Chapter 13: The Regulatory Framework of Accounting PDF

# Chapter 13: The Regulatory Framework of Accounting ## Learning Outcomes By the end of this chapter, you will be able to: - Outline the elements that constitute the regulatory framework of accounting. - Understand the need for accounting standards and the development and role of the Financial Re...

# Chapter 13: The Regulatory Framework of Accounting ## Learning Outcomes By the end of this chapter, you will be able to: - Outline the elements that constitute the regulatory framework of accounting. - Understand the need for accounting standards and the development and role of the Financial Reporting Council (FRC) in this regard. - Demonstrate an awareness of the importance of International Financial Reporting Standards and the role of the International Accounting Standards Board (IASB). - Outline the role of accounting concepts and have an understanding of the main accounting concepts and their application in financial accounting. - Outline the essence of the Statement of Principles as issued by the ASB in influencing the process of setting Financial Reporting Standards. - Demonstrate an understanding of the main information points relating to the FRS 18 Accounting Policies. ## Introduction "Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted." - Ian Griffiths, Creative Accounting (1987) There are significant moves in the business world to move towards a more ethical climate. Abuse in the provision of financial statements in the latter part of the last century has brought about the need to enforce more rigorous regulation of business practices. The term regulation implies the imposition of rules and requirements. In an accounting context, this would relate to the preparation and presentation of reports and statements for third parties. This level of regulation in financial reporting relates primarily to limited liability companies as they are legally required to prepare and present their accounts to the Companies Registration Office (CRO) for public inspection. The objective of an accounting regulatory framework is to ensure adequate and relevant disclosure, objectivity and comparability of accounting information for external users of financial reports. Accounting and the preparation of financial statements and reports are regulated through the following: 1. The government through the relevant legislation. In Ireland, this relates to the Companies Acts and Companies Amendment Acts of 1963 to present. The Companies Acts provide regulations for companies alone. 2. Regulation through the European Union. The EU issues directives to its member states to help ensure greater harmony in the presentation of financial statements. An EU directive requires the government of each member state to incorporate that directive into their laws. The EU's 4th Directive concerned the preparation and presentation of the accounts of companies and this was made law in Ireland through the Companies (Amendment) Act 1986. 3. The stock exchange listing requirements (yellow book) for listed, publicly quoted companies whose shares trade on the stock exchange. 4. The accounting standards issued by the professional accountancy bodies, in particular the FRC and the IASB. ### Figure 13.1: The four strands of the regulatory framework of accounting | Category | Name | Description | |---|---|---| | Legislation | Irish Government | Sets rules for companies | | Accounting Standards | Accounting Bodies | Sets rules for accounting | | Regulatory Framework | | | | EU Directives | EU | Sets directives for financial reporting | | Yellow Book | Stock Exchange Requirements | Sets rules for listed companies | ## The Role of Accounting Standards In the United Kingdom, the accounting profession began to make recommendations about accounting practices as early as 1942. These recommendations were issued with the sole purpose of reducing the wide range of diverse accounting methods then in operation. Each method of accounting could lead to the presentation of a completely different profit figure. Thus there was no unifying code of practice in preparing and presenting accounting information. The recommendations made by the accountancy bodies did not, however, solve the situation as they were not mandatory. In the 1960s, there was a surge of public criticism of financial reporting methods. This was due to a number of cases which highlighted the subjective nature of accounting. In essence, individuals and companies relied on the work of professional accountants for business takeover and investment decisions. However, their work was subsequently found to be flawed due to the choice of accounting treatments allowed at the time. One such case involved General Electric Company (GEC). ### Case Scenario - General Electric Company (GEC) In 1967, GEC was successful in a takeover bid of Associated Electrical Industries (AEI). Before the takeover, AEl produced a profit statement for the year that included ten months' actual results and two months forecast of sales and expenses. They estimated a profit of £10 million. GEC's takeover bid was influenced by this level of profitability. However, after the takeover, GEC reported the company actually made a loss of £4.5 million. According to GEC auditors, the difference was mainly due to judgements made regarding provisions for estimated losses and amounts of stock to be written off. The response of the accountancy bodies to this level of subjectivity and lack of uniformity in accounting practice was to set up the Accounting Standards Committee (ASC) in 1971. The committee, which consisted of members from the accountancy bodies, issued a total of 25 Statements of Standard Accounting Practice (SSAP) dealing with a variety of topics in an attempt to reduce the level of subjectivity and variety in accounting practice. The SSAPs required that once an accounting standard was issued, any material deviation from the standard by any company in the preparation and presentation of their accounting reports was to be disclosed in that report. SSAPS were also enforced by company law as compliance with standards implied truth and fairness in the accounts. The financial statements of companies are required by the Companies Act 1963 to give a 'true and fair view'. In 1990 the ASC was replaced by the Accounting Standards Board (ASB) following a review of the standard setting process. The ASB agreed to adopt the existing SSAPS and update and review where necessary. The accounting standards issued by the ASB are called Financial Reporting Standards (FRS). Some of these FRSs have replaced SSAPs (e.g. FRS 18 Accounting Policies replaced SSAP 2). In November 1997, the ASB issued a third category of standard, for smaller businesses, called Financial Reporting Standard for Smaller Entities (FRSSE). The reason for this was that the ASB felt that smaller companies should not have to follow the very detailed rules in the existing FRSs and SSAPs. Thus, FRSSE is a collection of some (not all) of the rules in all the other standards (SSAPs and FRSs) that small companies can choose to comply with. By complying with the FRSSE, small companies are exempt from complying with the onerous disclosure requirements of the full complement of FRSs and SSAPs. With the advent of international accounting standards and the requirement for companies to follow these standards (since 2005), the ASB proposed a new three-tier framework on financial reporting in the United Kingdom and Republic of Ireland, effective with mandatory transition by 1 January 2015. The aim is to balance the needs of preparers and users of financial statements and help reduce the onerous disclosure requirements for small and medium companies. The three-tier framework comprises the following: - **Quoted companies and 'publically accountable' companies,** would be required to report under International Financial Reporting Standards (IFRS) as adopted by the EU. Publically accountable companies are those that trade in bonds or hold deposits and manage other people's money. - **Other entities, excluding small companies,** would be required to report under a standard called the Financial Reporting Standards for Medium-Sized Entities (FRSME). This will allow them to be exempt from the many disclosure requirements as required by existing IFRS; as adopted by the EU. The standard that applies to this tier is FRS 102 and it is expected that 95 per cent of entities in Ireland are likely to adopt this new reporting standard. - **Small companies** would continue to report under the existing FRSSE. This framework has now been published under FRS 100, 101 and 102. ### Table 13.1: Accounting standards - key terms | Acronym | Name | Description | |---|---|---| | FRC | Financial Reporting Council | Replaced ASB in July 2012 | | ASC | Accounting Standards Committee | in existence up to 1990 | | ASB | Accounting Standards Board | Replaced ASC from 1990 onwards | | IASB | International Accounting Standards Board | | | SSAP | Statement of Standards Accounting Practice | issued by ASC, originally 25 issued, currently 11 enforced | | FRS | Financial Reporting Standard | issued by ASB/FRC | | FRSSE | Financial Reporting Standard for Smaller Entities | issued by ASB | | UITF | Urgent Issue Task Force Abstracts | issued by ASB | | FRED | Financial Reporting Exposure Draft | issued by ASB/FRC | | IAS | International Accounting Standard | issued by IASC | | IFRS | International Financial Reporting Standards | issued by the IASB, have taken over from IASs | ## Accounting Concepts and Their Role Modern accounting is based on certain concepts and conventions that have developed over the years. These concepts are a collection of broad basic assumptions that form the basis of financial accounting. They help ensure a high level of objectivity is present in accounting and that transactions are recognised and measured on a uniform basis. The accounting policies of a business are based on these generally accepted accounting concepts. An understanding of accounting is not possible without understanding the role and essence of these concepts. Although we have covered most of these concepts already in the text, the following is a summary. ### The business entity concept This concept states that the business is separate from the owner. Thus the items recorded in a firm's accounting records and books are limited to the transactions that affect the firm and will not concern themselves with the private transactions of the owner. The only transactions between the business and the owner that are recorded in the business records are: 1. The owner investing resources (usually cash) in the business 2. The owner taking out resources (usually cash or stock) from the business for his own use (termed drawings) ### The dual aspect concept This concept states that there are two aspects of accounting. One is represented by the assets of the business and the other by the claims against them (capital and liabilities). This concept states that these two aspects will always be equal. Assets = Capital + Liabilities ### The money measurement concept This concept requires that the transactions and assets of the business must be measured in some uniform way. Obviously this has to be in some monetary form. It follows that some assets of the business cannot appear on the statement of financial position of a business because to put a monetary value on them would be too subjective. The most obvious example is the 'human asset' of a good workforce or an excellent management team. These assets cannot appear on the statement of financial position as it is very difficult, if not impossible, to put an objective monetary value on them. An example of an exception to this rule can be found where sporting clubs purchase players. ### The realisation concept The concept clarifies when a business accounts for a transaction and thus the related profit or loss on the transaction. For example, when is a sale a sale, or when is a purchase a purchase? When do we account for expenses? There are three clear stages in the life of a transaction: 1. The order stage 2. The transfer of goods and acceptance of liability by the purchaser 3. The payment or cash stage Obviously, if some businesses account for sales on the basis of orders received and other businesses account for sales based only on cash received, then, there is no point in comparing the businesses performances as they recognise sales and profits at different time periods. The realisation concept holds to the view that a transaction should be accounted for at the transfer of goods and acceptance of liability stage, not at the order stage. Effectively the realisation concept tells us when to recognise the profits or loss on a transaction. It states that profits or losses on transactions can only be accounted for when realisation has occurred. A number of criteria have to be observed before realisation can occur. The most critical of these is that goods or services have been provided to a buyer who accepts liability for them and the monetary value of the goods or services has been established. Ultimately it is essential that all businesses account for transactions on the same basis. The realisation concept is very much a part of the prudence concept. ### The historic cost concept In presenting financial statements, a measurement basis must be chosen for each category of asset and liability. The historic cost concept requires that all assets are valued at their historic cost. This is because it is the most objective value compared to other valuation methods such as current value or economic value. Hence this method is the benchmark treatment for measuring most assets. However, in certain cases the historic cost of an asset can be adjusted to current value where it is considered more relevant to value assets at their current value. Current or fair value refers to the current exchange value in an arm-length transaction. The current value approach can be used provided there is: 1. Sufficient evidence that the monetary values of the asset/liability have changed and 2. The new value can be measured with sufficient reliability. Once a business has decided, for example, to apply current values to its property assets, then they will be constantly re-measured on the basis of an independent valuer's assessment. The current or fair value basis, though not as objective as the historic cost method, is quite commonly used for tangible assets such as property. Ultimately the basis selected, current value or historic cost, must be the one that best meets the objectives of financial statements and the demands of the qualitative characteristics of financial information (relevance, reliability, comparability, objectivity and understandability) bearing in mind the nature and circumstances of the assets and liabilities concerned. ### The going concern concept The going concern concept requires that in preparing the financial accounts we assume the business will continue into the foreseeable future. This ensures that the basis of measuring and valuing assets and liabilities will remain at either cost or current value. If the accounts were to be prepared on the basis that the business was to be sold or about to go into liquidation, then an alternative basis for valuing the assets would have to be considered including the break-up or liquidation values for assets. Thus unless the business entity is in liquidation or the directors have no alternative but to cease trading, then the going concern basis will apply and all assets and liabilities will be valued at historic cost or current value, whichever is appropriate. ### The accruals concept The calculation of profit is based on the accruals concept, which requires that the effects of transactions should be accounted for when they occur and are included in the financial statements for the periods they relate to. Knowledge of this concept is essential in understanding the net profit figure and the differences between cash and profit. The accruals concept requires two things: 1. When calculating net profit, expenses should be matched against related revenues. Thus in the trading account section of the income statement, if 100 units are sold in January then the cost of only 100 units is deducted in calculating gross (trading) profit. In the profit and loss section only the expenses for January are deducted when calculating net profit for January. In the trading account of a product-based company, purchases are matched to sales on a unit basis, and in the profit and loss section of the income statement expenses are matched on a time basis. For a service company all expenses are matched on a time basis. 2. Net profit is the difference between revenues earned (not necessarily received) and expenses charged (not necessarily paid). Thus net profit is worked on a transactions basis. That is, if a transaction occurs, it should be accounted for irrespective of whether cash has passed hands. Hence revenues and expenses are accounted for as soon as an invoice has been issued and liability has been accepted. For businesses that buy and sell on credit, sales and purchases in the trading account will be a mixture of cash and credit transactions. Also, expenses that relate to a period will be deducted from sales in the calculation of net profit for that period whether those expenses are paid or not. Any unpaid expenses will also be shown in the statement of financial position under liabilities. ### The prudence concept The intention of the prudence concept is to see that all asset values and profit figures are realistic, rather than overly optimistic or pessimistic. The essence of the concept is to insist that revenue or profit should not be accounted for until the business is virtually certain to get it, but that a loss in an assets value is accounted for as soon as it is probable or likely. The ability to reasonably measure the asset or liability is also necessary to ensure the reliability of the accounts. Ultimately, the prudence concept requires that, in preparing financial statements, gains and assets are not overstated and losses and liabilities are not understated. This concept requires that: 1. One should never anticipate profits. This can be explained by asking, when does a company account for a sales transaction? A sales transaction should only be accounted for when ownership of the goods passes from the company to the buyer and not when the goods were originally ordered. To account for the transaction at the order stage would be imprudent. This is related to the realisation concept outlined earlier. 2. One must provide for all possible losses. If a company anticipates that next year it will incur losses on a part/section of the business, it should provide for those losses. To provide for something is to treat it as a loss now. In other words, show it as a loss/expense in the income statement. However, a provision should only be recognised and accounted for when the following criteria apply: - It is probable that a transfer of economic benefits will occur. - A reasonable estimate of the amount involved can be made. A good example of the prudence concept is with regard to bad debts. If a company becomes aware just before the year-end that a debtor is likely to go into 'liquidation' and cease trading, then prudence requires a provision in the accounts for this future loss. ### The consistency concept The consistency concept requires that when a business has decided on an accounting treatment for an item, it will account for all similar items in the same way. The objective of the consistency concept is to ensure that accounts are comparable from period to period. The consistency concept was developed because of the belief that if accounts are not prepared on a consistent basis using similar accounting policies and assumptions, then any comparison will not just be meaningless but also misleading. However, the consistency concept is not rigid and should the directors feel that the 'truth and fairness' of the accounts are impaired by rigidly sticking to a particular accounting policy, they can change it, but the reason for the change and the effect of the change must be explained. FRS 18 has reconsidered the consistency concept and downgraded it from being a fundamental accounting concept as was the case under its predecessor SSAP 2. Now, consistency, although important, should not be allowed to prevent improvements in financial reporting and consequently it can be ignored if a new accounting policy is more appropriate than that used previously. ### Materiality concept "Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements." - IASB Framework The materiality concept recognises that some transactions are not sufficiently important to waste time and effort in ensuring the correct accounting treatment. For example, a hotel company purchases a cleaning machine that has an estimated life of five years for €60. Should a company treat this as a non-current asset and depreciate accordingly or write it off as an expense in the period purchased. In this case the €60 cost implies this is not a material item and thus should be written off as an expense in the period purchased. What represents a material value will differ from business to business as some businesses can fix their materiality level at €1,000 and others at €10,000. The deciding factor is that if the cost of accounting for a transaction in the correct manner is greater than the value of the transaction, then the amount in question would not be considered material. ### The substance over legal form concept This concept requires that if the legal aspect of a transaction is different from the substance of the transaction, then the substance of the transaction takes precedent over the legal form. In other words, we account for the substance (economic reality) of the transaction, not the legal aspect of it. For example, a hotel leases its premises from a property company on a long-term lease. The legal aspect of this transaction is that the hotel company does not own the property and should not show the property as an asset in its statement of financial position. Thus any lease payments are just treated as expenses in the income statement. However the substance of the transaction is, that because the company have the property on a long-term lease and, most likely have the option to renew the lease, then in substance they have the use of the asset for the majority of its life. Thus they should account for it as if they owned the asset showing it as a non-current asset (leasehold property) and showing the liability (the future amount of lease payments) in the non-current liabilities section of the statement of financial position. This concept helps to restrict companies from window dressing their financial statement through the use of 'off-balance sheet finance'. SSAP 2, published in 1971, identified four fundamental accounting concepts from the above-given list. These were accruals, prudence, consistency and going concern. These were to be the most important concepts that formed the bedrock of accounting and upon which the accounting policies of a business are based. ## Accounting Policies Accounting policies are those specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Examples include: - A company's policy on the classification of certain overheads that could be presented as a cost of sales expense in the trading account or as an administration expense in the profit and loss account. - A company's policy in accounting for loan interest incurred in connection with the construction of a hotel. The choice here is whether to capitalise the interest cost (add to the cost of the property in the statement of financial position) or treat it an operating expense in the profit and loss account. SSAP 2 was replaced by FRS 18 Accounting Policies in December 2000. This came about when the ASB issued its Statement of Principles in December 1999. The Statement of Principles is not an accounting standard, but it underpins all of the accounting standards issued and to be issued in the future. It effectively lays out the objectives of financial statements and the qualitative characteristics of financial information. It focuses on the elements of financial statements and how these elements are recognised and measured and how this information should be presented. It is an accounting framework, which lays the basis for all other accounting standards. Many of its principles, especially those relating to the elements of financial statements, and the recognition and measurement of these elements have been discussed in Chapters 2, 3, 6 and 10 of this text. The following is a summary of both the Statement of Principles and FRS 18: ## Statement of Principles for Financial Reporting The Accounting Standards Board (ASB) published its Statement of Principles for Financial Reporting in December 1999. Its main purpose is to provide a framework within which the ASB can develop and review its accounting standards. It sets out the principles that the ASB believe should underlie the preparation and presentation of financial statements that are required to give a true and fair view. The Statement has a total of eight chapters dealing with the following areas: ### The Objectives of Financial Statements This chapter outlines the objective of financial statements, which is to provide information about the financial performance and financial position of an enterprise that is useful to a wide range of users for assessing the stewardship of management, and for making economic decisions. This objective required focusing on the needs of present and potential investors. This was discussed in Chapter 1. ### The Reporting Entity This chapter identifies two main forms of business entities: single entities and groups. It states that an entity should prepare and publish financial statements if there is a legitimate demand for that information and if the entity is a cohesive economic unit. It also states that the boundary of the reporting entity is determined by the scope of its control. This text is primarily concerned with single-entity businesses. ### The Qualitative Characteristics of Financial Information This chapter identifies four principal qualitative characteristics classified as follows: - **Relevance:** Is the information useful for assessing stewardship and for making economic decisions? - **Reliability:** Is the information reliable and does it reflect the substance of the transactions? - **Comparability:** Is the information presented in such a way that ensures it can be compared with similar information about the entity in other periods and with similar information from other entities? - **Understandability:** Can the information be understood by the users of financial statements? ### The Elements of Financial Statements This chapter sets out and discusses the definitions of the following elements of financial statements: - **Assets:** Rights or other access to future economic benefits controlled by an entity as a result of past transactions or events - **Liabilities:** Obligations of an entity to transfer economic benefits as a result of past transactions or events - **Ownership interest:** The residual amount found by deducting all of the entity's liabilities from all of the entity's assets - **Gains:** Increases in ownership interest not resulting from contributions from owners - **Losses:** Decreases in ownership interest not resulting from distributions to owners The elements of financial statements were covered in detail in Chapters 2 and 3. ### Recognition in Financial Statements This section focuses on what is required to recognise a transaction that creates or increases assets and liabilities, gains and losses. In order to recognise, and thus include in the accounts, any transaction that affects any of the elements of financial statements, there must be evidence of its existence so that it can be measured as a monetary amount with sufficient reliability. Recognition in financial statements was covered in Chapter 3 when dealing with the money measurement and realisation concepts. ### Measurement in Financial Statements This section provides an overview of issues relevant to the measurement of assets and liabilities recognised in the balance sheet and the associated effects of gains and losses. Its main points are: - In preparing financial statements, the measurement basis of historic cost or current value needs to be selected for each category of asset and liability. - An asset or liability measured using historic cost is recognised at its initial transaction cost. If measured on current value basis, an asset or liability is recognised at its current value at the time it was acquired. - Re-measurement will occur if it is necessary to ensure that assets measured at historic cost are carried at the lower of cost and the recoverable amount. For assets measured at current value, re-measurement will occur to ensure that assets and liabilities are carried at up-to-date values. - Re-measurement will only be recognised if there is sufficient evidence that the monetary value of the asset or liability has changed and the new value of the asset/liability can be measured with sufficient reliability. Measurement in financial statements was discussed in Chapters 3 and 10 when dealing with the historic cost, going concern, accruals and prudence concepts. ### Presentation of Financial Information In presenting information in financial statements, the objective is to communicate clearly and effectively and thus meet the objectives of Chapter 1 in the Statement of Principles. This chapter focuses on the way in which the information on financial performance (income statement), financial position (balance sheet) and cash flow is presented. It lays out the following: - The presentation of information on financial performance should focus on the components of that performance and the characteristics of those components. For example, their nature, cause, function, stability, risk, reliability and predictability. - The presentation of information on financial position should focus on the type and function of assets and liabilities held and the relationships between them. - The information on cash flow should be presented in a way that distinguishes between those cash flows that are a result of operating activities and those that are from other activities such as capital activities (purchase/disposal of non-current assets, the acquisition of finance). ### Accounting for Interests in Other Entities This chapter focuses on accounting for interests in other entities and how these interests should be fully reflected in the financial statements of the entity that has the interest and exerts the influence. This chapter relates to accounting for subsidiaries, associated companies and joint ventures, which is beyond the scope of this book. ## FRS 18 Accounting Policies The Statement of Principles laid the way for the issue of FRS 18 Accounting Policies, which defines what accounting policies are selected, applied and disclosed. The standard defines what accounting policies are and distinguishes them from estimation techniques such as methods of depreciation. The objective of FRS 18 is to ensure the following for all material items: - An entity adopts the accounting policies most appropriate to its particular circumstances for the purpose of giving a true and fair view. - The accounting policies adopted are reviewed regularly to ensure that they remain appropriate, and are changed when a new policy becomes more appropriate to the entity's particular circumstances. - Sufficient information is disclosed in the financial statements to enable users to understand the accounting policies adopted and how they have been implemented. The standard states that accounting policies are those principles, bases, conventions, rules and practices applied by an entity that specify how the effects of material items are to be reflected in the financial statements. Any material item must firstly be: - Recognised in the financial statements as assets, liabilities, gains, losses or changes to shareholders' funds. - The measurement basis for the transaction must be selected. This monetary value can be chosen from two broad categories: current value or historic value. - The presentation of the information in the financial statements must enable the users to understand the policies adopted. Should there be any changes to any one of the three bases (recognition, measurement and presentation) then there is deemed a change of accounting policy and that change, and the effect of the change, must be reported in the financial statements. This is in contrast to a change of an 'estimate' or estimation technique where none of the three elements are affected and thus not required to be reported in the financial statements. Illustrations 13.1 and 13.2 should make the distinction clearer. ### Illustration 13.1: Accounting policy change - Loan interest previously charged to the income statement is now added to the cost of the assets as per FRS15. In this transaction, there is a change in recognition as the transaction was treated as an expense and is now treated as an asset. The measurement basis is unchanged; however, the presentation is changed as the item is now in the statement of financial position and not in the income statement. This would be considered a change of accounting policy and reported as such. ### Illustration 13.2: Accounting policy change - A change from depreciation calculated using the reducing-balance method to depreciation based on the straight-line method. In this transaction there is no change to either the recognition, the presentation or the measurement basis (as we are still depreciating assets valued at either historic cost or current value) and thus this change would not be considered a change in accounting policy but rather a change in estimating technique. In this case the change is not required to be reported in the financial statements. The reason for this distinction is to provide information for external users. A change in accounting policy is required to be reported in such a way that the users of accounts will understand the nature and effect of the change on the financial statements. A change in estimating techniques is not required to be reported in the financial statements. FRS 18 requires that accounting policies should be adopted that enable a company's financial statements to give a true and fair view. Out of all the accounting concepts the standard chooses two - going concern and accruals - for their pervasive role in selecting policies. FRS 18 replaced SSAP 2, which identified four fundamental concepts: going concern, accruals, prudence and consistency as part of the foundations of accounting. FRS 18 downgrades the influence of both the prudence concept (now desirable) and the consistency concept. The standard gives clear disclosure requirements about accounting policies and when changes occur in accounting policies. It also states that an entity should judge the appropriateness of its accounting policies against the following objectives: - **Relevance:** Will it influence the economic decisions of the users of accounts? - **Reliability:** Is it reliable and does it reflect the substance of the transaction? - **Comparability:** Is it capable of being compared with similar information about the entity in past periods and with similar information about other entities? - **Understandability:** Can it be understood by the users of financial statements? * **Note:** These are the qualitative characteristics of financial information as outlined in the Statement of Principles. ## Summary The following are the main information points covered in this chapter: - The objective of an accounting regulatory framework is to ensure adequate relevant disclosure, objectivity and comparability of accounting information for external users of financial reports. Accounting and the preparation of accounting financial statements and reports are regulated by the following: - The government through the relevant legislation. In Ireland this relates to the Companies Acts 1963 to present. - Regulation through the European Union. The EU issues directives to its member states to help ensure greater harmony in the presentation of financial statements. - The stock exchange listing requirements - The accounting standards issued by the accounting bodies - The accounting bodies created the Accounting Standards Board (ASB), which issues Financial Reporting Standards (FRS) to help regulate the practice of accounting and financial reporting. In July 2012, this role was taken over by the FRC. - The IASB issues its own IFRSs, which replaced its earlier International Accounting Standards (IASs). Today, compliance with FRSs ensures automatic compliance with IFRSs as the FRC has ensured all relevant requirements of IFRS are incorporated into existing SSAPs and FRSs. Since 2005 all listed companies worldwide are now obliged to comply with IFRSs and since January 2007 this has been extended to all companies both private and public. - Modern accounting is based on certain concepts and conventions that have developed over the years. These concepts are broad basic assumptions, which form the basis of the financial accounts of a business. They help ensure transactions are recognised and measured on a uniform basis. The accounting policies of a business are based on these generally accepted accounting concepts. - Accounting policies are those principles, bases, conventions, rules and practices applied by an entity that specify how the effects of material items are to be reflected in the financial statements. Before a company determines the accounting policies that are relevant to its circumstances it must have regard to both the fundamental accounting concepts and accounting bases in existence. - The Statement of Principles as published by the ASB sets out the principles that the ASB believe should underlie the preparation and presentation of financial statements that are required to give a true and fair view. It underpins all of the accounting standards issued to date and to be issued in the future. - FRS 18 Accounting Policies deals with how accounting policies are selected, applied and disclosed. The standard defines what accounting policies are and distinguishes them from estimation techniques such as a depreciation method. ==End of OCR==