ACCA Applied Knowledge · Financial Accounting

The regulatory framework: formula sheet

Full chapter guide

Key formulas

Company law: Made by government → legally binding → penalties for breach; Covers records, filing, audit, directors' duties and dividends. Varies by country.
Accounting standards: Issued by IASB → detailed recognition, measurement, presentation, disclosure; Binding only where law or a regulator requires them.
Listing rules: Set by stock exchange → apply only to listed companies → extra requirements; Sanctions include suspension or delisting rather than criminal penalties.
Priority if there is a conflict: National law > standards (where the law overrides); Standards operate through the law of the country, so law normally prevails.
IFRS Foundation: Oversight + governance + funding; Appoints members of the IASB, IFRIC and Advisory Council. Does not issue standards.
IASB: Develops and issues IFRS Accounting Standards; The standard-setter. It uses due process and public consultation.
IFRS Interpretations Committee (IFRIC): Interprets existing standards and issues IFRIC Interpretations; Deals with application issues where practice varies or wording is unclear. Interpretations are approved by the IASB.
IFRS Advisory Council: Advises the IASB and the Foundation; Strategic input from a wide range of stakeholders. No power to issue or approve standards.
Sequence of due process: Agenda setting → research / discussion paper (if used) → exposure draft → final IFRS → post-implementation review; Know the order. The discussion paper is optional; the exposure draft is the stage where a specific proposal is published for comment.
Discussion paper vs exposure draft: Discussion paper = ideas and options; Exposure draft = specific proposed requirements; A discussion paper asks 'what should we do?'. An exposure draft asks 'do you agree with what we propose?'.
Purpose of due process: Transparency + consultation + evidence = credible standards; Use this idea to answer why-questions.
Principles-based approach: Broad objectives + judgement = standard applied to substance; Typical of IFRS. Strengths: flexible and harder to avoid. Weakness: possible inconsistency.
Rules-based approach: Detailed rules + bright-line tests = standard applied mechanically; Typical of US GAAP. Strengths: consistency and clear guidance. Weakness: complexity and avoidance.
Fair presentation (IAS 1): Compliance with IFRS + additional disclosure where needed = fair presentation; An entity that complies with IFRS must say so explicitly. Departure is allowed only in extremely rare cases.
Harmonisation, convergence, adoption: Harmonisation = reduce differences; Convergence = move towards IFRS; Adoption = use IFRS directly; Do not treat these three terms as identical.

Quick revision

Regulation exists to protect users, improve reliability and make company reports comparable.
Sources of regulation include company law, accounting standards and stock exchange listing rules.
Listing rules apply only to companies listed on that exchange.
The IFRS Foundation oversees and funds the standard-setting structure and appoints IASB members.
The IASB develops and issues IFRS Accounting Standards.
IFRIC issues interpretations where standards are unclear or applied inconsistently.
The IFRS Advisory Council advises the IASB and the Foundation, and gives a channel for stakeholder views.
Due process involves public consultation, so those affected can comment before a standard is final.
Principles-based standards rely on broad principles and professional judgement.
Rules-based standards give detailed rules and are more prescriptive, which can encourage avoidance by following the letter only.
Convergence aims to reduce differences between national and international standards for better comparability.
Read each question carefully for the exact body or stage asked about.

Common mistakes

Saying regulation guarantees that accounts are free from fraud or error. Fix: Say regulation reduces the risk and gives reasonable assurance. It does not guarantee accuracy.
Mixing up principal and agent. Fix: Shareholders are the principals who own. Directors are the agents who manage on their behalf.
Saying accounting standards are laws in themselves. Fix: Say standards become binding only when law or a regulator requires them.
Applying listing rules to every company. Fix: Listing rules apply only to companies listed on that exchange. Check the scenario for 'listed'.
Saying the IFRS Foundation issues IFRS Accounting Standards. Fix: Remember the Foundation oversees and funds. The IASB is the body that issues standards.
Saying the IFRS Interpretations Committee writes new standards. Fix: IFRIC only clarifies the application of existing standards and issues Interpretations, which the IASB approves.
Treating the discussion paper and exposure draft as the same thing Fix: Link the discussion paper to ideas and options, and the exposure draft to specific proposed requirements.
Saying a discussion paper is always issued Fix: State that a discussion paper is often used for larger projects but is not mandatory for all.
Saying IFRS is entirely principles-based and US GAAP is entirely rules-based. Fix: Say IFRS is generally principles-based and US GAAP generally rules-based. Both contain elements of the other.
Treating harmonisation and convergence as the same thing. Fix: Harmonisation reduces differences in general. Convergence is specifically moving national standards towards IFRS. Adoption is using IFRS directly.

Exam tips

Link every answer to a user, a problem and a remedy. Examiners reward the cause and effect chain.
Watch for absolute words such as guarantees or eliminates. They usually signal a wrong option.
In multiple response questions, select exactly the number stated and judge each option on its own.
Know the difference between principal and agent, and between comparability and reliability. These are common distractor pairs.
In objective tests, look for trigger words: 'penalty' or 'directors' duty' means law; 'recognise' or 'measure' means standards; 'listed' means listing rules.
Check whether the company is listed before choosing listing rules.
Never say standards are law in themselves. Say they are given force by law or regulators.
For multiple response questions, select exactly the number asked. Do not guess extra options.