1. The reg framework & the role of IFRS Flashcards
(19 cards)
What is the role of the reg framework for the preparation of financial statements?
*ensure financial reporting is regulated through financial reporting standards e.g. IFRS, UK GAAP and US GAAP;
- ensure financial information is reported objectively to provide relevant, reliable and faithfully represented info helps users to make financial decisions;
- adequate min level of information for users of financial statements;
- financial information is comparable and consistent in the relevant economic arena (important in multinational co);
- to ensure and improve transparency and credibility of financial reports, promoting users’ confidence in the financial reporting process;
- regulate the behaviour of companies and directors through the corporate governance framework; and
- to achieve desired social goals through environmental and CSR reporting.
Two main approaches to reg frameworks?
Principle based
* IFRS
* Conceptual framework
* Underlying set of principles
* More flexibility for accountant to exercise judgement unlike RB
* Rigid reg system detrimental LT effect
* Political, economic and social differences, different in every country
* Expensive to follow and prepare
* Float company shares in on another stock market
* Raise capital at a lower cost
* IFRS adopted in many countries (slight variation) including Japan, Malaysia, Australia, African countries
* Statements easily compared with another company in another country
Rules based system
* US GAAP
* More rigid
* Minimise subjective exercise
* Less scope for controversial arguments
* Comparability
* Stability
* Removes accountant judgement
* Complex
What does a regulatory structure in accounting include?
NICEFM
- National or company law - CA (2006)
- Financial reporting standards body - FRC soon to be ARGA issues IFS
- Market Regulations - Sarbanes-Oxley Act (SOX)
- Industry-specific and securities exchange rules - FCA, LSE
- Corporate governance frameworks - Cadbury Report
- Environmental and sustainability reporting - goal of integrated reporting
What is the agency theory
The theory suggests modern corporation is based on the principal–agent relationship, where the owner (SH) is the principal and the manager is the agent.
2 enter contract - manager acts as the custodian (agent) over the assets of the firm and aims to maximise the owner’s wealth.
What is the agency problem?
Conflict of interests between the principal and agent
The agent (manager) may pursue their own interests at the expense of the principal (SH).
2009 Bernie Madoff affair - famous example
What are the solutions to the agency problem?
Principal will incur agency costs to monitor the agent’s activities and take corrective action where necessary.
Direct agency costs = use of company resources for agents own benefit (excessive executive pay)
Objective of external audit protect SH interests
Indirect agency costs = lost opportunities no quantifiable value
Role of CG in agency theory?
Part of the monitoring process.
Internal mechanism by which control is exercised by the board of directors over the activities of the managers.
CG refers to the set of internal rules, policies and processes that determine how a company is directed. The CG framework can play a role in helping boards gain a better understanding of their oversight role.
Enhance financial reporting by providing a degree of confidence to the users of accounting information.
Key objectives of financial reporting and accounting standards?
- improve the transparency of financial reporting and make financial information reliable, relevant and easier to understand;
- reduce the risk of creative accounting;
- make the financial statements of different period or of different entities comparable;
- increase the credibility of financial statements by improving the uniformity of accounting treatment between
companies; and - provide quality financial reports and accounting information which can be relied upon for consistency, commonality and overall transparency.
What is the aim of the CA (2006) stat requirements?
- strengthening and simplifying regulation by reforming provisions for private and public companies;
- providing rules around the formation and running of a company;
- improving communication with shareholders and management by codifying common law principles such as those relating to directors’ duties;
- enhancing a long-term investment culture;
- protecting the interests of consumers by increasing a company’s disclosure requirements; and
- affording flexibility for the future.
The IAS’s conceptual framework principle or rules based?
Principle based
What does the IASB conceptual framework cover?
- the objectives of financial reporting;
- the underlying assumptions;
- the qualitative characteristics;
- the elements of financial statements;
- the recognition (and derecognition) of the elements;
- the measurement of the elements; and
- the concepts of capital and capital maintenance
What are the advantages of adopting IFRS? (harmonisation)
- Financial statements presented under IFRS make global comparisons easier.
- Cross-border listing is facilitated, making it easier to raise funds and make investments abroad.
- Multinational companies with subsidiaries in foreign countries have a common, company-wide accounting language.
- Foreign companies can be more easily appraised for mergers and acquisitions.
- Multinational companies benefit for the following reasons:
– preparation of group financial statements may be easier;
– a reduction in audit costs might be achieved;
– management control would be improved; and
– transfer of accounting knowledge and expertise across national borders would be easier.
What are the disadvantages of adopting IFRS? (harmonisation)
- The cost of implementing IFRS.
- The lower level of detail in IFRS.
- International Financial Reporting Standards are principles-based standards which require the application of
judgement. Many do not favour this approach. For example, US GAAPs are more rules-based standards. US
accountants are subject to a high degree of litigation and their defence is usually that they complied with the relevant
sections of detailed standards which make up US GAAP. They fear that adoption of IFRS will remove this defence. - There are challenges in adopting IFRS in emerging economies, namely:
– the economic environment;
– incompatible legal and regulatory environments;
– concern around SMEs;
– level of preparedness; and
– education needs of auditors.
Difference between Standardisation and Harmonisation?
Standardisation is the process by which rules are developed to set standards for similar items on a global basis and through which technical issues relating to accounting treatments are resolved
Harmonisation reconciles national differences and achieves a common set of accounting principles. It provides a
common framework to deal with major issues in a similar manner.
What are the barriers to global harmonisation?
- Legal system: Differences in the legal system can restrict the development of certain accounting practices.
- Business financing and accounting practices: Many countries do not have strong independent accountancy or business bodies
which would press for higher standards and greater harmonisation. - Tax system: In most countries, tax authorities may influence the accounting rules around recording of revenues and expenses.
- Level of inflation: this is likely to influence valuation methods for various types of assets.
- Political and economic relationships: cultural differences etc
What are the economic implications of environmental reporting?
- Risk management: financial, legal and reputation implications.
- Marketing advantages: public image and brand enhancement by demonstrating environmental responsibilities.
- Legal needs: legally required to provide environmental reports (quoted companies, insurance market activity)
- Competitive advantage: improve relationships with skh such as investors, suppliers and the wider community + cost savings.
- Ethics: showing a commitment to accountability and transparency.
- Compliance and accounting requirements: the annual review is expected to include environmental matters + co’ impact on the environment.
- Green (ethical) investors: better position to be considered in
investment decisions by trustees. - Employee interests: applicants increasingly look at the environmental performance of a business.
- Value-added reporting: environmental KPI’s used to report on environmental matters to add value to corporate reports and communicate to a wider range of stakeholders.
- Integrated reporting: a move towards integrated reporting on CSR and environmental issues that allows interactive
web-based publication of such reports. Standalone environmental reporting is primarily web-based disclosure that is
usually separate from a company’s annual report
What do the EMS management systems integrate?
- organisational structure
- planning activities
- processes and procedures for training of personnel
- implementing, monitoring and maintaining of environmental policy
- reporting of specialised environmental performance to internal and external stakeholders
Key elements of the EMAS tool?
- conducting an environmental review
- adopting an environmental policy, improve perf
- carrying out an internal environmental audit
What are the 4 responsibilities on Carroll’s CSR pyramid
Philatontrophic
Ethical
Legal
Economic
