Acca f3 Financial Accounting (int) Study Text

13

The regulatory 

framework

Introduction

In this chapter, we introduce the regulatory system run by the International 

Accounting Standards Board (IASB). We are concerned with the 

IASB's

relationship with other bodies, and with the way the IASB operates. 

You must try to understand and appreciate the contents of this chapter. The 

examiner is not only interested in whether you can add up; she wants to know 

whether you can think about a subject which, after all, is your future career. 

This chapter can and 

will be examined.

Topic list 

Syllabus reference 

1 The regulatory system 

A4(a)

2 The International Accounting Standards Board (IASB) 

A4(a) 

3 International Financial Reporting Standards (IFRSs)

   and International Accounting Standards (IASs) 

A4(b)

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

Study guide 

Intellectual level

A4 

The regulatory framework 

(a) 

Understand the role of the regulatory system including the roles of the 

International Accounting Standards Committee Foundation (IASCF), the 

International Accounting Standards Board (IASB), the Standards Advisory 

Council (SAC) and the International Financial Reporting Interpretations 

Committee (IFRIC). 

1

(b) 

Understand the role of the International Financial Reporting Standards. 

1

Exam guide 

These ideas are fundamental to your studies and valuable background information. Expect at least one 

MCQ on the standard setting process or the regulatory system. The examiner is also likely to test you on 

the different bodies and their relationships.  This is an area that is consistently answered badly in the 

exam.

1 The regulatory system 

A number of factors have shaped the 

development of financial accounting. 

1.1 Introduction 

Although new to the subject, you will be aware from your reading of the press that there have been some 

considerable upheavals in financial reporting, mainly in response to criticism. The 

details of the regulatory 

framework of accounting, and the technical aspects of the changes made, will be covered later in this 

chapter and in your more advanced studies. 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 can be identified. 

 National/local 

legislation 

 

Accounting concepts and individual judgement 

 Accounting 

standards 

 

Other international influences 

 

Generally accepted accounting principles (GAAP)  

 Fair 

presentation 

1.2 National/local legislation 

Limited liability companies may be required by law to prepare and publish accounts annually. The form 

and content of the accounts may be regulated primarily by national legislation, but must also comply with 

International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs). 

1.3 Accounting concepts and individual judgement 

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 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. 

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Part A  The context and purpose of financial reporting

  2:  The regulatory framework

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It is clear that different people exercising their judgement on the same facts can arrive at very different 

conclusions.

Case Study

An accountancy training firm has an excellent 

reputation amongst students and employers. How would 

you value this? The firm may have relatively little in the form of assets that you can touch, perhaps a 

building, desks and chairs. If you simply drew up a statement of financial position showing the cost of the 

assets owned, then the business would not seem to be worth much, yet its income earning potential might 

be high. This is true of many service organisations where the people are among the most valuable assets. 

Other 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. 

(d) 

Brands such as 'Snickers' or 'Walkman'. Are they assets in the same way that a fork lift truck is an 

asset?

Working from the same data, different groups of people produce very different financial statements. If the 

exercise of judgement is completely unfettered, there will be no comparability between the accounts of 

different organisations. This will be all the more significant in cases where deliberate manipulation occurs, 

in order to present accounts in the most favourable light. 

1.4 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. In this text we are concerned with 

International Accounting 

Standards (IASs) and International Financial Reporting Standards (IFRSs). 

1.4.1 International Financial Reporting Standards and the IASB 

International Financial Reporting Standards (IFRSs) are produced by the 

International Accounting 

Standards Board (IASB). The IASB develops IFRSs through an international process that involves the 

world-wide accountancy profession, the preparers and users of financial statements, and national 

standard setting bodies. Prior to 2003 standards were issued as International Accounting Standards 

(IASs). In 2003 IFRS 1 was issued and all new standards are now designated as IFRSs. Throughout this 

Study Text, we will use the abbreviation IFRSs to include 

both IFRSs and IASs. 

The objectives of the IASB are: 

(a) To 

develop, in the public interest, a single set of high quality, understandable and enforceable 

global accounting standards that require high quality, transparent and comparable information in 

financial statements and other financial reporting to help participants in the world's capital markets 

and other users make economic decisions. 

(b) 

To promote the use and 

rigorous application of those standards.

(c) To 

bring 

about 

convergence of national accounting standards and International Financial 

Reporting Standards to high quality solutions.

In the UK the consolidated accounts of listed companies have had to be produced in accordance with IFRS 

from January 2005. 

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