International Financial

Reporting
Structure of the Regulatory
Framework for Companies

Lecture 1:
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Key Learning Outcome

1e. Conceptual & Regulatory Framework

Chapter 18: D’arcy (2nd Edition) Chartered Accountants Ireland

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 • Financial reporting is the process of
producing a set of financial statements that
provides information to various user groups
What is about the entity’s financial performance
and position.

Financial • Financial reporting is part of the financial

Reporting? accounting process.

• Financial accounting is the recording,

summarising and reporting of the financial
transactions of the entity.

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 The directors of the entity are responsible of
What is periodic preparation of financial information
including:
Included in a 1. A set of FS
• Statement of Profit or Loss and Other
Set of Comprehensive Income;
Financial • Statement of Changes in Equity;
• Statement of Financial Position; and
Statements? • Statement of Cash Flows.
2. Notes to FS
3. Other information – chairman’s and
directors reports

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 Regulatory Framework for
Companies (IASB)

Chapter 18 (D’arcy)

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 The Regulatory Framework encompasses:

1. Company Law (Companies Act 2014) –

True & Fair View
Regulatory 2. Stock Exchanges e.g. London Stock
Exchange (LSE)
Framework 3. Accounting Standards.

Rules and guidelines have been developed to

ensure that financial information prepared by
entities is presented in a consistent method
and is relevant to users.

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 Company law sets out the requirements in terms of
the incorporation of entities, regulations with respect
to meetings and the duty of the directors.

Companies Acts in the UK and Ireland require that

companies maintain “proper books of account”
1. Legal Proper books of account shall be deemed to be kept if
Framework they give a true and fair view of the state of affairs of
the company and explain its transactions.

- Company Directors prepare a financial statement comprising of

Law of
(a) a balance sheet as at the financial year end date,
(b) a profit and loss account for the financial year, and
(c) any other additional statements and information
required by the financial reporting framework
adopted in relation to the company.

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 Applies to listed companies only.

• LSE - “Yellow Book” Rules

• US – SEC (Securities and Exchange Commission) has
the power to dictate the form and content of
reports of listed companies.

2.
Listing Rules include:
INTERNATIO 1. Conditions to be met when a company applies
NAL STOCK for listing.
2. Rules and procedures to be followed for a
EXCHANGES company listed.
3. Disclosure requirements (tend to be greater
than those required under company legislation).
4. Details of situations that will cause the
withdrawal /suspension of company listing.

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 Accounting standards are guidelines
for businesses to follow when
recording transactions for the
preparation of financial statements.

Accounting standards and the

3. Conceptual Framework provide
Accounting guidance.
Standards.
Conceptual Framework – sets out
the concepts that underlie the
preparation and presentation of
financial statements.

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 • Global and national standards.

• Global
• International Accounting Standards
3. Board IASB – IFRS International Financial
Reporting Standards and IAS
Accountin International Accounting Standards
• US GAAP Generally Accepted
g Accounting Principles

Standards. • National
• UK and Ireland
• FRC (Financial Reporting Council)
• FRS 100 to 102

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 • Aim:
1. To develop a single set of high quality,
understandable and enforceable and
globally accepted IFRSs
International 2. To promote the use and application of
Accounting those standards
3. To take into account the financial
Standards reporting needs of the emerging
Board economies and the small and medium
size entities (SME’s)
4. To promote and facilitate adoption of
IFRSs through the convergence of
national accounting standards and IFRSs.

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Summary:
Accountin 1. All Companies – Company Law

g 2. Listed Company – Listing Rules &

International Accounting Standards
(IAS’ & IFRS’)
Standards 3. Non Listed: UK & Irish GAAP - FRS 101,

Framework FRS 102, FRS 105

ROI

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 International Financial
Reporting
Conceptual Framework for
Companies (IASB)

Chapter 18 (D’arcy)
Chapter 4 (Alexander
Lecture 1: Part 2
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 The Conceptual Framework:
• Is not an accounting standard and cannot
override any specific accounting standard.
The IASB • Consists of a eight ‘chapters’:

2018 • Chapter 1 The Objective of General

Purpose Financial Reporting
• Chapter 2 Qualitative Characteristics of
Conceptual Useful Financial Information
• Chapter 3 Financial Statements and the
Framework Reporting Entity
• Chapter 4 The Elements of Financial
for Statements
• Chapter 5 Recognition and
Financial Derecognition
• Chapter 6 Measurement

Reporting • Chapter 7 Presentation and Disclosure

• Chapter 8 Concepts of Capital and
Capital Maintenance

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Chapter 1:
Objectives Financial Reporting

• The objective of financial reporting is to

provide information about the reporting entity
that is useful to existing and potential investors,
lenders and other creditors in making decisions
relating to providing resources to the entity.”

• Those decisions involve buying, selling or

holding equity and debt instruments; providing
or settling loans and other forms of credit.
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Chapter 2: Qualitative Characteristics

• Qualitative characteristics of useful information.

• IF financial information is to be useful, it must be
relevant and faithfully represent what is purports
to represent.

• Usefulness of financial information is enhanced if

it is comparable, verifiable, timely and
understandable

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Chapter 2: Qualitative Characteristics

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

Useful
FAITHFULLY
RELEVANT Information REPRESENTED
(Reliable)

Comparable Timely Understandable Verifiable

Enhancing Qualitative Characteristics

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Chapter 2: Qualitative Characteristics:
RELEVANCE

• Information is relevant if it is capable of making a difference

because it is material, has predictive value, confirmatory
value, or both.

• Therefore information must have confirmatory or predictive

value
• Confirmatory value – provides feedback e.g. it confirms
previous estimates or assessments.
• Predictive value – used to predict the future. e.g. it can
assist in estimating future performance

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Chapter 2: Qualitative Characteristics:
RELEVANCE
• Omission or misstatement of material information
could influence the decision made by the primary
users of financial information.

• Materiality levels are specific to each entity,

depends on size and/or significance of an item.

• E.g. Entity has profit €80m. Electricity bill €15,000

omitted from expenses. Material????

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 Chapter 2: Qualitative Characteristics:
FAITHFULLY REPRESENTED
• Information that faithfully represents and underlying transaction or event
will also reflect the substance of the transaction or event (substance over
legal form);

• Faithfully representation requires all of the following qualities:

• Complete - within the bounds of materiality and cost. Includes all the
information necessary so that the user can understand (the transaction /
event).
• Neutral - Free from deliberate or systematic bias; supported by prudence
– assets are not over stated and liabilities not understated
• Free from error - No errors or omission:.
• Clear and Accurate
• Uncertainty - Not perfectly accurate e.g. an estimate –
• Use reasonable estimates - disclosed as an estimate and appropriate
estimation method is selected and explained.

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 Chapter 2: Qualitative Characteristics:
ENHANCING CHARACTERISITCS
• The fundamental qualitative characteristics can be improved if the
information provided is:
1. Comparable
2. Verifiable
3. Timely
4. Understandable

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 Chapter 2: Qualitative Characteristics:
COMPARABILITY
• Comparatives - Allows users must be able to compare the financial
statements over time and relative to other entities. To assess relative
financial position and performance and changes in financial position.

• Therefore, financial statements should:

I. Include current year statements;
II. Be presented beside the prior year statements (called comparatives);
III. Present a statement of the material accounting policies used.

• This enables the user to ascertain if the figures have been prepared using the
same methods of recognition and measurement.

• Require consistency and disclosure:

• Consistency: same methods for same items within and between periods
• Disclosure: Any changes to accounting policies and the impact of these
changes should disclosed.
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Chapter 2: Qualitative Characteristics:
Verifiability
• Verifiability assures the users of the F.S. that the information
provided is reflective of the events and transaction it is supposed to
represent.

• Different knowledgeable and independent observers should be able

to reach consensus that the information provided faithfully
represents the transaction/event.

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Chapter 2: Qualitative Characteristics:
Timeliness

Information available to decision makers in time to be capable of

influencing their decisions.

Generally older information is less useful / relevant unless assessing

trends.

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Chapter 2: Qualitative Characteristics:
UNDERSTANDABILITY

• Clearly and concisely classified and presented (assuming a

reasonable knowledge on the part of the user).

• Classifying, characterising and presenting information clearly

and concisely makes it understandable.

• Assume Users have a reasonable knowledge of business and

economic activities and who will review and analyse the
information diligently. At times even well informed and
diligent users may need to seek the aid of an adviser to
understand information about complex economic phenomena.

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Chapter 2: Qualitative Characteristics:
Summary

Relevant
• Capable of making a difference because it is material, has predictive
value, confirmatory value, or both.

Faithful representation
• Complete - Includes all the information necessary to understand the
phenomenon depicted.
• Neutral - Without bias in the selection or presentation of the
financial information.
• Free from error - No errors or omission in the description of the
phenomenon, or the selection and application of the process to
produce the information representing it.

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Chapter 2: Qualitative Characteristics:
Summary
Comparable
Comparing financial statements over time and across entities.

Verifiable
Different knowledgeable and independent observers should be able to reach
consensus

Timely
Available to decision makers in time to be capable to influence their decisions.

Understandable
Clearly and concisely classified and presented (assuming a reasonable
knowledge on the part of the user).

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Chapter 3. Financial Statements and the
Reporting Entity

• A reporting entity is ‘an entity that is required, or chooses, to prepare

financial statements’.

• Underlying assumption the entity is a going concern.

• GOING CONCERN: This concept is the assumption that the business

will continue in operational existence into the foreseeable future.

• When financial statements are not prepared on a going concern

basis, this fact should be disclosed(IAS 1).

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Chapter 3. Financial Statements and the
Reporting Entity
Financial Statement provide information:
• Statement of Financial Position – assets, liabilities and equity
• Statement of Financial Performance – income and expenses
• Other statements and notes –
• Cashflows
• Contributions from and distributions to equity claim
• Methods and assumption and judgements used in
preparing the financial statements

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Chapter 4. Elements of Financial Statements
Elements

Statement of Statement of
Profit or Loss Financial Position

• Income • Assets
• Expenses • Liabilities
• Capital

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Chapter 4. Elements of Financial Statements
Asset
An asset is a
• a present economic resource of the entity
• controlled by the entity
• as a result of past events

Economic Resource - A right that has the potential to

produce economic benefits
Control – present ability to make the decisions about the
use (or prevent others from using the asset) and collect
any benefits that accrue from the use of that asset
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Chapter 4. Elements of Financial Statements
Assets
• Asset
• Presented according to the length of time an entity expects to hold the
asset:
• Non-Current > one accounting period
• Current < one accounting period
• Buildings
• Motor vehicles,
• Inventory (stock) – goods purchased for resale, raw materials, work in
progress
• Amounts due from customers to whom goods were sold on credit “ trade
receivables”
• Investments
• Cash on hand
• Bank balances
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Chapter 4. Elements of Financial Statements
Liability
A liability is a
• a present obligation of the entity
• to transfer an economic resource
• as a result of past events

Three conditions:
1. There is an obligation:
2. The obligation is to transfer economic resources: AND
3. The obligation is a present one arising from past
events
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Chapter 4. Elements of Financial Statements
Liability
Non Current Liabilities:
Due to the entity for more than one accounting period
E.g. Bank loans

Current Liabilities:
Expect to pay within one year
E.g.
Bank Loans – that part that falls due within one year.
Bank Overdrafts
Amounts due to suppliers from whom goods were purchased on credit “ trade payables”

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Chapter 4. Elements of Financial Statements
Capital / Equity
• Equity / Capital is the residual interests in the assets of an entity
after deducting all its liabilities : (Assets – Liabilities)

• Is increased by contributions from equity holders, reduced by

distributions to them.

• Is increased by profits or reduced by losses.

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Chapter 4. Elements of Financial Statements
Income & Expenses
• Income - Includes revenue and gains

• Revenue is income earned in the period from normal trading

activities
• Other Income – from activities that are not part of its core business,
e.g. sale of an asset or receiving interest income

• Expense - Includes losses as well as expenses that arise in

ordinary course of business

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Professional Ethics

• Focus of this course is the preparation of financial statements.

• It is important to recognise position of trust an accountant holds in
relation to clients, employer and general public who rely on his / her
judgement.
• Trust derived from professional status and ethical codes.
• Key to maintain confidence in the profession.
• The Chartered Accountants Ireland has a Code of Ethics to guide their
members actions and decisions.

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Fundamental Principles are:
• Integrity – straightforward and honest in all professional and
business relationships:
• Objectivity – not to allow bias, conflict of interest or undue
influence of others to override professional judgement
• Professional competence and due care – maintain professional
knowledge to provide a competence professional service.
• Confidentiality – of information acquired as a result of
professional relationships. Do not disclose to third parties without
proper and specific authority, unless there is a legal or
professional right or duty to disclose, nor use the information for
personal advantage: and
• Professional behaviour – compliant with relevant laws and
regulations to avoid discrediting the profession.

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