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Learning Objectives
Explain and define an accounting standard
Evaluate the distinction between rules-based and principles-based standards
Apply the theories and concept of regulation to the production of accounting information
Analyse standard setting as a political process
Understand the benefits and challenges of harmonisation of accounting standards
Understand what constitutes an event occurring after the end of the reporting period, and how to deal
with an adjusting event and a non-adjusting event after the reporting period
1
ACF3100 Advanced Financial Accounting
Quiz
The IFRS requires that a lease should be capitalised as an asset and a liability when it transfers substantially all
the risks and rewards to the lessee. The IFRS contains no numerical or other technical rules surrounding that
vague principle, which is itself based on the principle of substance over form.
In order to make the same principle practicable and auditable in the U.S., SFAS 13 requires capitalisation when
any one of four technical tests are satisfied, including cases where the length of the lease equals or exceeds 75
percent of the useful life of the asset or where the present value of the lease payments equals or exceeds 90
percent of the fair value of the asset.
IFRS Principles-based
US GAAP Rules-based
AASB Principles-based
Defining Regulation
Regulation is the policing, according to a rule, of a subjects choice of activity, by an entity not directly part to or
involved in the activity
Elements of Regulation
Intention to intervene
Restriction on choice to achieve certain goals
Exercise of control by a party independent of those directly involved the activity
Theories of Regulation
Accounting information is a public good
Therefore, some argue it is likely to be under-produced without regulation
Others suggest supply would exist without regulation
There are competing theories regarding the need for and intention of regulation
Signalling Theory
Suggests reporting entities can increase their value through financial reporting.
2
ACF3100 Advanced Financial Accounting
Capture Theory
Capture theory holds that regulation is supplied in response to the demands of self-interested groups
trying to maximise the incomes or interests of their members
o People are rational utility maximisers
o The coercive power of government can be used to give valuable benefits to particular groups
o Regulation can be viewed as a product that is governed by the laws of supply and demand
Lobbying
Those affected by accounting standards have an incentive to lobby standard setters to achieve a
favourable outcome
Lobbying is viewed as a mechanism through which regulators are informed about policy issues
Those affected must decide:
o Whether they should lobby
o Which method of lobbying they should use
o When they should lobby
o What arguments they should use to support their position
3
ACF3100 Advanced Financial Accounting
Disadvantages of Regulation
Difficult to achieve efficiency and equity: what may benefit one party may not benefit another eg. LIFO
(not currently in Aus) may benefit one party but will not benefit another
Determining the optimal quantity of information is problematic: what is optimal for one party may not
be enough for another every firm is unique and regulation = one size fits all approach
Regulating is difficult to reverse
Communication is restricted
Reporting entities are different
There is lobbying
4
ACF3100 Advanced Financial Accounting
Accounting Harmonisation
Benefits (outweigh the problems)
International comparability
Reduced cost of capital:
Reduced conflicting reporting requirements: good for MNCs
Problems
Various methods of implementation lead to inconsistencies
Listed entities underestimated the complexities, effects and costs of IFRSs: eg. costs of intangible
assets likely to change, effects R&D companies
Compromise leads to diversity