Accounting Principles.
A set of accounting rules and procedures used in standardised financial reporting practices.
Set by local standard-setters.
What is IFRS
International Financial Reporting Standards.
a set of accounting rules for how information should be gathered and presented in financial reports.
Set by International Accounting Standards Board (IASB).
What is the Purpose of Accounting Standards?
Reduce variation in practice and introduce a degree of uniformity. Key focus on Faithful representation and comparability.
What is Harmonisation?
Process of making standards used in different countries more similar.
Brings IFRS & US GAAP closer.
Freedom of movement of people, goods, and capital. Harmonisation should encourage freer movement of capital.
What is Standardisation?
Implies countries settling on exactly same standards & processes.
What are the Benefits of Standardisation?
- Easier access to international capital markets
- Reduce costs for companies with listings on different international stock exchanges.
- Reduced accounting costs for multinationals
- Increased comparability across industries, benefitting investors.
What is the Role of IASB in Harmonisation?
2 Objectives:
* Formulate & publish accounting standards, and promote its rigorous use and acceptance worldwide.
* Improve and harmonise regulations, accounting standards and procedures.
No enforcement powers, relies on national regulators to enforce compliance with IFRS.
What is the Role of the EU in Harmonisation?
In 2002, EU agreed that groups of companies listed in EU would have to apply IFRS by 2005. This acted as a catalyst for other countries to adopt IFRS.
What are the Post-Brexit Changes?
The UK Endorsement Board (UKEB) influences new or amended international accounting standards issued by the IASB for UK companies to use.
UKEB consults publicly with stakeholders in UK so it can develop & represent evidence-based UK views with aim of acting as UK’s voice on IFRS financial reporting.
Provide Evidence of the Convergence between IFRS & US GAAP:
IASB & US Financial Accounting Standards Board (FASB) work in convergence with IFRS and US GAAP since 2002. Boards have completed several major converged accounting standards:
* Revenue recognition (IAS 18 –> IFRS 15 from 01/01/2018)
* Leases (IAS 17 –> IFRS 16 from 01/01/2019)
* Financial Instruments (IAS 39 –> IFRS 9 from 01/01/2018)
What are Principle Based Standards?
Defines elements of financial statements like:
* The concept of prudence
* Matching
* Consistency
* Comparability
What are Rules Based Standards?
Specific criteria, thresholds, detailed tests, restrictions, exceptions, detailed implementation guidance.
Principles Based Standards v Rules Based Standards:
IFRS & UK standards = Principles Based
US (GAAP) standards = Rules Based.
How do Principle and Rules Approach Depreciation Differently?
Depreciation expense = decline in economic value of asset over period.
Underlying principal = accruals concept, depreciation allocates cost of non-current assets to the periods of their use in generating revenue.
Apply a hard rule, e.g. annual depreciation of all non-current assets of equipment is to be 10% of the original cost until it is fully depreciated.
Argument For Rule Based Standards:
- Provides detailed guidance & clarification to questions. Favoured by auditors & regulators.
- Authoritative & enforceable
- Greater comparability
- Reflects underlying business
- Deters creative accounting too an extent (auditor scrutiny – easy to identify if rules are violated)
Argument Against Rule Based Standards:
- Reduce exercise of professional judgement and lead to de-skilling of the profession
- Doesn’t prevent dishonest practice
- Doesn’t guarantee comparability
- Causes complexity and delay in keeping up with change
- Can foster creative accounting too an extent (loophole exploitation, complexity encourages manipulation)
