The Regulatory Framework

1 Introduction

In this chapter we will look briefly at the regulatory system that exists for financial accounting, and the role of International Financial Reporting Standards.

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2 The purpose of International Financial Reporting Standards (previously called International Accounting Standards)

In a perfect world, all accounts would be prepared according to the same ‘set of rules’.

In practice each country has its own standards, and the purpose of International Financial Reporting Standards is, as far as possible, to develop a single set of standards worldwide.

Standards issued before 2001 are called International Accounting Standards (IASs) and many are still in force, for example IAS 2 Inventories and IAS 16 Property, Plant and Equipment. Standards issued since then are called International Financial Reporting Standards (IFRSs). Together they are often simply called IFRS.

A single worldwide set of standards means that the financial statements of companies in different countries can be compared more easily, and a group with companies in several countries can prepare one set of accounts instead of several.

IFRS are principles-based: they set out broad principles and rely on the accountant’s professional judgement to apply them, rather than giving a detailed rule for every possible transaction.

2.1 Company law and accounting standards

Every country has its own company law, and the law of the country overrides everything else. Company law typically requires a company to:

• keep proper accounting records;

• prepare financial statements each year, which must show a fair view of its financial position and performance;

• have them audited (often only above a certain size); and

• send them to the shareholders and file them with a public registry, so that they are published.

IFRS do not have the force of law, but most countries have changed their rules to be consistent with IFRS. Many countries’ laws require listed companies, or all companies, to prepare their financial statements under IFRS, and unless the law says otherwise accountants are expected to follow the standards.

2.2 Formats for published accounts

IAS 1 sets out the format and content of a company’s published financial statements — the statement of financial position, the statement of profit or loss and other comprehensive income, and the statement of changes in equity (Chapter 16) — and IAS 7 the statement of cash flows (Chapter 17). For BA3 you need to be aware of the format and content of published accounts, but you are not required to prepare them.

3 The IFRS Foundation

The IFRS Foundation (in full, the International Financial Reporting Standards Foundation) is the supervisory body. Its objectives are to develop a set of accounting standards and to promote their use throughout the world. Its trustees appoint the members of the IASB, oversee its work and raise its funding.

Since 2021 the Foundation has also had a second board, the International Sustainability Standards Board (ISSB), which issues IFRS Sustainability Disclosure Standards such as IFRS S1 and IFRS S2; these deal with sustainability information rather than the financial statements, and are not part of BA3.

4 The International Accounting Standards Board (IASB)

It is the IASB that is actually responsible for developing and issuing the IFRSs. Its members are experts appointed by the IFRS Foundation.

5 The IFRS Advisory Council

This body consults with a wide range of interested parties and gives advice to the IASB.

6 The IFRS Interpretations Committee

When a standard is applied in practice, questions arise that the standard does not answer clearly. The IFRS Interpretations Committee (formerly called IFRIC) issues guidance on the interpretation of IFRSs, so that they are applied consistently.

7 Exposure Drafts

An exposure draft is a proposed IFRS which is published for public comment. After all the comments have been considered, and revisions made where appropriate, the final version of the IFRS is published.

The steps in issuing a new standard are therefore:

1. The IASB adds the topic to its work plan.

2. It often publishes a discussion paper first, to gather early views.

3. It publishes an exposure draft — the proposed standard — for public comment.

4. It considers the comments, makes any revisions, and issues the final standard.

8 The Conceptual Framework for Financial Reporting

This is not an accounting standard, but was issued by the IASB (the current version in 2018) setting out the concepts underlying the preparation and presentation of financial statements. It replaced the older Framework for the Preparation and Presentation of Financial Statements.

IFRSs are developed within this framework. It covers, among other things:

• the objective of financial reporting — to provide information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity;

• the qualitative characteristics that make information useful (Chapter 23);

• the elements of financial statements — assets, liabilities, equity, income and expenses (Chapters 2 and 23) — and when they are recognised and how they are measured.

The Framework helps the IASB develop standards that are consistent with each other, and helps preparers when no standard applies to a transaction. It does not override a standard: if a standard conflicts with the Framework, the standard is followed.

9 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.