REGULATORY DEVELOPMENT:
FINANCIAL REPORTING
COUNCIL AND
IFAC REQUIREMENTS
By
Prof. Benjamin Chuka
Osisioma
Nnamdi Azikiwe
University, Awka.
I.
INTRODUCTION
Three major phenomena have defined the
agenda for recent developments in the
accounting profession:
- A series of corporate misadventures and
professional abuses, which began with the
Enron scandal in 2001/2002;
- The Asian Financial Crisis, 1997/98
fuelled largely by a ballooning currency
crisis and weak financial systems;
- The global financial meltdown of 2008
which started as a crash in the US
mortgage industry, and soon spread to all
countries of the world.
Together, these crises worked transformed
the
regulatory
and
public
policy
environment for accounting and auditing
world-wide.
Perhaps the gravest consequence of
these mishaps is the loss of the freedom
of self-regulation which had in the past
governed the development of the
profession.
Today, the emerging regulatory landscape
is quite a crowded field encompassing –
- The G20 which in April 2009 set up the
Financial Stability Board to ensure global
convergence of standards and their
consistent application, enhanced risk
disclosure, disclosure of complex financial
instruments, and financial regulatory
reform;
- The International Forum of Independent
Audit Regulators.
IFIAR among other objectives sought to
look into a wide range of issues - revenue
recognition,
professional
judgement,
auditor skepticism, group audits, second
partner
review,
governance
and
transparency of firms, and international
networks.
The new emphasis is on:
Mandatory rotation of auditors;
Greater transparency in financial and
accounting statements;
Increased focus on corporate bribery,
fraud and defalcation;
Tightening the Scope of Services provided
by accountants and auditors;
Increased Oversight and Supervisory
function;
Enhancement in Corporate Governance
practices;
New Risk Management & Compensation
practices;
Expansion of Business Reporting;
Questioning the role of the Audit Function;
Increase in Mandatory Capital;
Emphasis on Systemic Safety and
Soundness;
Call for Convergence of Standards; and,
Financial Regulatory Reform.
The G20 sought to ensure transparency and
accountability through:
-Enhanced guidance for valuation of
securities;
-Accounting and disclosure standards for
off-balance sheet vehicles;
-Required disclosure of complex financial
instruments;
-Governance
of
the
international
accounting standards setting body;
-A single set of high-quality global
standards;
-Consistent application and enforcement
of high-quality accounting standards;
-Enhanced risk disclosures.
-A single set of high-quality global
standards;
-Consistent application and enforcement
of high-quality accounting standards;
-Enhanced risk disclosures.
All these factors impacted on the
development of the regulatory landscape.
In the United States the Blue Ribbon
Committee Report released its Report in
February 1999 to influence the pattern and
general
effectiveness
of
corporate
governance.
The Securities and Exchange Commission
(SEC) unveiled a Public Accountability
Board empowered to perform quality
control reviews and ensure that the
profession’s ethical, auditing and quality
control standards are of the highest
calibre. The goal was to address ethical
lapses or competence deficiencies among
accountants.
In July 2002, the Sarbanes-Oxley (SOX)
Act was signed into law with far-reaching
impact for accounting practice.
In the United Kingdom, the Ethics
Standards Board issued a consultation
paper, raising three fundamental issues:
independence of auditors appointed and
re-appointed
on
the
advice
of
management, provision of non-audit
services by auditors to clients, and the
need for rotation of auditors after a certain
number of years!
In Nigeria, these developments have
resulted in the passing into law in 2011 of
the Financial Reporting Council.
II
FINANCIAL REPORTING COUNCIL
The NASB was first set up on September
9, 1982 with the task of promoting the
application of the highest standards of
financial reporting in Nigeria through the
development and issuance of Statements
of Accounting Standards for users and
preparers
of
financial
statements,
investors, commercial enterprises and
regulatory agencies of government.
The Board was actually conceived as a
National Accounting Standard Setting
body like the Financial Accounting
Standards Board in the US, Accounting
Standards Board in the UK, and Australian
Accounting Research Foundation in
Australia.
ANAN had in 1990, made a strong case
for a Council for Registered Public
Accountants in Nigeria (CORPAN) to
serve as a regulatory
body for
accountancy profession.
The CORPAN was to be charged with:
-Oversight function over the profession;
-Stipulation of Code of Professional Best
Practices among professional accountants
in Nigeria;
-Observance
and
enforcement
of
professional ethics;
-Resolution of conflict in the profession;
-Maintainance of discipline and good
practice in the profession.
In 1990, the Companies and Allied Matters
Act required that financial statements
prepared under the Act shall comply “...
with the accounting standards laid down in
the Statements of Accounting Standards
issued from time to time by the Nigerian
Accounting Standards Board” (Sec. 335
(1). This was a form of legal recognition for
the body.
In 2003 the NASB Act was formally
promulgated, charging the Board with the
functions to:
Develop and publish Statements of
Accounting Standards (SAS);
Promote the general acceptance and
adoption of such Standards;
Promote and enforce compliance with the
Standards;
Review the accounting Standards from
time to time
Receive notices of non-compliance with
the Standards;
Receive copies of qualified audit reports.
The Financial Reporting Council
(FRC) of Nigeria Act 2011 repealed
the Nigerian Accounting Standards
Board (NASB) Act of 2003, and
created the Financial Reporting
Council whose task shall be to:
Protect
investors
and
other
stakeholders interest;
Give guidance on issues relating to
financial reporting and corporate
governance;
Ensure good corporate governance
practices in the public and private
sectors of the Nigerian economy;
Ensure accuracy and reliability of
financial reports and corporate
disclosures; and,
Harmonize activities of relevant
professional and regulatory bodies as
relating to Corporate Governance and
Financial Reporting.
The FRC is empowered to “enforce and
approve enforcement of compliance with
accounting,
auditing,
corporate
governance and financial reporting
standards in Nigeria”. To this end, it is
further empowered to:
issue rules and guidelines for the purpose
of implementing auditing and accounting
standards;
demand assessment of internal controls,
including information system controls with
independent attestation;
 require code of ethics for financial officers and
certification of financial statements by Chief
Executive Officer and Chief Financial Officer;
and
 insist that entities provide real time disclosures
on material changes in financial conditions or
operations.
 The functions of the Council include to:
 Develop and publish accounting and financial
reporting
standards,
and
ensure
their
consistency with IFRSs;
 Review, promote and enforce compliance with
the accounting and financial standards;
Receive notices of non-compliance with
approved standards;
Receive and review copies of annual
reports and financial statements of public
interest entities, and qualified reports
where necessary;
Advise the Federal Government on
matters relating to accounting and
financial reporting standards;
Maintain a register of professional
accountants and other professionals
engaged in the financial reporting process;
Monitor compliance with the reporting
requirements;
Promote compliance with the adopted
standards issued by the IFAC and IASB;
Monitor and promote education, research
and training in the fields of accounting,
auditing, financial reporting and corporate
governance;
Specify in the Reporting Standards,
minimum requirements for recognition,
measurement, presentation & disclosure;
Develop or adopt and keep up-to-date
auditing standards and ensure consistency
with Standards and pronouncements of
International Auditing and Assurance
Standards Board.
A cursory view of the law will highlight the
major pre-occupation of the legislative
enactment:
There are four stress areas: Financial
Reporting, Auditing and Assurance,
Actuarial and Valuation Standards and
Corporate Governance;
Among the 3 Standing Committees of the
Council, there is a Technical and Oversight
Committee on new issues requiring setting
of standards, and convergence of local
and international standard and other
related matters.
The Directorate of Inspection and
Monitoring is established to monitor
compliance with auditing, accounting,
actuarial and valuation standards and
guidelines approved by the Council.
Protection of investors, accountants,
users, auditors, employers, and every
other corporate stakeholder;
Emphasis on the loss of self-regulation
which had been the pride of the profession
for centuries. The FRC is thus empowered
to develop and publish, promote and
enforce compliance, monitor and receive
notices of non-compliance with required
standards, and maintain a register of
professionals
involved
in
financial
reporting.
III REQUIREMENTS OF IFAC AND
THE FRC.
 The mission of the International Federation of
Accountants (IFAC) is to serve the public
interest, strengthen the worldwide accountancy
profession and contribute to the development of
strong international economies by establishing
and promoting adherence to high quality
professional
standards,
furthering
the
international convergence of such standards and
speaking out on public interest issues where the
profession’s expertise is most relevant.
The FRC Act duly acknowledges the need
for convergence of the national Standards
with International prescriptions.
Sections 23-27 of the Act spell out the
standard-setting functions of the Council in
respect of Private Sector Accounting,
Public
Sector
Accounting,
Auditing
Practices, Actuarial and Valuation matters.
The law encourages the establishment of
ethical standards particularly, for the
auditor, “in relation to the independence,
objectivity
and
integrity”
of
the
professional.
The law requires the professional
accountant registered to express clear
written opinion with respect to:
Whether or not the financial statement as
a whole give a true and fair view;
Whether or not the financial statements
comply with the provisions of the Act and
other relevant enactments;
Level of compliance with Standards issued
by the Council;
Level of compliance with the Code of
Corporate Governance.
The Council shall specify in those
standards, the minimum requirements for
recognition, measurement, presentation
and disclosure in financial statements or
other financial reports prepared by public
interest entity.
The IFRSs make very clear prescriptions
in these areas for the guidance of national
standards-setting bodies. The overarching goal is to make international
comparisons
of
company
financial
statements as easy as possible.
Essentially, IFRS seeks to:
Synchronize accounting standards across the
globe;
Enhance international comparison of company
financial statements;
Make interpretation of company financial
statements as uncomplicated and painless as
possible, regardless of the country of origin or
jurisdiction of the reporting entity.
 The IFRS Framework for the Preparation of
Financial Statement states:
 Objectives of Financial Statements - to provide
information about the financial position (balance
sheet), performance (income statement) and
changes in financial position (cash flow
statement). The statements should also show
the results of management’s stewardship,
providing information about the entity’s assets,
liabilities, equity, income and expenses,
including gains and losses, contributions by and
distributions to owners in their capacity as
owners, and cash flows.
Qualitative Characteristics comprising Understandability, Relevance, Reliability
and Comparability.
The underlying assumptions are the
accrual basis and the going-concern
concept.
Constraints on relevance and reliability are
stated as Timeliness and Benefit versus
Cost. Providers of information are
expected to balance the qualitative
characteristics in such a way that best
meets the objectives of financial
statements.
Elements of Financial Statement include
Assets, Liabilities, Equity, Income and
Expenses.
Assets are resources controlled by an
entity as a result of past events and from
which future economic benefits or service
potential are expected to flow to the entity.
Liabilities are present obligations of the
entity arising from past events, the
settlement of which is expected to result in
an outflow from the entity of resources
embodying economic benefits or service
potentials.
Net asset/equity is the residual
interest in the assets of the entity
after deducting all its liabilities.
Revenue is the gross inflow of
economic benefits or service potential
during the reporting period when
those inflows result in an increase in
net asset/equity, other than increases
relating to contributions from owners.
Expenses are decreases in economic
benefits or service potential during the
reporting period in the form of outflows or
consumption of assets or incurrence of
liabilities that result in decreases in net
assets/equity, other than those relating to
distribution to owners.
Recognition of Elements - An element can
only be recognised in the financial
statements if it is probable that any future
economic benefit associated with the item
will flow to or from the entity; and if the
item has a cost or value that can be
measured with reliability.
Revenue is recognised when an entity has
transferred significant risk and reward of
ownership to the buyer, coinciding with the
transfer of the legal title or the passing of
possession to the buyer. But where the
entity retains significant risk of ownership,
the transaction is not a sale, and revenue
is not recognised.
Thus, the entity retains the risk of
ownership, and so there is no revenue
recognition where:
-the entity retains the obligation for
unsatisfactory performance;
-the receipt of the revenue is contingent on
derivation of revenue by the buyer, as in
Sale or Return transactions;
-the goods are shipped subject to
installation, and this is a crucial part of the
contract which has not yet been
completed;
-the buyer has the right to rescind the
purchase for a reason specified in the
sales contract and the entity is uncertain
about probability of return.
 Measurement of Elements - The following bases
are used: Historical Cost, Current Cost,
Realizable (settlement) Value, and Present
Value (Fair market value). Fair value is to be
used in measurement of financial instruments,
but is optional valuing property, plant and
equipment.
 When goods or services are exchanged or
swapped for goods or services which are of a
similar nature and value, no sale has occurred
and no revenue is recognised. But where the
goods and services are dissimilar, the exchange
could be regarded as a sale. And revenue is
measured at the fair value of goods and services
received.
Emphasis is on measuring the fair
value of assets and liabilities.
-Analyze the properties, strengths &
weaknesses of various measurement
attributes;
-Provide definitions of the terms used;
-Distinguish between a measurement
technique and a measurement
attribute;
-Provide guidance for choosing a
measurement attribute.
Concept of Capital Maintenance include:
Financial capital which is synonymous with
net assets or equity and defined in terms
of nominal monetary units. Profit
represents the increase in nominal money
capital over the period;
Physical Capital which is regarded as the
operating capability defined in terms of
productive capacity. Profit represents the
increase in productive capacity over the
period.
The Framework defines:
Transparency as making information on
existing conditions, decisions and actions
accessible, visible and understandable to all;
Disclosure as providing information and
making policy decisions known through
timely dissemination and openness.
Accountability as the need for market
participants to justify their actions and
policies and to accept responsibility for both
decisions and results.
Any entity claiming compliance with IFRSs
must comply with all standards and
interpretations,
including
disclosure
requirements, and make a statement of
explicit and unreserved compliance;
IFRSs do not apply to items that are not
‘material’; transactions are accounted for
in accordance with their substance rather
than their legal form. Transactions with
shareholders in their capacity as
shareholders are recognised directly in
equity;
Comparative information is required for the
preceding period only, but when an entity
restates comparative information following
a change in accounting policy, a correction
of an error or a reclassification of items in
the financial statement, a Statement of
Financial Position as at the beginning of
the earliest comparative period is
presented. Comparative information must
include numerical information in respect of
the previous period, and relevant narrative
and descriptive information.
The Statement of Comprehensive Income
should cover: Revenue, Finance Costs,
Share of Profits or Losses of associates or
joint ventures, tax expense, Discontinued
operations, profit or loss, each component
of other comprehensive income, total
comprehensive income, profit or loss
attributable to non-controlling interests,
profit or loss attributable to owners of the
parent, and comprehensive income
attributable to non-controlling interests as
well as to owners of the parent.
The Statement of Cash Flows presents
cash-flows during the period classified by
operating,
investing
and
financing
activities. Net cash flows from all three
categories are totalled to show the change
in cash and cash equivalents during the
period, which then is used to reconcile
opening and closing cash and cash
equivalents. Cash-flow from operating
activities may be presented using either
the direct method or the indirect method.
The Statement of Changes in Equity
should reflect all owner-related changes in
equity,
separately
from
non-owner
changes in equity. The Statement should
include Profit or loss for the period, Every
item of income or expense recognized
directly in equity, Total of above items
showing separately amounts attributable
to minority shareholders and parent
shareholders, Effects of changes in
accounting policy, and Effects of correction
of errors.
 A special purpose entity (SPE) is an entity
created to accomplish a narrow and well-defined
objective. SPEs are consolidated based on
control. The determination of control includes an
analysis of the risks and benefits associated with
an SPE.
 All subsidiaries are consolidated, including
subsidiaries of venture capital organisations and
unit trusts, and those acquired exclusively with a
view to subsequent disposal. Non-controlling
Interests (NCI) are recognised initially at fair
value or at their proportionate interest in the
recognised amount of the identifiable net assets
of the acquired firm at the acquisition date.
Accounting Policies & Notes should
provide for:
• Disclosure of accounting policies measurement bases, accounting policy
used, and Judgements.
Estimation Uncertainty - Key assumptions
about the future;
Other Disclosures - Domicile of the entity,
Legal form of the entity, Nature of
Operations and such like.
The IFRS does not include a matching
concept, but includes accrual accounting,
and recognition of elements when they
satisfy definition and recognition criteria;
It does not include prudence/conservatism
concept, but a neutrality concept;
It does not include other comprehensive
income, only asset, liability, equity, income
and expense;
Principle-based
standards
are
not
necessarily less rigorous than rules.
IV CONCLUSION
The full import of the changes in
accounting standards and traditional
methods, will take sometime to
digest.
The enactment of the FRC Act and
the imperatives of the IFRS, clearly
dictate great urgency in the
application of international standards
locally.
The Implementation date of 2012 for the
IFRSs is already here.
For Nigeria as a first-time adopter, the
date of first set of financial statements that
explicitly comply with IFRS will be
December 31, 2012. This is the Reporting
Date. The Transition Date which is the
date of the opening balance sheet for the
comparatives, is January 1, 2011. And the
Comparative Date - the date of the
comparative balance sheet of the first set
of IFRS financial statements - is
December 31, 2011.
The implication is that there is no time for
the professional, the reporting entity and
the other stakeholders to drag their feet.
The time to act is NOW!!!