Acca f3 Financial Accounting (int) Study Text

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2: The regulatory framework   Part A  The context and purpose of financial reporting 

3.3.2 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. 

The IASB 

concentrates on essentials when producing standards. This means that the IASB tries not to 

make standards too complex, because otherwise they would be impossible to apply on a worldwide basis. 

Question

Standards 2 

How far do the accounting standards in force in your country diverge from the IFRSs you will cover in this 

text?

If you have the time and energy, perhaps you could find out. 

3.4 Worldwide effect of international standards and the IASB 

As far as 

Europe is concerned, the consolidated financial statements of many of Europe's top 

multinationals are prepared in conformity with national requirements, EC directives and IASs/IFRSs. 

Furthermore, IFRSs are having a growing influence on national accounting requirements and practices. 

Many of these developments have been given added impetus by the internationalisation of capital markets. 

There was a 2005 deadline for implementation of IASs/IFRSs. 

In

Japan, the influence of the IASB had, until recently, been negligible. This was mainly because of links in 

Japan between tax rules and financial reporting. The Japanese Ministry of Finance set up a working 

committee to consider whether to bring national requirements into line with IFRSs. The Tokyo Stock 

Exchange has now announced that it will accept financial statements from foreign issue that conform with 

home country standards. This was widely seen as an attempt to attract foreign issuers, in particular 

companies from Hong Kong and Singapore. As these countries base their accounting on international 

standards, this action is therefore implicit acknowledgement by the Japanese Ministry of Finance of IFRS 

requirements.

America and Japan have been two of the developed countries which have been most reluctant to accept 

accounts prepared under IFRSs, but recent developments suggest that such financial statements may 

soon be acceptable on these important stock exchanges.

In

America, the Securities and Exchange Commission (SEC) agreed in 1993 to allow foreign issuers (of 

shares, etc) to follow IFRS treatments on certain issues, including statement of cash flows under IAS 7. 

The overall effect is that, where IASB treatments differ from US GAAP, these treatments will now be 

acceptable. The SEC is now supporting the IASB because it wants to attract foreign listings. 

Now that you are aware of the workings and impact of the IASB, we will spend the rest of this chapter 

looking at some of the problems and criticisms which the IASB is faced with, and how it has tackled some 

of them. We begin at the end of this section by looking at the problem of choice in IASs/ IFRSs. 

3.5 Accounting standards and choice 

It is sometimes argued that companies should be given a 

choice in matters of financial reporting on the 

grounds that accounting standards are detrimental to the quality of such reporting. There are arguments 

on both sides. 

In favour of accounting standards (both national and international), the following points can be made. 

(a) They 

reduce or eliminate confusing variations in the methods used to prepare accounts. 

(b) 

They provide a 

focal point for debate and discussions about accounting practice. 

(c) 

They oblige companies to 

disclose the accounting policies used in the preparation of accounts. 

(d) They 

are 

a 

less rigid alternative to enforcing conformity by means of legislation.

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Part A  The context and purpose of financial reporting

  2:  The regulatory framework

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(e) 

They have obliged companies to 

disclose more accounting information than they would otherwise 

have done if accounting standards did not exist, for example IAS 33 Earnings

per share.

Many companies are reluctant to disclose information which is not required by national legislation. 

However, the following arguments may be put forward against standardisation and in 

favour of choice.

(a) A 

set of rules which give backing to one method of preparing accounts might be inappropriate in

some circumstances.

(b) Standards 

may 

be 

subject to lobbying or government pressure (in the case of national standards). 

For example, in the USA, the accounting standard FAS 19 on the accounts of oil and gas companies 

led to a powerful lobby of oil companies, which persuaded the SEC (Securities and Exchange 

Commission) to step in. FAS 19 was then suspended. 

(c) 

Many national standards are 

not based on a conceptual framework of accounting, although IASs 

and IFRSs are (see

 Chapter 3

). 

(d) 

There may a 

trend towards rigidity, and away from flexibility in applying the rules.

The examiner has indicated that, while Sections 3.4 and 3.5 give useful background information, you are 

unlikely to be directly examined on these points. 

Chapter Roundup 

 

A number of factors have shaped the 

development of financial accounting. 

 

Many figures in financial statements are derived from the 

application of judgement in applying 

fundamental accounting assumptions and conventions. This can lead to subjectivity. 

 

Financial statements are required to give a 

true and fair view or present fairly in all material respects 

the financial results of the entity. These terms are not defined and tend to be decided in courts of law on

the facts. 

 

The main objectives of the IASB are to raise the standard of financial reporting and to eventually bring 

about global harmonisation of accounting standards. 

 

In this section, we examine the process by which IFRSs are created and we will list the full range of IFRSs 

currently in force, so you can place the standards you will study into context. 

Quick Quiz 

1 

What are the objectives of the IASB?  

A 

To enforce IFRSs 

B 

To issue IFRSs 

2 

What development at the IASB aids users' interpretation of IFRSs?  

3 

Which of the following arguments is not in favour of accounting standards, but is in favour of accounting 

choice?

 

A 

They reduce variations in methods used to produce accounts 

 

B 

They oblige companies to disclose their accounting policies 

 

C 

They are a less rigid alternative to legislation 

 

D 

They may tend towards rigidity in applying the rules 

4 

What happened in 2005 for listed companies in the EU? 

A 

IFRSs to be used for all financial statements 

B 

IFRSs to be used for consolidated financial statements  

5 

The IASB guides the standard setting process. True or false? 

Exam focus 

point

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