FIA-FFA- FINANCIAL ACCOUNTING

REFERENCE- CHAPTER 2
THE REGULATORY FRAMEWORK
The Regulatory System

The purpose of this section is to give a general picture of some of the factors which have
shaped financial accounting. We will concentrate on the accounts of limited liability
companies, as these are the accounts most closely regulated by statute or
otherwise.
The following factors that have shaped financial accounting can be identified.

National/local legislation

Accounting concepts and individual judgement

Accounting standards

Other international influences

Generally accepted accounting principles (GAAP)

Fair presentation
National/local legislation
In most countries, limited liability companies are required by law to prepare and
publish accounts annually. The form and content of the accounts is regulated
primarily by national legislation.
Accounting concepts and individual judgement
Financial statements are prepared on the basis of a number of fundamental accounting
assumptions and conventions. Many figures in financial statements
are derived from the application of judgement in putting these assumptions into
practice. It is clear that different people exercising their judgement on the same facts
can arrive at very different conclusions.
Examples of areas where the judgement of different people may vary are as follows.
a) Valuation of buildings in times of rising property prices.
b) Research and development: is it right to treat this only as an expense? In a
sense it is an investment to generate future revenue
c) Accounting for inflation.

Accounting standards
In an attempt to deal with some of the subjectivity, and to achieve comparability
between different organisations, accounting standards were developed. These are
developed at both a national level (in most countries) and an international level. The
FFNF3 syllabus is concerned with International Financial Reporting Standards (IFRSs).
International Financial Reporting Standards are produced by the International
Accounting Standards Board (lASB).

The International Accounting Standards Board (IASB)

The IASB develops International Financial Reporting Standards (lFRSs). The parent
entity of the IASB is the IFRS Foundation. The main objectives of the IFRS Foundation
are to raise the standard of financial reporting and eventually bring about global
harmonisation of accounting standards.
The International Accounting Standards Board (IASB) is an independent,
privately-funded body that develops and approves IFRSs.
Prior to 2003, standards were issued as International Accounting Standards (lASs).
In 2003 IFRS 1 was issued and all new standards are now designated as IFRSs.
The IFRS Foundation
The IFRS Foundation (formally called the International Accounting Standards
Committee Foundation or IASCF) is a not-for-profit, private sector body that oversees
the IASB. The objectives of the IFRS Foundation are to:

develop a single set of high quality, understandable, enforceable and globally

accepted International Financial Reporting Standards (IFRSs) through its
standard-setting body, the IASB
promote the use and rigorous application of those standards

take account of the financial reporting needs of emerging economies and small
and medium-sized entities (SMEs)

bring about convergence of national accounting standards and IFRSs to high

quality solutions.

The IFRS Foundation is currently made up of 22 Trustees, who essentially monitor

and fund the IASB, the IFRS Advisory Council and the IFRS Interpretations
Committee. The Trustees are appointed from a variety of geographic and functional
backgrounds. The structure of the IFRS Foundation and related bodies is shown
below.

Appoints
Reports to ____
Advises -- - - -

IFRS Advisory Council

2

The IFRS Advisory Council (formerly called the Standards Advisory Council or SAC) is
essentially a forum used by the IASB to consult with the outside world. It consults with
national standard setters,
academics, user groups and a host of other interested parties to advise the IASB on a
range of issues, from the IASB's work programme for developing new IFRSs, to giving
practical advice on the implementation of particular standards.
The IFRS Advisory Council meets the IASB at least three times a year and puts
forward the views of its members on current standard-setting projects.
IFRS Interpretations Committee
The IFRS Interpretations Committee (formerly called the International Financial
Reporting Interpretations Committee or IFRIC) was set up in March 2002 and provides
guidance on specific practical issues in the interpretation of IFRSs. Note that despite the
name change, interpretations issued by the IFRS Interpretations Committee are still
known as IFRIC Interpretations. In your exam, you may see the IFRS Interpretations
Committee referred to as the IFRS IC.
The IFRS Interpretations Committee has two main responsibilities:

To review, on a timely basis, newly identified financial reporting issues not

specifically addressed in IFRSs

To clarify issues where unsatisfactory or conflicting interpretations have

developed, or seem likely to develop in the absence of authoritative guidance,
with a view to reaching a consensus on the appropriate treatment.

International Financial Reporting Standards (lFRSs)

IFRSs are created in accordance with due process. There are currently 41 lASs and 13
IFRSs in issue
IFRSs have helped to both improve and harmonise financial reporting around the
world. The standards are used in the following ways.

As national requirements

As the basis for all or some national requirements

As an international benchmark for those countries which develop their own

requirements

By regulatory authorities for domestic and foreign companies

By companies themselves
In the UK the consolidated accounts of listed companies have had to be produced in
accordance with IFRSs since January 2005

Standard setting process

The IASB prepares IFRSs in accordance with due process. You do not need to know this for your
exam, but the following diagram may be of interest. The procedure can be summarised as follows.

Consultative Group

Board

On acceptance

Steering Committee
( Chaired by board members)

Discussion Paper

Public Comment

Exposure draft

Public Comment

IFRS

Current IFRSs
The current list is as follows. Those examinable in FFA/F3 are marked with
a *.
Framework for the Preparation and Presentation of Financial Statements*
IFRS 1
IFRS 2
IFRS 3*
IFRS 5
IFRS 6
IFRS 7
IFRS 8
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IAS 1 *
IAS 2*
IAS 7*
IAS 8*
IAS 10*
IAS 11
IAS 12
IAS 16*

First time adoption of International Financial Reporting Standards

Share based payment
Business combinations
Non-current assets held for sale and discontinued operations
Exploration for the evaluation of mineral resources
Financial instruments: disclosures
Operating segments
Financial instruments
Consolidated financial statements
Joint arrangements
Disclosure of interests in other entities
Fair value measurement
Presentation of financial statements
Inventories
Statement of cash flows
Accounting policies, changes in accounting estimates and errors
Events after the reporting period
Construction contracts
Income taxes
Property, plant and equipment

IAS 17
IAS 18*
IAS 19
IAS 20
IAS 21
IAS 23
IAS 24
IAS 27*
IAS 28*
IAS 29
IAS 31
IAS 32
IAS 33
IAS 34
IAS 36
IAS 37*
IAS 38*
IAS 39
IAS 40
IAS 41

Leases
Revenue
Employee benefits
Accounting for government grants and disclosure of government
assistance
The effects of changes in foreign exchange rates
Borrowing costs
Related party disclosures
Consolidated and separate financial statements
Investments in associates
Financial reporting in hyperinflationary economies
Interests in joint ventures
Financial instruments: presentation
Earnings per share
Interim financial reporting
Impairment of assets
Provisions, contingent liabilities and contingent assets
Intangible assets
Financial instruments: recognition and measurement
I nvestment property
Agriculture

Scope and application of IFRSs

Scope
Any limitation of the applicability of a specific IFRS is made clear within that standard.
IFRSs are not intended to be applied to immaterial items, nor are they retrospective. Each
individual standard lays out its scope at the beginning of the standard.
Application
Within each individual country local regulations govern, to a greater or lesser
degree, the issue of financial statements. These local regulations include
accounting standards issued by the national regulatory bodies and/or professional
accountancy bodies in the country concerned.