The Conceptual Framework and Regulatory Environment Flashcards
Why is there a need for regulation in accounting?
Financial statements will be used by shareholders and many other types of users to make decisions. In order that they can be relied upon by users, published financial statements should be subject to regulation.Regulation can also promote consistency and so helps users when interpreting financial statements. Different countries will be subject to a variety of economic, social and political factors. As a result, the way in which published financial statements are regulated will vary from country to country
Describe the 5 main elements of a regulatory environment
- Local law
- Local accounting standards
- International accounting standards
- Conceptual frameworks e.g. Statement of Principles in the UK
- Requirements of international bodies e.g. EU IOSCO
Outline the differences between a principles based approach and a rules based approach to accounting standards
Principles-based approach:
- based upon a conceptual framework such as the IASB’s Framework
- accounting standards are set on the basis of the conceptual framework
Rules based approach
- Cookbook’approach
- accounting standards are a set of rules which companies must follow
Describe the role of the IFRS Foundation
Established in March 2001 as a non-profit making corporation with a number of Trustees. The trustees are responsible for;
- appointing the members of the IASB, the International Financial Reporting Interpretations Committee and IFRS Advisory Council;
- reviewing annually the strategy of the IASB and its effectiveness;
- approving annually the budget and determining the funding of the IASB;
- reviewing broad strategic issues affecting accounting standards;
- promoting the IASB and its work and the rigorous application of IASs;
- establishing and amending operating procedures for the IASB, IFRS Interpretations Committee and IFRS Advisory Council
Describe the role of the International Accounting Standards Board (IASB)
The IASB consists of a number of members and is responsible for developing international accounting standards, now called International Financial Reporting Standards (IFRS Standards).All members are appointed for a term of 5 years, renewable once.The IASB has complete responsibility for all IASB technical matters, including the preparation and publication of IFRS Standards, Exposure Draft, withdrawal of IFRS Standards and final interpretations by the IFRS Interpretations Committee.The IASB have also adopted all IASs that were previously issued by the IASC.
Describe the role of the IFRS advisory council
The IFRS Advisory Council has approximately 30 members and provides a forum for organisations and individuals to participate in the standard setting process. The members are appointed by the trustees from various backgrounds, for a renewable term of 3 years and meet three times a year. The objectives of the IFRS Advisory Council are:
- to give advice to the IASB on agenda decisions and priorities in its work;
- to inform the IASB of the views of organisations and individuals on the Council on major standard setting projects;
- to give other advice to the Board or to the Trustees
Describe the role of the IFRS Interpretations Committee
The IFRS Interpretations Committee (formally known as IFRIC), assists the IASB by reviewing accounting issues that are likely to receive divergent or unacceptable treatment in the absence of authoritative guidance, with a view to reaching an appropriate accounting treatment. It was established in 2002 by the IFRS Foundation to replace the Standing Interpretations Committee (SIC)®. Previously SIC Interpretations were issued, now IFRS Interpretation Committee Interpretations are issued.
The IFRS Interpretations Committee has two main responsibilities;
Review, on a timely basis, new financial reporting issues not specifically addressed in IFRSs.
- Clarify issues where unsatisfactory or conflicting interpretations have developed, with a view to reaching a consensus on the most appropriate treatment
Describe the role of IOSCO
IOSCO - The International Organisation of Securities Commissions is the representative body of the world’s securities markets regulators. Financial information is vital to the operation of markets and differences in the financial information from entities in different countries can reduce the efficiency of markets
Outline the steps involved in the accounting standard setting process
- Establishment of an AAAAAadvisory committee to give advice on the issues arising on the project. The IASB will consult with this committee and IFRS Advisory Committee throughout the process.
- On major projects, the IASB develops and publishes a Discussion PPPPPPPaper for public comment. This will give an overview of the issue, possible approaches to address the issue, views of the authors or the IASB and an invitation to comment.
- Following the receipt and review of comments, an EEEEEEExposure Draft is produced for public comment. The Exposure Draft is based upon the earlier Discussion Paper, together with the IASB review of feedback received from the public –i.e. mainly firms of accountants and companies who are likely to be affected by the introduction of a new or changed reporting standard. The Exposure Draft is then the draft standard made available for final review, which can still be amended before final approval as a reporting standard.
- Following the receipt and review of comments, the final SSSSSSStandard will be issued
Explain the IASB’s Conceptual Framework
The IASB have developed a conceptual framework, which lays out the broad principles that should be applied when developing accounting standards and when determining an appropriate accounting treatment
Elaborate on the purpose and status of the conceptual framework
The framework exists to;
- assist the IASB in the development of future IFRS Standards and in its review of existing IFRS Standards;
- assist the IASB in promoting harmonisation of regulations, accounting standards and procedures by reducing the number of alternative treatments permitted by IFRS Standards;
- assist national standard-setting bodies in developing national standards;
- assist preparers of financial statements in applying IFRS Standards and in dealing with topics that are not subject to an IFRS Standard
.•assist auditors in forming an opinion as to whether financial statements comply with IFRS Standards;
- assist users of financial statements in interpreting the information contained in a set of financial statements;
- provide those who are interested in the work of the IASB information about its approach to the formulation of IFRS Standard
The Framework is not an accounting standard and does not override the requirements of any IFRS Standards
What does the conceptual framework cover?
- The objectives of financial statements;
- The underlying assumption of financial statements;
- Qualitative characteristics of financial statements;
- Definition of the elements of financial statements;
- Recognition of the elements of financial statements;
- Measurement of the elements of financial statements;
- Concepts of capital and capital maintenance.
What are the objectives of financial statements?
The objective of financial reporting is to provide information about the reporting entity that is useful to a wide range of users in making economic decisions
What is the underlying assumption of the conceptual framework?
Going concern. The accruals concept is no longer considered to be an underlying assumption although it is still covered by the framework as an important concept.
What are the 2 fundamental qualitative characteristics of financial statements?
1 - Relevance
2 - Faithful representation
