Chapter-06 A conceptual and regulatory framework

1. The need for a regulatory framework-

The regulatory framework of accounting in each country which uses IFRS
Standards is affected by a number of legislative and quasi-legislative influences
as well as IFRS Accounting Standards:
➢ National company law
➢ EU directives
➢ Security exchange rules
Why a regulatory framework is necessary?
➢ Regulation of accounting information is aimed at ensuring that users of
financial statements receive a minimum amount of information.
➢ It enables them to make meaningful decisions regarding their interest in a
reporting entity.
➢ It is required to ensure that relevant and reliable financial reporting is
achieved to meet the needs of shareholders and other users.
➢ Accounting standards on their own wouldn’t be complete regulatory
framework.
➢ In order to fully regulate the preparation of financial statements and the
obligations of companies and directors, legal and market regulations are
also required.
Principles-based framework:
➢ Based upon a conceptual framework such as the international accounting
standards board’s framework.
➢ Accounting standards are created using the conceptual framework as a
basis.
Rules-based framework:
➢ Cookbook approach
➢ Accounting standards are a set of rules which companies must follow.
Advantages of harmonisation:
a. Multinational entities-
➢ Access to international finance is easier as financial information is more
understandable if it is prepared on a consistent basis.

1
 ➢ The preparation of financial information is easier as it would be prepared
on the same basis.
➢ Greater efficiency in accounting departments.
➢ Consolidation of financial statements is easier.
b. Investors-
➢ If investors make decisions based on the worldwide availability of
investments, better comparisons between entities are required.
➢ It assists the process as financial information would be consistent between
different entities from different regions.
c. Tax authorities-

➢ Tax liabilities of investors should be easier to calculate.

d. international accounting firms-

➢ Accounting firms would benefit as accounting and auditing is easier if

similar accounting practices exist on a global basis.
Disadvantages of harmonisation:
➢ Difficult to introduce, apply and maintain or enforce in different countries
which has range of social, political, economic and business factors to
consider.
➢ Different legal systems may prevent the applications of certain accounting
practices and restrict the options available.
➢ Different purpose of financial reporting between countries.
➢ Countries may be unwilling to accept another country’s standards.
➢ Costly to develop a fully detailed set of accounting standards.
IFRS Foundations-
➢ It is the supervisory body for the board.
➢ It is responsible for governance issues and ensuring each body is properly
funded.
The objectives of the IFRS Foundations include:
➢ Developing a set of global accounting standards of high quality which are
understandable and enforceable.
➢ Promoting the use and application of these standards.

2
 ➢ Bringing about the convergence of national and international accounting
standards.
International Accounting Standards Boards (IASB)-
➢ It is solely responsible for issuing International Financial Reporting
Standards.
➢ Develop new accounting standards.
➢ Liaise with national standard-setting bodies to promote convergence of
international and national accounting standards.
International Financial Reporting Interpretations Committee (IFRIC)-
➢ Assist the IASB to establish and improve standards.
➢ Issues interpretations which provide timely guidance on emerging
accounting issues are not addressed in full standards.
➢ Assist in the international/ national convergence process.
➢ These must be approved by the board.
IFRS Advisory Council (IFRSAC)-
➢ Advising the board on agenda decisions and priorities in the board’s work.
➢ Informing the board of the views of the organisations and individuals on
the council on major standard-setting projects.
➢ Giving other advice to the board or trustee.
International Sustainability Standards Board (ISSB)-
➢ In 2021, IFRS Foundation created ISSB with the objective of delivering a
comprehensive global baseline of sustainability-related disclosure
standards.
➢ International investors called for corporate reporting on climate and other
environmental, social and governance matters i.e. high quality, transparent,
reliable and comparable.
➢ The aim to provide users with reliable, comparable, sustainability-related
information to help them make informed decisions concerning
sustainability-related risks and opportunities relevant to individual entities.
Development of an IFRS Accounting Standard-
The procedure for the development of an IFRS Accounting Standard is as follows:
➢ Setting the agenda
➢ Planning the project
3
 ➢ Development and publication of discussion paper
➢ Development and publication of exposure draft
➢ Development and publication of an IFRS standard
➢ Procedure after a standard is issued
2. A conceptual framework-
➢ A coherent system of interrelated objectives and fundamental principles.
➢ A framework which prescribes the nature, function and limits of financial
accounting and financial statements.
Why have a conceptual framework?
➢ It enables accounting standards and generally accepted accounting practice
(GAAP) to be developed in accordance with agreed principle.
➢ It avoids fire-fighting whereas accounting standards are developed in a
piecemeal way in response to specific problems or abuse.
➢ Lack of a conceptual framework may mean that certain critical issues are
not addressed.
➢ As transactions become more complex and businesses become more
sophisticated it helps preparers and auditors of financial statements to deal
with transactions which are not subject of an accounting standard.
➢ Accounting standards based on principles are thought to be harder to
circumvent.
➢ It strengthens the credibility of financial reporting and the accounting
profession.
➢ It makes it less likely that the standard-setting process can be influenced
by vested interests.
Advantages of rules-based system-
➢ Increased accuracy of requirements
➢ Increased comparability
➢ Increased verifiability
➢ Less scope for judgemental manipulation of figures
Purpose of the framework-
➢ Assist in the development of future IFRS and the review of existing
standards by setting out the underlying concepts.
➢ Promote harmonisation of accounting regulation and standards

4
 ➢ Assist the prepares of financial statements in the application of IFRS and
dealing with accounting transactions for which there is not an accounting
standard.
Advantages of a conceptual framework-
➢ Financial statements are more consistent with each other
➢ Avoids firefighting approach and a has a proactive approach in determining
best policy
➢ Less open to criticism of political/external pressure
➢ Has a principles-based approach
➢ Some standards may concentrate on effect on statement of financial
position; others on statement of profit or loss.
Disadvantages of a conceptual framework-
➢ A single conceptual framework cannot be devised which will suit all users
➢ Need for a variety of standards for different purposes
➢ Preparing and implementing standards may still be difficult with a
framework
3. Qualitative Characteristics-
Fundamental qualitative characteristics:
i. Relevance-
➢ It has the ability to influence the economic decisions of users.
➢ It is provided in time to influence those decisions.
➢ Information provided by financial statements needs to be relevant.
➢ Information that is relevant has predictive and confirmatory value.
ii. Materiality-
➢ It is an entity-specific aspect of relevance and depends on the size of the
item or error judged in the particular circumstances of its omission or
misstatement.
➢ It is also known as threshold quality.
➢ One that needs to be studied before considering the other qualities of that
information.
➢ A cut-off point- i.e. if any information doesn’t pass the test of materiality,
it doesn’t to be considered further.
iii. Faithful representation-
5
Completeness-
➢ To be understandable, information must contain all necessary descriptions
and explanations.
Neutrality-
➢ Information must be neutral, i.e. free from bias.
➢ Financial statements are not neutral by the selection or presentation of
information.
➢ They deliberately influence the making of a decision or judgement in order
to achieve a predetermined result or outcome.
Free from error-
➢ Information must be free from error within the bounds of materiality.
➢ A material error or omission can cause the financial statements to be false
or misleading.
➢ Thus, unreliable and deficient in terms of their relevance.
Enhancing qualitative characteristics-
i. Comparability-
➢ Compare the financial statements of an entity over time to identify trends
in its financial position and performance.
➢ Compare the financial statements of different entities to evaluate their
relative financial performance and financial position.
ii. Verifiability-
➢ It helps to assure users that information represents faithfully the economic
phenomena it purports to represent.
➢ Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement.
iii. Timeliness-
➢ It means having information available to decision makers in time to be
capable of influencing their decisions.
iv. Understandability-

6
 ➢ Classifying, characterising and presenting information clearly and
concisely.
➢ Information should not be excluded on the grounds that it may be too
complex/difficult for some users to understand.
4. Elements of the financial statements-
a. Assets-
➢ A present economic resource controlled by the entity.
➢ As a result of past events.
➢ An economic resource is a right that has the potential to produce economic
benefit.
b. Liabilities-
➢ A present obligation of the entity.
➢ To transfer an economic resource as a result of past events.
c. Equity Interest- Equity is the residual interest in the assets of the entity after
deduction all its liabilities.
d. Income-
➢ Increases in assets or decreases in liabilities that result in increases in
equity other than those relating to contributions from holders of equity
claims.
e. Expenses-
➢ Decreases in assets or increases in liabilities that result in decreases in
equity other than those relating to distribution to holders of equity claims.
Recognition of the elements of financial statements-
Recognition is the process of incorporating in the statement of financial position
or statement of profit or loss an item that satisfies the following criteria for
recognition:
➢ The item that meets the definition of an element
➢ It is probable that any future economic benefits associated with the item
will flow to or from the entity.
➢ The item’s cost or value can be measured with reliability.