Introduction
The following essay is concerned with the aspects of the regulatory framework for accounting and the conceptual framework. The essay also examines the functions of the International Financial Reporting Standards Foundation, the advantages of International Accounting Standards, and the challenges of adopting International Accounting Standards. The main aim of accounting regulation is to ensure that the public is informed about the financial status of the firm.
The regulation enables the accountants to be straightforward as chances of manipulating the financial laws are lowered. Regulation thus plays an important role in protecting the public by preventing the occurrence of fraudulent activities. The International Financial Reporting Standards is an independent body that supervises the International Accounting Standards Board (IASB).IASB on the other hand is a self-regulating body that is concerned with developing and approving the financial reporting standards. The International Accounting Standards (IAS) was established in 1973 and has representatives from the United Kingdom and other founder members. The representatives usually sit on a committee together with co-opted members.
The structure of the International Financial Reporting Standards Foundation
The International Financial Reporting standards are composed of the monitoring board, the IFRS Foundation, the Board, the IFRS Advisory Council, the IFRS Interpretations Committee, and the Working Groups.
Functions of the Monitoring Board
Usually, the Monitoring Board is comprised of 14 members who are appointed by the trustees of the IFRS Foundation. For one to be appointed as a member of the Monitoring Board, one is required to have technical skills as well as adequate knowledge of the market. The monitoring board has the role of setting the standards of IASB. It also ensures that the IFRS are developed and adopted.
The Monitoring board acts as a link between the International Financial Reporting Standards Foundation and the capital markets and they thus enhance the effectiveness of the capital markets by protecting investors, ensuring that there is sufficient information, and also raising funds. The Monitoring Board meets on monthly basis and the Board members appoint and advise the trustees. Thus, the main objective of the Monitoring Board is to enhance the IFRSF’s accountability and this, in turn, helps to maintain public confidence(Garner, et.al.2008,36-38).
Functions of the Trustees of the IFRS Foundation
The trustees of the International Financial Reporting Standards are not involved in setting the standards. They are thus involved with governing the International Accounting Standards Board. I.e. they are responsible for all the policies concerning the IASB. The trustees are also vested with the role of making budgetary and strategic decisions. In addition, the trustees have the role of appointing the International accounting Standards members.
Functions of the International Accounting Standards Board
The International Accounting Standards Board consists of i4 members who ensure that the standards are drafted for interpretation. The following are the main functions of the International Accounting Standards Board; the International Accounting Standards Board has the role of developing accounting standards of high quality to enhance transparency and comparability of information. Transparency and comparability of information help the participants in making investment decisions.
The International Accounting Standards Board is vested with the role of promoting the worldwide application of the accounting standards that are developed. The IASB is also concerned with converging the IFRS and the accounting standards that are used in a given country e.g. it has the role of converging the UK Accounting standards and the IFRS to enhance uniformity. The International Accounting Standards also play an important role in developing the international standards. The International Accounting Standards Board thus plays a vital role in assisting the users to interpret the financial statements (International Accounting Standards Committee Foundation & International Accounting Standards Board, 2008, 889).
Functions of the International Financial Reporting Standards Interpretations Committee
The International Financial Reporting Interpretations Committee commonly referred to as IFRIC is an interpretive body that is concerned with expanding the interpretive regulations on agendas that are not adequately addressed by the IFRS. The IFRIC is also concerned with interpreting divergent issues. The Trustees of the IFRS Foundation appoint the IFRIC members. Some of the IFRIC interpretations include the Restatement Approach application, the Decommissioning Interest Rights e.t.c.
Functions of the International Financial Reporting Standards Advisory Council
Usually, the International Financial Reporting Standards Advisory Council commonly referred to as the IFRSAC is responsible for advising the IASB. The IFRS is comprised of 40 members who are selected by the IFRSF Trustees to advise the International Accounting Standards Board on agenda issues. The IFRSAC thus selects the main areas that require to be addressed and also comments on key IFRS projects (Needles, & Powers, 2009, 4).
Advantages of adopting the International Accounting Standards
The following are the main advantages that a country can enjoy as a result of adopting the International Accounting Standards;
There is a need for adopting International Accounting Standards due to the considerable growth that is associated with international investment i.e. it is important to have the same methods worldwide to enhance the compatibility of investment decisions.
Adopting the International Accounting Standards is essential as a result of the multinational companies’ growth i.e. multinational companies produce accounts that cover many countries around the world and therefore, standardization between nations enhances the accounting work by making it easier and reducing costs.
Several countries across the world have their bodies of setting the standards and therefore it is important to harmonize their efforts.
Most of the developing nations cannot afford to own their bodies of setting standards and so, the International Accounting Standards can assist them by allowing them to use IAS instead of developing new standards (Jefferson, 2009, 62-66).
Limitations of Adopting the International Accounting Standards
The following are the main challenges of adopting the International Accounting Standards; usually, different countries have different accounting practices and this implies that a country may be forced to apply accounting standards that have adverse effects on that country.
Different countries have different economic and political systems implying that a country might suffer as a result of adopting the International Accounting Standards as it may lose its sovereignty. The adoption of International Accounting Standards has the effect of ceding a country control of its financial reporting and so many countries are skeptical about adopting the IAS.
There are many negative externalities as a result of the adoption of the International Accounting Standards. The act of coordinating the IAS with a country’s accounting policies is challenging (Jefferson, 2009, 62-66).
Purpose of the IFRS Framework for the Preparation and Presentation of Financial Statements.
The International Finance Reporting Standards explains the manner under which the fundamental concepts concerning the financial statements are prepared and presented to users across the globe. The International Financial Reporting Standards provides guidelines to the Board for future preparation of the financial statements. The senior leadership team in an organization is required to make their judgments in the development and application of accounting policies in a case where the interpretation or standard does not exist. The International Financial Reporting Standards framework is essential as it addresses the following;
IFRS is important as it ensures that the financial reporting is unbiased to the users of financial statements. The financial statement users include prospective investors, debtors, consumers, government among others. The IFRS provides information to the above users to enable them to come up with clear decisions concerning investment e.t.c. The users also require information concerning a firm to determine whether the firm will be profitable in the future.
The users may also require to know whether or not the senior leadership has carried out their duties effectively and efficiently i.e. stewardship accounting. The IFRS also provides the users with information concerning the firm’s economic resources as well as claims. This is important as it helps the users to determine the firm’s strengths, opportunities, weaknesses, and threats. The IFRS also enables the users to determine the changes that may occur in a firm’s economic resources and this is important as users can determine the firm’s ability to generate cash flows in the future.
The IFRS is important as it ensures that the financial statements have qualitative characteristics to be useful to the users i.e. it ensures that the financial information is relevant, comparable, timely, verifiable, material, and has faithful representation (International Accounting Standards Board, 2008, 921).
An evaluation on how the qualitative characteristics in the Framework contribute to the decisions made by investors
Investors are concerned with providing a business organization with risk capital and they are therefore interested in determining whether a business entity is capable of generating cash flows in the future. The qualitative characteristics in the framework include understandability, relevance, reliability, and comparability. With understandability, the investors should understand the financial information to make sound investment decisions.
With regards to relevance, information is regarded as relevant; it should be capable of enhancing the confirmatory and predictive value of the decisions made by the investors.
Information is regarded as reliable if it’s impartial and contains no error so that the investors can transact effectively and efficiently.
The financial information of a firm should be comparable with other entities’ information to enable the investors to have an understanding of similarities and differences that occurs. Investors require to know which entities to invest in and therefore, comparing an entity’s financial statements with another is essential (Jefferson, 2009, 62-66).
Conclusion
The accounting information helps the users in making various decisions such as investment decisions e.t.c.This emergency of the global economy in the last few years have brought about the adoption of International Accounting Standards. The International Accounting Standards have enhanced transparency of the financial statements and this has enabled the investors to make quality decisions. There are advantages as well as challenges of adopting the International Accounting Standards. The International Financial Reporting Standards play an important role in the preparation and presentation of financial statements.
Reference List
Garner, D.E et.al., 2008. Accounting and the global economy after Sarbanes-Oxley. Armonk: M.E. Sharpe.
International Accounting Standards Board., 2008. International Financial Reporting Standards IFRS. Alphen aan den Rijn: Kluwer.
International Accounting Standards Committees Foundation & International Accounting Standards Board., 2008. A Guide through International Financial Reporting Standards. Alphen aan den Rijn: Kluwer.
Jefferson, P.J.et.al., 2009. Intermediate Accounting. Stamford: Cengage Learning.
Needles, B.E. & Powers, M., 2009. International Financial Reporting Standards. Stamford: Cengage Learning.