Regulatory framework of accounting

REGULATORY FRAMEWORK

The Regulatory System

Structure of the International Regulatory System

The IASC Foundation

 

IASB

IFRIC

SAC

 

The International Accounting Standards Committee (IASC) Foundation

The IASC Foundation:

·         Is a supervisory body for the new structure

·         Has 22 trustees

·         Is responsible for governance issues and ensuring each body is properly funded

Objectives of IASC Foundation

1)      Develop a set of global accounting standards which are of high quality, are understandable and are enforceable

2)      Which require high quality, transparent and comparable information in financial statements to help those in the world’s capital markets and other users make economic decisions

3)      Promote using and applying of these standards

4)      Bring about the convergence of national and international accounting standards

International Accounting Standards Board (IASB)

The IASB:

·         Is solely responsible for issuing International Accounting Standards (IASs)

·         Standards now called International Financial Reporting Standards (IFRSs)

·         Is made up of 14 members

·         Has the same objectives as the IASC Foundation

The IASB and National Standard Setters

The intentions of the IASB are

·         To develop a single set of understandable and enforceable high quality world wide accounting standards, however

·         The IASB cannot enforce compliance with its standards, therefore

·         It needs the co-operation of national standard setters

In order to achieve this IASB works in partnership with the major national standard setting bodies:

·         All the most important national standard setters are represented on the IASB and their views are taken into account so that a consensus can be reached

·         All national standard setters can issue IASB discussion papers and exposure drafts for comment in their own countries, so that the views of all preparers and users of financial statements can be represented

·         Each major national standard setter ‘leads’ certain international standard setting projects

The IASB intends to develop a single set of understandable and enforceable high quality worldwide accounting standards.

International Financial Reporting Interpretations Committee (IFRIC)

·         Issues rapid guidance on accounting matters where divergent interpretations of IFRSs have arisen

·         Issues interpretations called IFRIC 1, IFRIC 2, etc

In 1997 the IASC formed the Standards Interpretation Committee (SIC) to ensure proper compliance with IFRSs by considering points of contention where divergent interpretations have emerged and issuing an authoritative view; 33 interpretations (entitled SIC 1, SIC 2, etc) were issued by the SIC before its change of name (see below).

SICs are important because IAS 1 (revised) states that financial statements cannot be described as complying with IFRSs unless they comply with each IAS/IFRS and each interpretation from the SIC/IFRIC.

In 2002 the SIC changed its name to the International Financial Reporting Interpretations Committee (IFRIC). Interpretations are now designated IFRIC 1, IFRIC 2, etc.

Standards Advisory Council (SAC)

The SAC provides a forum for a range of experts from different countries and different business sectors to offer advice to the IASB when drawing up new standards.

The procedure for the development of an IFRS is as follows:

1)      The IASB identifies a subject and appoints an advisory committee to advise on the issues

2)      The IASB publishes an exposure draft for public comment, being a draft version of the intended standard

3)      Following the consideration of comments received on the draft, the IASB publishes the final text of the IFRS

4)      At any stage the IASB may issue a discussion paper to encourage comment

5)      The publication of an IFRS, exposure draft or IFRIC interpretation requires the votes of at least 8 of the 14 IASB members

Status of IFRS’s

Neither the IASC Foundation, the IASB nor the accountancy profession has the power to enforce compliance with IFRSs. Nevertheless, some countries adopt IFRSs as their local standards, and others ensure that there is minimum difference between their standards and IFRSs. In recent years, the status of the IASB and its standards has increased, so IFRSs carry considerable persuasive force worldwide.

Benchmark Treatment and Allowed Alternative Treatment

Some older IASs have two choices of treatment of items in the financial statements:

·         Benchmark treatment

·         Allowed alternative treatment

In future IFRSs:

·         If different treatments are allowed they will be given equal status

·         No treatment will be designated as the benchmark treatment

This is the case in IFRS 3 (revised), issued in 2008, which provides a choice of treatment with regard to goodwill

The Regulatory Framework

The regulatory framework of accounting in each country which uses IFRS is affected by a number of legislative and quasi-legislative influences as well as IFRS:

·         National Company Law

·         EU directives

·         Security Exchange Rules

Why a Regulatory Framework is Necessary

A regulatory framework for the preparation of financial statements is necessary for the following reasons:

1)      Financial Statements are used by a wide range of users – investors, lenders, customers, etc.

2)      They need to be useful to these users

3)      They need to be comparable

4)      They need to provide at the least some basic information

5)      They increase users’ understanding of, and confidence in, financial statements

6)      They regulate the behavior of  companies towards their investors

Accounting standards on their own would not be a complete regulatory framework. In order to fully regulate the preparation of financial statements and the obligations of companies and directors, legal and market regulations are also required

Principles Based and Rules Based Framework

Principles based Framework:

·         Based upon a conceptual framework such as the IASB’s Framework

·         Accounting standards are set on the basis of conceptual framework

Rules based framework

·         Cookbook approach

·         Accounting standards are a set of rules which companies must follow

For Example: In the UK there is a principles based framework in terms of the statement of principles and accounting standards and a rules based framework in terms of the Companies Acts, EU directives and Stock Exchange Rules.