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Flashcards

1.6 Convergence Process

Ed Blocksidge Financial Accounting & Reporting ACA English 31 cards

Cards in this deck (31)

  1. 1Summarise the 'convergence process' in one sentence (1)A drive towards harmonisation of accounting standards (1)
  2. 2Which FRSs must UK companies comply with? (1)FRSs 100, 101 & 102 (1)
  3. 3Us-based entities are required to prepare their financial statements in accordance with which financial reporting standards? (1)US FASB (1)
  4. 4What are the two causes for the drive towards worldwide harmonisation of financial reporting? (4)- Increased globalisation of trade and capital markets, with the result that: (1)
    a. Management wants all group entities to produce financial statements on the same basis (1)
    b. Investors & lenders are now adopting an international approach to their activities and want to be spared the trouble of having to understand a number of different bases for the preparation of financial statements (1)
    - It is also the case that the increasing pace of information technology development now provides companies with the communications to take advantage of such harmonisation (1)
  5. 5What are the benefits from the convergence of global financial reporting? (4)- Reducing the cost of capital as investors/lenders understand all financial statements better (1)
    - Encouraging investment growth (1)
    - Improving the quality of financial reporting (1)
    - Reducing the time and cost of preparing financial statements (1)
  6. 6What are the argued costs of global convergence? (3)- The cost of changing accounting practices and systems to suit IFRS (1)
    - A perceived dilution of national sovereignty (1)
    - A concern that a desire to converge with US requirements which are really only appropriate for the very largest, international companies, which regularly raise finance on the capital markets. Such standards are just too complex, and compliance with them too expensive, for companies operating only in their domestic markets and raising the finance they need from their local banks (1)
  7. 7What are two potential explanations for the loss of momentum in global convergence in recent years? (3)- Renewed confidence in US GAAP within the USA itself (1)
    - Many US investors tend to see IFRS as a predominantly European project (1)
    - The euro crisis has not helped to persuade investors that accounting rules are in safe hands under IFRS (1)
  8. 8Summarise the EU's relationship with accounting (3)- For many years, EU has had an overall objective of creating properly functioning internal market (1)
    - Therefore set specific objective in financial arena of developing integrated & efficient operating capital market (1)
    - Adoption of internationally accepted accounting standards with few measurement options, leading to single set of internationally accepting accounting standards, is a major contribution to the achievement of this objective (1)
  9. 9Describe what the EU has done in recent years in working towards its internal market objective (3)- In 2000, the International Organisational of Securities Commissions (IOSCO) adopted a core set of IFRS for use by multi-national entities (1)
    - In June 2002 the European Comission issued a regulation requiring the adoption of IFRS for the preparation of consolidated financial statements for financial periods starting on or after 1 Jan 05 for entities incorporated in a member state and whose securities, debt or equity, are traded on a regulated market in the EU (1)
    - To maintain some political control over standards and prevent them being solely under control of unelected accountants, the European Commission set up an endorsement mechanism whereby the European Parliament and the Council of the EU must adopt new international accounting standards before companies are required to comply with them (1)
  10. 10What is IOSCO? (2)- International Organisation of Securities Commission (1)
    - Represents the regulators of securities markets and keeps a watching brief over the major regulatory issues associated with international securities in general and with multi-national disclosure and accounting in particular (1)
  11. 11From which two committees do the European Commission take advice from in deciding whether to adopt a standard? (2)- The Accounting Regulatory Committee (ARC) which is made up of representatives of member states and works at a political level (1)
    - The European Financial Reporting Advisory Group (EFRAG) which is made up of technical experts such as national standard setters, national regulators, and preparers and users of financial statements. (1)
  12. 12Specifically, what is the role of EFRAG? (2)- Provides advice to the commission on all issues relating to the application of IFRS in the EU (1) - Expected to identify early in the development of an IFRS whether the IASB proposals are going to cause significant problems within the EU (1)
  13. 13How are IFRSs enforced? (3)- IASB has no legal authority to require compliance with them (1)
    - Use of IFRS requires specific legislation in each country or on part of the EU (1)
    - Within the EU enforcement is delegated to the regulatory authorities in member states, but must be carried out in line with the enforcement principles set out by ESMA (1)
  14. 14What are the seven enforcement principles set out by ESMA? (7)- Purpose of enforcement is to protect investors & promote securities market confidence (1)
    - Enforcement shall take the form of a review to see whether IFRS have been properly complied with (1)
    - Enforcement shall be 'ex-post', in that there shall be reviews of financial statements only after they have been published (1)
    - Selection of financial statements to be reviewed should combine a risk-based approach together with sampling and/or rotation approach (1)
    - Total reliance on a risk-based approach may be acceptable, but total reliance on a rotation approach is not (1)
    - A purely reactive approach (conducting a review only when someone complains) is not acceptable (1)
    - Restatements of financial statements should be demanded where appropriate (1)
  15. 15In 2010, when the EU performed full reviews of many companies accounts, what was the most problematic area? (1)- Impairment of assets, financial and other (1)
  16. 16Descrivbe the early 2014 'Directive on Statutory Audit' (4)- Requires EU auditors to publish audit reports according to ISAs and introduce a new 'mandatory rotation' rule (1)
    - Public-interest entities will be required to put their audit out to tender every 10 years (1)
    - EU auditors will no longer be able to provide certain non-audit services to their clients (1)
    - Rules establish a cap on the fees generated for non-audit services to public-interest entities (1)
  17. 17Describe the three main bodies which regulate financial statements in the UK (3)- The Financial Conduct Authority (FCA) which is the UK regulator of financial statements. The FCA supervises the provision of information to the investing public when an entity wishes to make a public offering of its securities (1)
    - The Prudential Regulatory Authority, which regulates banks, building societies and insurance companies (1)
    - The Financial Reporting Review Panel (FRRP) (1)
  18. 18Describe the role of the FRRP (5)- Independent of the ASB but is, like it, answerable to the FRC (1)
    - Was set up to enquire into financial statements & directors' reports which appear to not comply with UK requirements (1)
    - In line with ESMA principles it adopts proactive approach to the review of all financial information within its remit (1)
    - If it considers that inappropriate accounting has been adopted, its aim is to reach an agreement with the directors for the voluntary restatement of FSs (1)
    - Failing voluntary correction, the FRRP does have the power to restate the FSs through a court order (1)
  19. 19Describe what the 'Norwalk Agreement' is? (4)- US FASB and the IASB issued the Norwalk Agreement after a joint meeting in September 2002, in which they... (1)
    - Acknowledged their commitment to the development of high quality, compatible accounting standards that could be used for both domestic & cross-border financial reporting (1)
    - Pleaded to use their best efforts to make their existing financial statements fully compatible as soon as is practicable (1)
    - Pledged to co-ordinate their future work programmes to ensure that once achieved, compatibility is maintained (1)
  20. 20Describe the developments in the convergence process since the Norwalk Agreement (6)- October 2004, agreement between IASB & FASB to develop a common conceptual framework (1), divided into two phases: a. Initial focus on particular aspects of framework such as objectives, qualitative characteristics, elements, recognition & measurements (1) b. In later stage, apply these aspects to other aspects (1)
    - Feb 06: 'A roadmap for convergence between IFRSs and US GAAP 2006-2008 Memorandum of Understanding between the FASB and IASB' was issued (1)
    - Progress on convergence was such that in Nov 07, the Securities & Exchange Comission (SEC) removed the requirement referred to above for non-US companies listed in the US and reporting under IFRS to prepare the reconciliations of profit and equity under IFRS to the amounts under US GAAP (1)
    - Nov 08: SEC produced for comment its proposals for a 'Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by US Issuers'. (1)
  21. 21Describe in more detail the 'Roadmap for Potential Use.... ' (5)- Proposals revised in 2010 and npow set out six headings on which progress needs to be made (1), including:
    - 'Further Improvements to IFRS' (1)
    - 'Changes to the accountability and funding arrangements for the IFRS arrangements for the IFRS Foundation, to demonstrate beyond doubt its independence' (1)
    - Investor understanding and education regarding IFRS (1)
    - If these proposals are adopted and assuming that SEC judges that significant progress has been made, then the use of IFRS, as opposed to US financial reporting standards, would become compulsory for all US entities, starting approximately in 2015/2016 (1)
  22. 22What are the four characteristics of the common conceptual framework? (4)1. Complete and internally consistent (1)
    2. An improvement on the existing frameworks of both boards (1)
    3. Capable of providing a sounds foundation for developing future accounting standards (1)
    4. Essential to fulfilling the boards' goal of developing standards that:
    a. Are principles-based
    b. Are internally consistent
    c. Are nationally converged, and
    d. Lead to financial reporting that provides the information needed for investment, credit and similar decisions
    (1)
  23. 23What are the eight phases for conducting the common conceptual framework? (8)A - Objectives and qualitative characteristics (1)
    B - Definitions of elements, recognition and de-recognition (1)
    C - Measurement (1)
    D - Reporting entity concept (1)
    E - Boundaries of financial reporting and presentation and disclosure (1)
    F - Purpose and status of the framework (1)
    G - Application to not-for-profit entities (1)
    H - Remaining issues, if any (1)
  24. 24Describe the progress of the common conceptual framework to date (6)- Phase A completed & implemented (1) - Exposure draft in respect of Phase D published in March 2010 (1) - Work had started in relation to B & C also (1) - Late 2010: IASB deferred work on the joint project until after more urgent convergence projects were finalised (1) - Project reactivated in Sep 2012 as an IASB ONLY project (1) - In July 2013 the IASB issued a discussion paper as a first step towards issuing a revised conceptual framework (1)
  25. 25Describe the three new standards issued by the FRC to recitfy the outdated UK GAAP in 2012/2013? (3)FRS 100 Application of Financial Reporting Requirements - issued Nov 12 (1)
    FRS 101 Reduced disclosure framework - issued Nov 12 (1)
    FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland - issued March 2013 (1)
  26. 26Describe the purpose of FRS100, FRS101 and FRS102 (3)FRS100: Provides rules and guidance on how to select the appropriate accounting framework for a particular entity or group (1)
    FRS101: Provides a reduced disclosure framework for qualifying entities, such as subisdiaries of groups reporting under IFRS (1)
    FRS102: Replaces the majority of UK accounting standards, adopts an IFRS-based framework and improves accounting for financial instruments (1)
  27. 27What are the objectives & intended effects of the new UK standards stated by the FRC? (1)'To enable users of accounts to receive high-quality understandable financial reporting proportionate to the size and complexity of the entity and users' information needs' (1)
  28. 28How is FRS 102 structured? (2)- 32 chapters based mainly on the IFRS for SMEs with some cross-reference to full IFRS (1)
    - Disclosure requirements are less than for full IFRS (1)
  29. 29Give four of the changes that will impact UK companies on moving to FRS 102 (4)- New requirements for financial instruments, bringing all derivatives on balance sheet at fair value (1)
    - More intangible assets to be recognized separately from goodwill when there is a business combination (1)
    - Useful life of goodwill and intangible assets not to exceed five years when no reliable estimate can be made (1)
    - Merger accounting only permitted in limited cases (1)
  30. 30For when do the new accounting standards FRS 100-101-102 become mandatory? (1)- AP beginning on or after 1 Jan 15 (1)
  31. 31In which three ways should UK companies benefit from the transition to FRS 102? (3)- For private companies that are looking for venture capital, private equity or to make the transition to a public market, moving to IFRS- based reporting will be an advantage to potential investors in terms of making it easier to compare financial performance (1)
    - Improved transparency against international companies (1)
    - Assistance to overseas trade development with international partners (1)

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ACA Financial Accounting & Reporting (Reporting Framework & Ethics) Flashcards on 1.6 Convergence Process, created by Ed Blocksidge on 27/12/2014.
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Ed Blocksidge
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