Professional Statutory and

Current
Accounting Issues
 Teaching
Team
Module Leader
Mr Michael Olusoji
Email: molusoji@arden.ac.uk
 Module
Support
• iLearn support – check regularly
• Assessments:
• Summative – 4,000-word Assignment due Wednesday 1st May 2024 at 12
noon
• Lectures: will discuss practicalities of the module
 Regulatory
Framework
A regulatory framework surrounding the preparation of financial statements
is required in order to ensure that:

• Financial statements can be relied upon by their various users

• The information provided within financial statements is useful and
relevant
• The financial information of entities is comparable
• Companies and their management behave in a proper fashion towards
their investors
• Market confidence in companies and their financial statements is
maintained.
 Regulatory
Framework
Accounting standards alone cannot provide a regulatory framework,
particularly since in many countries they do not have legal standing. The
regulatory framework of a jurisdiction adopting International Financial
Reporting Standards (IFRS) may therefore include all of the following:
• IFRS themselves
• Local company law
• Local securities exchange regulations
• EU directives (where relevant)
• Local Generally Accepted Accounting Principles (GAAP) where relevant.
 Regulatory Requirement in
UK
• In the UK, all companies must adhere to the Companies Act 2006.
• This statute includes a legal requirement for all companies to prepare and
deliver financial statements.
• It does not, however, detail how the financial statements should be
prepared or the accounting treatment that should be applied to
transactions.
• This information is provided through accounting standards, which in the
UK are not legally binding.
• Listed companies must apply IFRS, and private companies have a choice
to apply IFRS or UK accounting standards.
• Beyond this, listed companies have a further layer of regulation in the form
of Stock Exchange rules.
Structure of International Regulatory
Framework
 Discussion
Task
How do you think each country enforces its own regulatory framework as we
have just described? In particular, consider what problems and real-world
situations may be/have been avoided if an appropriate framework was in
place and enforced appropriately. (Clue: Think about what has gone wrong in
the accounting and finance world in the last 10-15 years)
 Fundamental
Concepts
Qualitative Characteristics
“The International Accounting Standards Board (IASB) identified the
Qualitative Characteristics of accounting information that distinguish
better (more useful) information from inferior (less useful) information for
decision-making purposes.”
 Qualitative
Characteristics
Hierarchy of
Accounting
Qualities
 Qualitative
Characteristics
Fundamental Quality—Relevance

To be relevant, accounting information must be capable of

making a difference in a decision.
 Qualitative
Characteristics
Fundamental Quality—Relevance

Financial information has predictive value if it has value as an

input to predictive processes used by investors to form their own
expectations about the future.
 Qualitative
Characteristics
Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior

expectations.
 Qualitative
Characteristics
Fundamental Quality—Relevance

Information is material if omitting it or misstating it could

influence decisions that users make on the basis of the reported
financial information.
 Qualitative
Characteristics
Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and

descriptions match what really existed or happened.
 Qualitative
Characteristics
Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary

for faithful representation is provided.
 Qualitative
Characteristics
Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to

favor one set of interested parties over another.
 Qualitative
Characteristics
Fundamental Quality—Faithful Representation

An information item that is free from error will be a more

accurate (faithful) representation of a financial item.
 Qualitative
Characteristics
Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.
 Qualitative
Characteristics
Enhancing Qualities

Verifiability occurs when independent measurers, using the

same methods, obtain similar results.
 Qualitative
Characteristics
Enhancing Qualities

Timeliness means having information available to decision-

makers before it loses its capacity to influence decisions.
 Qualitative
Characteristics
Enhancing Qualities

Understandability is the quality of information that lets

reasonably informed users see its significance.
 Measurement
Principles
The most commonly used measurements are based on historical cost and fair
value.
Issues:
 Historical cost provides a reliable benchmark for measuring historical trends.
 Fair value information may be more useful.
 Recently the IFRS have taken the step of giving companies the option to use
fair value as the basis for measurement of financial assets and financial
liabilities.
 Reporting of fair value information is increasing.
 Revenue
Recognition
Revenue Recognition - generally occurs (1) when realised or realisable
and (2) when earned.
 Expense
Recognition
Expense Recognition - “Let the expense follow the
revenues.”
 Full
Disclosure
Full Disclosure – providing information that is of sufficient importance
to influence the judgment and decisions of an informed user.
Provided through:
 Financial Statements
 Notes to the Financial Statements
 Supplementary information
 Impact of Constraints on Reporting Accounting
Information
Cost Constraint – cost of providing information must be weighed against the
benefits that can be derived from using it.

Industry Practice - the peculiar nature of some industries and business

concerns sometimes requires departure from basic accounting theory.
What is the
Conceptual A practical tool that assists
Framework?
Board Preparers All
• to develop Standards • to develop consistent • to understand and
accounting policies interpret Standards

Addresses fundamental issues

What are assets, liabilities, equity, income

What is the objective of What makes financial and expenses, when should they be
financial reporting? information useful? recognised and how should they be
measured, presented and disclosed?
 Why did IFRS revise the
Conceptual Framework?

Previous version of Conceptual Framework

useful but some improvements needed

incomplete out of date unclear

Main improvements

Updated, for example, the Clarified, for example, the roles

Filled in the gaps, for example, definitions of an asset and a of stewardship and prudence in
concepts on measurement and liability and recognition criteria financial reporting
presentation and disclosure,
including guidance on the use of
profit or loss and OCI
 Effects of the
revised
Conceptual Not a Standard and does not override Standards
Framework
Underpins Board’s decisions in setting Standards
but Board can depart from aspects of the Conceptual Framework
to meet the objective of financial reporting

Effects of the revised Conceptual Framework

Board and IFRS Interpretations Committee Preparers

• Affects development of Standards
• Standards are interpreted in the context of the
revised Conceptual Framework
• Effective immediately
• Directly affects only those who develop accounting
policies using the Conceptual Framework if no
applicable Standard
• Effective 1 January 2020
• Indirectly affects through future Standards
Objective of financial information useful to users in making decisions
Provide
financial Users’ decisions involve decisions about
reporting voting and influencing
buying, holding or selling providing or settling loans
management

To make these decisions, users assess

prospects for future net cash inflows to the management’s stewardship of the entity’s
entity economic resources

To make both these assessments, users need information about both

economic resources, claims and changes in how efficiently and effectively management has
those resources and claims discharged its responsibilities
Qualitative Fundamental qualitative characteristics
characterist
ics Relevance Faithful representation
• Information is relevant if it is capable of • Information must faithfully represent the
making a difference to the decisions made substance of what it purports to
by users represent

Enhancing characteristics

Comparability Verifiability Timeliness Understandability

Cost constraint
Clarifying
aspects of • Exercise of caution under conditions of uncertainty
faithful
Prudence • Does not allow for overstatement or understatement of assets,
liabilities, income or expenses
representati • Supports neutrality

on • Arises when monetary amounts cannot be observed directly and

need to be estimated
Measurement • Does not prevent information from being useful
uncertainty • If very high, may affect whether a sufficiently faithful
representation can be achieved

• Economic substance of the underlying economic phenomenon is

Substance over normally the same as the legal form
• If not, need to represent the substance to provide faithful
form representation
Elements of financial statements— assets, liabilities and
equityto financial position
Relate
A present economic resource controlled by the entity as a result of past
events
Asset • An economic resource is a right that has the potential to produce
economic benefits

A present obligation of the entity to transfer an economic resource as a

result of past events
Liability • An obligation is a duty or responsibility that the entity has no
practical ability to avoid

The residual interest in the assets of the entity after deducting all its
liabilities
Equity • Financial Instruments with Characteristics of Equity research project
further explores how to distinguish liabilities from equity
Elements of financial statements— income and
expenses
Relate to financial performance
Increases in assets, or decreases in liabilities, that result in increases in
Income equity, other than those relating to contributions from holders of equity
claims

Decreases in assets, or increases in liabilities, that result in decreases

Expenses in equity, other than those relating to distributions to holders of equity
claims

Information about income and expenses is just as important as information about

assets and liabilities
Recognition
Recognition criteria

Relevance Faithful representation

Whether recognition of an item results in relevant
information may be affected by, for example:
• low probability of a flow of economic benefits
• existence uncertainty
Whether recognition of an item results in a faithful
representation may be affected by, for example:
• measurement uncertainty
• recognition inconsistency
• presentation and disclosure of resulting income,
expenses and changes in equity

Cost constraint
 Measureme
nt
Historical cost measurement bases Current value measurement bases
• include amortised cost • include fair value, value in use, fulfilment value
and current cost

Selecting a measurement basis

Relevance Faithful representation

• characteristics of the asset or liability • measurement inconsistency
• contribution to future cash flows • measurement uncertainty

Information in both the statement of financial position and the statement(s) of

financial performance

Enhancing qualitative characteristics and cost constraint

 Profit or
loss and
OCI
Statement of profit or • Primary source of information about performance
loss • Default location for income and expenses

Other comprehensive • Exceptional circumstances

• Only changes in current values of assets and liabilities
income • In principle, OCI items are recycled

Classification into profit or loss and OCI and recycling

Relevance Faithful representation

Only the Board can take decisions on OCI and recycling

ANY QUESTIONS?