Role and Formation of
Financial Accounting
Standards
Mr. Barry
A-level Accounting Year13
Outline
• The Regulatory System of Accounting
• Why accounting standards are required
• Harmonisation of Standards (UK +
International)
• International Accounting Standards Board
(IASB)
• List of IAS / IFRS
• US GAAP
• IASB Framework (within which new
standards are formulated)
Mr. Barry
A-level Accounting Year13
THE REGULATORY SYSTEM
OF ACCOUNTING
• Limited Liability companies most affected.
• Local / National legislation
• Accounting concepts (acctg assumptions
/conventions) & individual judgement (eg
value of property)
• Accounting standards (national and
intern’l)
• Other International influences (EU, UN,
World Bank, Stock Exchanges etc)
• Generally accepted accounting practices
(GAAP)
• True and Fair View
Mr. Barry
A-level Accounting Year13
WHY THERE IS A NEED FOR
MANDATORY STANDARDS
Mandatory standards needed to define the way in which
accounting numbers are presented in financial statements.
Aim is that their measurement and presentation are less
subjective.
Until the 1960s thought that the accountancy profession
could obtain uniformity of disclosure by persuasion BUT
difficult to resist management pressures.
During the 1960s confidence in the accountancy profession
lost when internationally known UK-based companies were
seen to have published financial data that were materially
incorrect.
Mr. Barry
A-level Accounting Year13
Creative accounting
Companies try and show their financial
statements in the best possible light to attract
potential investors or avoid paying taxation
Accounting standards help minimise this
unethical practice and allows sufficient
comparability of financial statements between
years and companies
Mr. Barry
A-level Accounting Year13
INTERNATIONAL ACCOUNTING
STANDARDS BOARDS (IASB)
It uses a framework that deals with:
• The objective of financial statements, to provide
information about the financial position,
performance and changes that are useful to users
• Qualities that financial information should have
for it to be useful
• Definitions of the elements of its financial
statements and their recognition and
measurement
Mr. Barry
A-level Accounting Year13
DIFFERENT SET OF TERMS
1. Ireland and UK standards
– First SSAP : Statements of standard
accounting practice
– FRS : Financial reporting standards
2. International Standards
– IAS : International accounting standards
– IFRS : International financial reporting
standards
3.
US Standards
–
Mr. Barry
US GAAP (Generally accepted accounting practices)
A-level Accounting Year13
TWO APPROACHES TO
REDUCE NATIONAL
DIFFERENCES
• Standardisation approach
– Rules to account for similar items in all
countries
• Harmonisation approach
– Allows for some different national approaches
– Provides a common framework
• Benefit from reducing national differences
– Reduces training costs for profession
– Permits greater comparability
Mr. Barry
A-level Accounting Year13
INTERNATIONAL BODIES
STANDARDISING AND
HARMONISING
• IASC
– IASs
– IFRSs
• European Union
– Directives
– Adopting IASs
• IOSCO (International organisation of
securities commissions – represent
securities markets regulators)
Mr. Barry
A-level Accounting Year13
IASB
• International Accounting Standards Board
(IASB)
• Independent ,privately funded Accounting
Standard setter based in London
• IASC (IAS Committee) based in USA
• IASB – 14 members from 9 different
countries. Auditors, preparers of Fin
Stmts, users of F.Stmts and an Academic
Mr. Barry
A-level Accounting Year13
OBJECTIVES OF IASB
• To develop IAS (International accounting
Standards)
– a single set of high quality, understandable and
enforceable global accounting standards that
require transparent and comparable information
– to promote the application and use of those
Standards
• To co-operate with national accounting standard
setters to achieve convergence in acc stds
around the world
Mr. Barry
A-level Accounting Year13
STRUCTURE OF IASB
• IASC : appoint IASB members, raise
funds
• IASB : set accounting stds (IAS)
• Standards Advisory Council (advise
IASc and IASB)
• International financial reporting
interpretations Committee. (Advise on
IFRS - International Financial
Reporting standards)
Mr. Barry
A-level Accounting Year13
PROCEDURE WHEN SETTING
NEW STANDARD
1. Issue arises and Advisory board is consulted
2. IASB develops and publishes a “discussion
document”, to get feedback from members of
profession and public.
3. IASB reviews comments. Publishes an
Exposure Draft for public comment
4. IASB reviews comments on the ED and finally
issues a new IFRS.
Whole process can take time !
Mr. Barry
A-level Accounting Year13
IAS
Relevant UK standard(s)
IAS 2 Inventories
SSAP 9 Stocks and
long-term contracts
IAS 7 Cash Flow
Statements
FRS 1 Cash flow
statements
Under IAS 7, the statement must report change in
cash and cash equivalents (rather than cash, as in
FRS 1).
IAS 8 Accounting
policies, changes in
accounting
estimates and errors
FRS 18 Accounting policies
FRS 3 Reporting financial
performance
Under IAS 8, all material errors must be adjusted for
(FRS 3 only requires restatement for fundamental
errors).
IAS 10 Events
after the balance
sheet date
FRS 21 Accounting for post
balance sheet events
FRS 21 issued in May 2004 (apart from the
exemption for entities applying the FRSSE)
implements IAS 10.
Mr. Barry
Effect of any substantial differences
A-level Accounting Year13
IAS
Relevant UK standard(s)
IAS 11 Construction
contracts
SSAP 9 Stocks and
long-term contracts
IAS 12 Income taxes
FRS 16 Current tax
FRS 19 Deferred tax
Under IAS 12, deferred tax must be recognised on
all liabilities, including gains on revaluation (not
required under FRS 19).
IAS 14 Segment
reporting
SSAP 25 Segmental
reporting
IAS 14 additionally (to SSAP 25) requires separate
identification of segments with different risks, returns
or expectations.
IAS 16 Property,
plant and
equipment
FRS 15 Tangible fixed
assets
Under IAS 16, fair values must be used where one
asset is obtained in exchange for another. The
depreciation charge for each year has to reflect any
increase in assets’ residual value ascertained at the
balance sheet date. (Under FRS 15 increases in
residual value are generally reflected in profits on
disposal in the final year of the assets’ lives rather
than in reduced depreciation.)
Mr. Barry
Effect of any substantial differences
A-level Accounting Year13
IAS
Relevant UK standard(s)
Effect of any substantial differences
IAS 17 Leases
SSAP 21 Accounting for
leases and hire purchase
contracts
Under IAS 17, leases of land and buildings are split
into one operating lease for the land and another
lease (finance or operating, depending on the terms)
for the buildings. (Under SSAP 21 long-term
property leases are generally treated as operating
leases.)
IAS 17 requires disclosure of total minimum lease
payments (rather than SSAP 21’s requirements of
commitments within one year).
IAS 18 Revenue
SSAP 9 Stocks and longterm contracts
IAS 19 Employee
benefits
FRS 17 Retirement
benefits
Mr. Barry
Some differences in detail of measurement
approach.
‘Corridor’ approach to recognising actuarial gains
and losses in IAS 19 means that recognition may be
deferred.
A-level Accounting Year13
IAS
Relevant UK standard(s)
IAS 20 Accounting for
government grants and
disclosure of government
assistance
SSAP 4 Accounting for
government grants
IAS 21 The effects of
changes in foreign
exchange rates
FRS 23 The effects of
changes in foreign
exchange rates
IAS 23 Borrowing costs
FRS 15 Tangible fixed
assets
IAS 24 Related party
disclosures
FRS 8 Related party
disclosures
IAS 26 Accounting and
reporting by retirement
benefit plans
SORP Financial reports of
pension schemes
Mr. Barry
Effect of any substantial differences
FRS 23 issued in December 2004 implements
IAS 21
Related party transactions must be disclosed by type
of related party, but names do not have to be given
under IAS 24. There is no exemption equivalent to
that in FRS 8 for intra-group transactions with 90%
subsidiaries whose accounts are publicly available.
A-level Accounting Year13
Relevant UK standard(s)
Effect of any substantial differences
IAS 27 Consolidated and
separate financial
statements
FRS 2 Accounting for
subsidiary undertakings
Profits should be recognised in the P&L.
IAS 28 Investments in
associates
FRS 9 Associates and joint
ventures
IAS 28 requires a parent to recognise only the
obligations or payments made on behalf of a loss
making associate. This is a stricter definition of when
liabilities should be recognised than under FRS 9.
IAS 29 Financial reporting
in hyperinflationary
economies
FRS 24 Financial reporting
in hyperinflationary
economies
FRS 24 issued in December 2004 implements
IAS 29.
Mr. Barry
M.Ronan
IAS
A-level Accounting Year13
IAS
Relevant UK standard(s)
Effect of any substantial differences
IAS 31 Interests in joint
ventures
FRS 9 Associates and joint
ventures
Proportionate consolidation of joint ventures
(prohibited by FRS 9) is the benchmark treatment
under IAS 31.
IAS 32 Financial
instruments: Disclosure
and Presentation
FRS 25 Financial
Instruments: Disclosure
and Presentation
FRS 25 also has the effect of withdrawing FRS 4
‘Capital Instruments’, except for material on the
measurement of debt and gains and losses on the
repurchase of debt. This material is withdrawn for
entities applying the measurement requirements in
FRS 26, but remains applicable for other entities.
IAS 33 Earnings per
share
FRS 22 Earnings per share
FRS 22 issued in December 2004 implements
IAS 33.
IAS 34 Interim financial
reporting
ASB statement on interim
financial reporting
Mr. Barry
A-level Accounting Year13
IAS
Relevant UK standard(s)
IAS 36
Impairment of
assets
FRS 11 Impairment of fixed
assets and goodwill
IAS 37 Provisions,
contingent liabilities
and contingent
assets
FRS 12 Provisions,
contingent liabilities and
contingent assets
Definitions in IAS 37 are more strictly associated
with definite legal obligations.
IAS 38 Intangible
assets
FRS 10 Goodwill and
intangible assets
SSAP 13 Accounting for
research and development
Under IAS 38, goodwill can stay on the balance
sheet indefinitely (subject to impairment reviews)
whereas FRS 10 has a rebuttable presumption of a
maximum life of 20 years.
Rules for capitalising research and development
expenditure differ – more will be capitalised under
IAS 38.
IAS 39 Financial
instruments: recognition
and measurement
FRS 26 Financial
Instruments: Measurement
FRS 26 issued in December 2004 implements the
measurement and hedge accounting requirements
of IAS 39.
Mr. Barry
Effect of any substantial differences
A-level Accounting Year13
IAS
Relevant UK standard(s)
Effect of any substantial differences
IAS 40 Investment
property
SSAP 19 Accounting for
investment properties
Under IAS 40, companies can choose between
depreciated cost and fair value (with gains or
losses going through the income statement). In
contrast, SSAP 19 requires market value with
gains and losses going through STRGL.
Leased investment properties on leases can be
accounted for as investment properties under
IAS 40 and the present value of the minimum
lease payments is recognised as a separate
liability at the start of the lease.
IAS 41 Agriculture
No equivalent standard
No equivalent standard
Financial reporting
standard for smaller
entities (FRSSE)
Mr. Barry
Companies claiming compliance with IFRS must
follow all standards in full, regardless of their size.
A-level Accounting Year13
What we need to know!!
IAS 2 Inventories
IAS 7 Statement of Cash flows
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
IAS 10 Events After the Reporting Period
IAS 16 Property, Plant and Equipment
IAS 18 Revenue
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent
Assets
IAS 38 Intangible Assets
Mr. Barry
A-level Accounting Year13
IAS 1 Presentation of Financial
Statements
Overall requirements for the
presentation of financial statements
Mr. Barry
A-level Accounting Year13
IAS 1 Presentation of Financial Statements
• “Sets out the overall requirements for financial
statements, including how they should be
structured, the minimum requirements for
their content…”
• The standard requires a complete set of
financial statements to comprise a statement
of financial position, a statement of profit or
loss and other comprehensive income, a
statement of changes in equity and a
statement of cash flows.
Mr. Barry
A-level Accounting Year 12
IAS1 Context
Mr. Barry
A-level Accounting Year 12
• Prudence convention
– Recognise revenues only when they are realised
– Recognise expenses as soon as they are known
even if they have not yet actually incurred.
• Matching convention
– Provides guidance concerning the recognition of
expenses
– Expenses should be matched to the revenues
that they helped to generate (i.e. expenses
must be taken into account in the same income
statement in which the associated sale is
recognised).
Mr. Barry
A-level Accounting Year13
Matching convention and the
recognition of expenses
When the amount paid
during the year is more
than the full expense for
the period
When the expense for
the period is more than
the cash paid during the
period
PREPAID
EXPENSE
ACCRUED
EXPENSE
27
Mr. Barry
A-level Accounting Year13
Format of the balance sheet
recommended by IAS 1
• Assets – Definition
– Economic resources that are controlled by
an enterprise and whose cost can be
objectively measured:
• An asset is acquired in a transaction
• An asset is an economic resource as it provides future benefits to
the enterprise
• The resource is controlled by the enterprise
• Its cost (or fair value) at the time of acquisition is objectively
measurable.
Mr. Barry
A-level Accounting Year13
Format of the balance sheet
recommended by IAS 1
• Assets – Classification
– Non-current assets are held with the intention of
being used to generate wealth rather than being
held for resale.
– Current assets are
• not held on a continuing basis.
• They are held primarily for trading purposes
• They are expected to be converted to cash at some
future point in time in the normal course of trading
(normal operating cycle).
• If any portion of an asset / liability is to be settled
or recovered after more than 12 months – then
must disclose separately
Mr. Barry
A-level Accounting Year13
Format of the balance sheet
recommended by IAS 1
• Liabilities – Definition
– Present obligation of the enterprise arising from
past events, the settlement of which is expected to
result in an outflow from the enterprise of resources
embodying economic benefits
Mr. Barry
A-level Accounting Year13
Format of the balance sheet
recommended by IAS 1
• Liabilities – Classification
– Non-current liabilities represent those amounts
due to other parties that are not liable for
repayment within the twelve-month period
following the B/S date (i.e.bank loan)
– Current liabilities represent amounts due for
repayment to third parties within 12 months of the
B/S date (i.e. bank overdraft, trade payables, etc.),
• They are expected to be settled within normal operating
cycle.
• They are held primarily for trading purposes.
Mr. Barry
A-level Accounting Year13
Format of the balance sheet
recommended by IAS 1
• Equity
– Amount of finance owners have provided to the
enterprise
– The equity section of a balance sheet normally
contains:
• Issued capital
• Reserves
• Retained earnings.
• IAS 1 Specific disclosure requirements re Share
Capital.
Mr. Barry
A-level Accounting Year13
Published Accounts
• Regulated by the Companies Act 1985,
amended 1989 and 2006 and IAS 1
• Annual returns must be completed and filed
with the Registrar and kept at Companies
House in Cardiff
• Published accounts are used by shareholders
and potential investors to allow them to make
decisions
Mr. Barry
A-level Accounting Year13