International Financial Accounting (IFA)

Transcription

1 International Financial Accounting (IFA) Part I Accounting Regulation; Normative Theories of Accounting DEPARTMENT OF BUSINESS AND LAW ROBERTO DI PIETRA SIENA, NOVEMBER 4, INTERNATIONAL FINANCIAL Part I Accounting Regulation International Accounting Normative Theories of Accounting 2

2 Academics have formulated a number of normative theories Current purchasing power accounting Current cost accounting Continuously contemporary accounting (exit price accounting) These theories have been adopted by professional accounting bodies and regulators throughout the world Recently there has been an increased propensity for accounting standard-setters to adopt fair value as the basis for measuring many assets, and to thereby move away from using historical cost for many assets 3 Normative theory IASB has undertaken work to develop its conceptual framework This process is providing many advantages and disadvantages and is supporting the process of legitimization of the accounting profession IASB Framework (for the Preparation and Presentation of Financial Statements) 4

3 What is a conceptual framework of accounting? In 1978 the FASB has defined its conceptual framework A coherent system of interrelated objectives and fundamental that is expected to lead to consistent standards In general, a conceptual framework is: A scheme or system of ideas or statements held as an explanation or account of a group of facts or phenomena In the accounting theory A theory as a coherent set of hypothetical, conceptual and pragmatic principles forming the general framework or reference for a field of inquiry 5 FASB (mid-1970s) 6 The earliest comprehensive conceptual framework project IASC (1989) Has published a sort of abbreviated CF IASB (2001) Has adopted the IASC CF Revised in 2010 (and now under revision)

4 Elements on the history on the Conceptual Framework development US First steps during the 60; 1973 the Trueblood report (committee created within the AICPA) 12 objectives + 7 qualitative characteristics that financial information should possess; FASB has started this activity in 1978 Statement of Financial Accounting Concept n 1 (the last one was issued in 2000 n 7 UK Guidance issued with a document titled Corporate Report (1976); addressing rights of the community in terms of their access to financial information about the entities operating in their community Australia In the 1980s it has started a work on the conceptual framework with many similarities to the FASB project IASB In 1989 IASC has issued the first version of the Framework for the preparation and presentation of financial statements (the IASB Framework in 2001 was re-adopted) 7 Definition A CF is a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribe the nature, function and limits of financial accounting and financial statements (USA, FASB in 1976) A CF is a set of broad, internally consistent fundamentals and definitions of key terms (UK, ASC in 1978) 8

5 The CF purposes are to Provide standard setting bodies with a set of internally consistent definitions of accounting principles that can be used for setting accounting standards that are not contradictory or in conflict with each-other Provide guidance to accountants in their day-to-day work of choosing appropriate forms of accounting treatments for various transactions and items 9 What is a conceptual framework of accounting? FASB and IASB convergence project was based on the idea to develop an improved conceptual framework for financial reporting July 2006 DP titled Preliminary Views on an Improved Conceptual Framework for (200 comment letters) 2008 ED on an Improved Conceptual Framework for The objective of financial reporting is the fundamental building block (IASB and FASB); kind of entity; qualitative characteristics of financial information; elements of financial reporting; measurements rules In spite of this logic it is evident that large part of the national accounting standard setter have issues their standards without any conceptual framework 10

6 Elements on the history on the Conceptual Framework development IASB and FASB Convergence process Both standards setters have worked on a joint project designed to update and align the two boards Conceptual Framework 8 phases Objectives and qualitative characteristics Elements: recognition and measurement attributes Initial and subsequent measurement Reporting entity Presentation and disclosure Status of Framework in GAAP hierarchy Applicability to not-for-profit entities Reconsideration of the entire Framework 11 What is a conceptual framework of accounting? IASB view on the conceptual framework is a coordinated and interrelated group of building block that must be developed in order to prepare and present a Financial Statement 12

7 IASB Conceptual Framework 1. Definition of financial reporting 2. Definition of the reporting entity 3. Definition of users of accounts and their information needs 4. Objectives of financial statements 5. Underlying assumptions 6. Qualitative characteristics of financial statements 7. Element of financial statements 8. Recognition criteria Measurement basis and techniques Purpose of the IASB Framework The Framework describes the basic concepts that underlie FS prepared under the IFRSs Serves as a guide to the IASB in developing accounting standards resolving accounting issues that are not addressed directly in a IFRS Is not itself an IASB standard 14

8 Purpose of the IASB Framework The Framework Defines the objective of FS Identifies the qualitative characteristics that make information in FS useful Defines the basic elements of FS and the concepts for recognising and measuring them in FS IAS 8 (2003) on Accounting policies has introduced a hierarchy of sources by which an entity would choose its accounting policies In the absence of a specific standard addressing an issue, an entity is required to look to the IASB Framework 15 Purpose of the IASB Framework The Framework has a variety of uses: The Framework guides the IASB and IFRIC members in deliberating and establishing IFRS and interpretations of those standards The Framework helps to ensure that the body of standards is internally consistent Preparers and Auditors of FS use the Framework as a point of reference to resolve an accounting question in the absence of a standard or interpretation that specifically deals with the question The Framework establishes precise terminology by which people can discuss accounting questions The Framework reduces the volume of standards (without the F., each accounting question would have to be answered ad hoc) 16

9 Purpose of the IASB Framework The Framework has a variety of uses: The Framework makes it more likely that the standards will be principles based rather than detailed rules that try to cover every conceivable potential situation The Framework reduces the need for interpretations and other detailed implementation guidance The Framework enhances public confidence in financial reports 17 Status of the IASB Framework Authority of the Framework IASB Preface to IFRS (2002) IFRSs are based on the Framework, which addresses the concepts underlying the information presented in general purpose FS. The objective of the Framework is to facilitate the consistent and logical formulation of IFRSs The Framework also provides a basis for the use of judgement in resolving accounting issues ( 8) 18

10 Status of the IASB Framework Authority of the Framework The IASB Preface also describes a due process steps that have to be followed in developing IFRS Step 1: the Staff are asked to identify and review all of the issues associated with the topic and to consider the application of the Framework to the issues An identical Step 1 is set out in the due process followed by IFRIC in developing its interpretations Step 2: see 10 and 11 of IAS 8 (2003). IAS 8 is an authoritative, binding standard, and it states that the Framework is the first place to which a preparer or auditor must look in the absence of a specific standard or interpretation 19 General purpose of FSs The Framework addresses general purpose FS, which are the financial statements that an entity prepares and presents at least annually to meet the common information needs of a wide range of users external to the entity Therefore the Framework does not necessarily apply to special purpose FS such as reports to tax authorities, report to government regulatory authorities, prospectus prepared in connection with securities offerings, and reports prepared in connection with proposed business combinations, etc. 20

11 General purpose of FSs The Framework focuses on the FS of business entities, which would include both privately owned and state-owned business entities The entities does not necessarily apply to the FS of governments, government non-business units, or other not-for-profit entities, although most of the concepts in the Framework would seem to be equally relevant to those types of entities 21 General purpose of FSs The Framework acknowledges that some parties who use the general purpose FSs of an entity may have the power to obtain information in addition to that contained in the FSs Many present and potential investors, creditors, vendors, and other who seek financial information about the entity do not have the same power as the major lender to get special information They must rely on the general purpose FSs to meet their information needs 22

12 General purpose of FSs IASB-FASB Convergence project (Conceptual Framework for financial reporting: The reporting entity, IASB 2010) Definition of Reporting entity Is a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain the information they need in making decisions about providing resources to the entity 23 Users and their information needs The Framework identifies the main classes of users of general purpose FSs as Present and potential investors (and their advisers) Employees (and their representative groups) Lenders Suppliers (and other trade creditors) Customers Governments (and their agencies) The (general) public 24

13 Users and their information needs Investors Employees Public Suppliers Government Customers Lenders 25 Users and their information needs All of these 7 categories of users rely on FSs to help them in making various kinds of economic and public policy decisions The Framework also concludes that Because investors are providers of risk capital to the entity, FSs that meet their needs will also meet most of the general financial information needs of the other classes of FS users Common to all of these user groups is their interest in the ability of an entity to generate cash and cash equivalents, and the timing and certainty of those future cash flows 26