Chapter 2 The Regulatory Framework

1. 1.1 1.2 1.3 1.4 Objectives Explain why a regulatory framework is needed. Distinguish between a principles-based framework and a rules-based framework. Discuss whether a principles-based framework and a rules-based framework can be complementary. Describe the structure and ob ecti!es of the "nternational #inancial $eporting %tandards &"#$%' #oundation( the "nternational )ccounting %tandards *oard &")%*'( the "#$% )d!isory +ouncil &")+' and the "nternational #inancial $eporting "nterpretations +ommittee &"#$"+'. Describe the ")%*-s standard-setting process. Describe the relationship between national standard setters and the ")%* in respect of the standard-setting process.

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2. 2.1

The Need or a Regulatory Framework ! " 6he regulatory framework is the most important element in ensuring rele!ant and reliable financial reporting and thus meeting the needs of shareholders and other users. #ithout a si$gle body o!erall responsible for producing financial standards &the ")%*' and a framework of general principles within which they can be produced &the #ramework'( there would be $o mea$s o e$ orci$g complia$ce with %&&'. )lso( 7))/ would be unable to e!ol!e in any structured way in response to changes in economic conditions. 'ri$ciples(based a$d rules(based systems 'ri$ciples(based )ystems &a' &b' "t based upon a conceptual framework such as the ")%*-s #ramework8 )ccounting standards are set on the basis of the conceptual framework.

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Rules(based )ystems &a' &b' 9+ookbook: approach8 )ccounting standards are a set of rules which companies must follow.

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"n the ;< there is a principles-based framework in terms of the %tatement of /rinciples and accounting standards and a rules-based framework in terms of +ompanies )cts( E; directi!es &' and stock exchange rulings. 'roblems o a pri$ciples(based system 6he #ramework was produced in 1=>= by the ")%+ and adopted by the ")%* in 2??1. 6he updated !ersion was issued in 2?1? and so it is in danger of becoming out of date as constant changes take place in financial reporting. +FR)s are re lecti$g these cha$ges but the Framework which u$derpi$s them is $ot. #or instance( the fair !alue concept is now an important part of many "#$%s( but is not referred to in the #ramework. %o the "#$$s are running ahead of the #ramework( rather than !ice !ersa. "n this regard( a rules(based system( while more unwieldy( at least has the merit o keepi$g pace with what is
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happe$i$g. "f it is accepted that the #ramework should be sub ect to a continuous process of re!iew and updating( then some machinery will ha!e to be set up to do this( and a rules-based approach could be used to deal with issues which arise between re!iews. 6he ")%* and the #)%* are nor working to produce a oint conceptual framework which should combine the best of both approaches. The +$ter$atio$al &ccou$ti$g )ta$dards *oard !+&)*" 6he organiAational structure consists ofB &a' 6he ")%+ #oundation &b' 6he ")%* &c' 6he %tandards )d!isory +ouncil &%)+' &d' 6he "nternational #inancial $eporting "nterpretations +ommittee 6he "nternational )ccounting %tandards *oard is an independent( pri!atelyfunded accounting standard setter based in 4ondon. "n 5arch 2??1 the ")%+ #oundation was formed as a not-for-profit corporation incorporated in the ;%). 6he ")%+ #oundation is the parent entity of the ")%*. #rom )pril 2??1 the ")%* assumed accounting standard setting responsibilities from its predecessor body( the "nternational )ccounting %tandards +ommittee &")%+'. 6his restructuring was based upon the recommendations made in the $ecommendations on %haping ")%+ for the #uture. 6he 14 members of the ")%* come from nine countries and ha!e a !ariety of backgrounds with a mix of auditors( preparers of financial statements( users of financial statements and an academic. 6he *oard consists of 12 full-time members and two part-time members. Objectives o the +&)* 6he formal ob ecti!es of the ")%*( formulated in its mission statement areB &a' 6o de!elop( in the public interest( a single set of high Cuality( understandable and enforceable global accounting standards that reCuire high Cuality( transparent and comparable information in general purpose financial statements &b' 6o pro!ide the use and !igorous application of those standards
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,. 3.1

3.2 3.3

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6o work acti!ely with national accounting standard setters to bring about con!ergence of national accounting standards and "#$% to high Cuality solutions.

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)tructure o the +&)* 6he structure of the ")%* has the following main featuresB &a' 6he ")%+ #oundation is an independent corporation ha!ing two main bodies D the 6rustees and the ")%*. 6he ")%+ #oundation holds the copyright of "#$%s and all other ")%* publications. &b' 6he ")%+ #oundation trustees appoint the ")%* members( exercise o!ersight and raise the funds needed. &c' 6he ")%* has sole responsibility for setting accounting standards. &d' 6here are also two further bodies( the %tandards )d!isory +ouncil and the "nternational #inancial $eporting "nterpretations +ommittee &see below'.

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Trustees D 6he 6rustees comprise a group of twenty two indi!iduals( with di!erse geographic and functional backgrounds. 6he 6rustees appoint the 5embers of the *oard( the "nternational #inancial $eporting "nterpretations
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+ommittee and the %tandards )d!isory +ouncil. "n addition to monitoring ")%+Es effecti!eness and raising its funds( the 6rustees will appro!e ")%+Es budget and ha!e responsibility for constitutional changes. 6rustees were appointed so that initially there were six from 1orth )merica( six from Europe( four from )sia /acific( and three others from any area( as long as geographic balance is maintained. &a' 6he "nternational #ederation of )ccountants &"#)+' suggested candidates to fill fi!e of the nineteen 6rustee seats and international organisations of preparers( users and academics each suggested one candidate. &b' 6he remaining ele!en 6rustees are Eat-largeE in that they were not selected through the constituency nomination process. )ta$dards &dvisory Cou$cil D 6he %tandards )d!isory +ouncil pro!ides a formal !ehicle for further groups and indi!iduals with di!erse geographic and functional backgrounds to gi!e ad!ice to the *oard and( at times( to ad!ise the 6rustees. "t comprises about fifty members and meets at least three times a year. "t is consulted by the ")%* on all ma or pro ects and its meetings are open to the public. "t ad!ises the ")%* on prioritisation of its work and on the implications of proposed standards for users and preparers of financial statements. +$ter$atio$al Fi$a$cial Reporti$g +$terpretatio$s Committee D6he "#$"+ pro!ides timely guidance on the application and interpretation of "nternational #inancial $eporting %tandards. "t deals with newly identified financial reporting issues not specifically addressed in "#$%s( or issues where unsatisfactory or conflicting interpretations ha!e de!eloped( or seem likely to de!elop. Other i$ter$atio$al i$ lue$ces 6here are a few other international bodies worth mentioning. Fou are not reCuired to follow their workings in detail( but knowledge of them will aid your studies and should help your general reading around the sub ect area. IASB and the EC/intergovernmental bodies 6he European +ommission has acknowledged the role of the ")%* in harmonising world-wide accounting rules and E+ representati!es attend ")%* *oard meetings and ha!e oined %teering +ommittees in!ol!ed in setting
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"#$%s. 6his should bring to an end the idea of a separate layer of European reporting rules. 6he E+ has also set up a committee to in!estigate where there are conflicts between E; norms and international standards so that compatibility can be achie!ed. "n turn( the ")%* has used E+ directi!es in its work. United Nations (UN) 6he ;1 has a +ommission and +entre on 6ransnational $eporting +orporations through which it gathers information concerning the acti!ities and reporting of multinational companies. 6he ;1 processes are highly political and probably reflect the attitudes of the go!ernments of de!eloping countries to multinationals. #or example( there is an inter-go!ernmental working group of EexpertsE on international standards of accounting and reporting which is dominated by the non-de!eloped countries. International Federation of Accountants (IFAC) 6he "#)+ is a pri!ate sector body established in 1=@@ and which now consists of o!er 1?? professional accounting bodies from around >? different countries. 6he "#)+Es main ob ecti!e is to co-ordinate the accounting profession on a global scale by issuing and establishing international standards on auditing( management accounting( ethics( education and training. Fou are already familiar with the "nternational %tandards on )uditing produced by the "))%*( an "#)+ body. 6he "#)+ has separate committees working on these topics and also organises the 0orld +ongress of )ccountants( which is held e!ery fi!e years. 6he ")%* is affiliated with "#)+. rgani!ation for Economic Co"o#eration and $evelo#ment ( EC$) 6he 3E+D & ' was established in 1=.? by the go!ernments of 21 countries to Eachie!e the highest sustainable economic growth and employment and a rising standard of li!ing in member countries while maintaining financial stability and( thus( to contribute to the world economyE. 6he 3E+D supports the work of the ")%* but also undertakes its own research into accounting standards !ia ad hoc working groups. #or example( in 1=@. the 3E+D issued guidelines for multinational companies on financial reporting and non-financial disclosures. 6he 3E+D appears to work on behalf
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of de!eloped countries to protect them from the extreme proposals of the ;1. -. 4.1 )etti$g o +FR)s "#$%s are de!eloped through a formal system of due process and broad international consultation in!ol!ing accountants( financial analysts and other users and regulatory bodies from around the world. .ue process 6he o!erall agenda of the ")%* will initially be set by discussion with the %tandards )d!isory +ouncil. 6he process for de!eloping an indi!idual standard would in!ol!e the following steps. %tep 1 During the early stages of a pro ect( ")%* may establish an &dvisory Committee to gi!e ad!ice on issues arising in the pro ect. +onsultation with the )d!isory +ommittee and the %tandards )d!isory +ouncil occurs throughout the pro ect. ")%* may de!elop and publish .iscussio$ .ocume$ts !.." for public comment. #ollowing the receipt and re!iew of comments( ")%* would de!elop and publish an /0posure .ra t !/." for public comment. #ollowing the receipt and re!iew of comments( the ")%* would issue a final "nternational #inancial $eporting %tandard.

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6he period of exposure for public comment is normally =? days. Gowe!er( in exceptional circumstances( proposals may be issued with a comment period of .? days. Draft "#$"+ "nterpretations are exposed for a .? day comment period. Co(ordi$atio$ with $atio$al sta$dard setters +lose co-ordination between ")%* due process and due process of national standard setters is important to the success of the ")%*Es mandate. 6he ")%* is exploring ways in which to integrate its due process more closely with national due process. %uch integration may grow as the relationship

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between ")%* and national standard setters e!ol!es. "n particular( the ")%* is exploring the following procedure for pro ects that ha!e international implications. &a' ")%* and national standard setters would co-ordinate their work plans so that when the ")%* starts a pro ect( national standard setters would also add it to their own work plans so that they can play a full part in de!eloping international consensus. %imilarly( where national standard setters start pro ects( the ")%* would consider whether it needs to de!elop a new %tandard or re!iew its existing %tandards. 3!er a reasonable period( the ")%* and national standard setters should aim to re!iew all standards where significant differences currently exist( gi!ing priority to the areas where the differences are greatest. &b' 1ational standards setters would not be reCuired to !ote for ")%*Es preferred solution in their national standards( since each country remains free to adopt ")%* standards with amendments or to adopt other standards. Gowe!er( the existence of an international consensus is clearly one factor that members of national standard setters would consider when they decide how to !ote on national standards. &c' 6he ")%* would continue to publish its own Exposure Drafts and other documents for public comment. &d' 1ational standard setters would publish their own exposure document at approximately the same time as ")%* Exposure Drafts and would seek specific comments on any significant di!ergences between the two exposure documents. "n some instances( national standard setters may include in their exposure documents specific comments on issues of particular rele!ance to their country or include more detailed guidance than is included in the corresponding ")%* document. &e' 1ational standard setters would follow their own full due process( which they would ideally choose to integrate with the ")%*Es due process. 6his integration would a!oid unnecessary delays in completing standards and would also minimise the likelihood of unnecessary differences between the standards that result. !C" 4.. +&)* liaiso$ members %e!en of the full-time members of the ")%* ha!e formal liaison responsibilities with national standard setters in order to promote the con!ergence of national accounting standards and "nternational )ccounting
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%tandards. 6he ")%* en!isages a partnership between the ")%* and these national standard setters as they work together to achie!e con!ergence of accounting standards world-wide. 6he countries with these liaison members are )ustralia and 1ew Healand( +anada( #rance( 7ermany( Iapan( ;< and ;%). "n addition all ")%* members ha!e contact responsibility with national standards setters not ha!ing liaison members and many countries are also represented on the %tandards )d!isory +ouncil.

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/0ami$atio$ )tyle 1uestio$s

1uestio$ 1 %tate three different regulatory influences on the preparation of the published accounts of Cuoted companies and briefly explain the role of each one. +omment briefly on the effecti!eness of this regulatory system. &1? marks' 1uestio$ 2 6here are those who suggest that any standard setting body is redundant because accounting standards are unnecessary. 3ther people feel that such standards should be produced( but by the go!ernment( so that they are a legal reCuirement. Re2uired3 &a' &b' Discuss the statement that accounting standards are unnecessary for the purpose of regulating financial statements. Discuss whether or not the financial statements of not-for-profit entities should be sub ect to regulation. &1? marks'

1uestio$ , Gistorically financial reporting throughout the world has differed widely. 6he "nternational )ccounting %tandards +ommittee #oundation &")%+#' is committed to de!eloping( in the public interest( a single set of high Cuality( understandable and enforceable global accounting standards that reCuire transparent and comparable information in general purpose financial statements. 6he !arious pronouncements of the ")%+# are sometimes collecti!ely referred to as "nternational #inancial $eporting %tandards &"#$%' 7))/. Re2uired3 &a' &b' &c' Describe the functions of the !arious internal bodies of the ")%+#( and how the ")%+# interrelates with other national standard setters. &1? marks' Describe the ")%+#-s standard setting process including how standards are produced( enforced and occasionally supplemented. &1? marks' +omment on whether you feel the mo!e to date towards global accounting standards has been successful. &, marks' &2, marks' &)++) 2., #inancial $eporting &G<7' December 2??4 J3'
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