CH3: STANDARD SETTING

:submitted to
Dr Mohamed albnan
:By
Nada abdullah
Mayar mokhtar
Afnan hatem
THE INSTITUTIONAL FRAMEWORK OF
AUSTRALIAN ACCOUNTING
ACCOUNTING STANDARDS

Accounting standards are authoritative standards for financial

reporting and are the primary source of generally accepted

.accounting principles (GAAP)

ACCOUNTING STANDARDS

Accounting standards specify how transactions and other

events are to be recognized, measured, presented and

.disclosed in financial statements

STANDARD SETTING PROCESS
RULES-BASED VERSUS PRINCIPLES-
BASED STANDARDS
 Rules-based standards are sets of detailed rules that
must be followed when preparing financial statements.

 Principles-based standards are based on a conceptual

framework that provides a broad basis for accountants to
follow instead of a list of rules.
 The focus is on the economic substance of a transaction,
engaging the professional judgement and expertise of those
preparing financial statements.

 The IASB follows a principle-based approach to standard

setting.
EVALUATE THE DISTINCTION BETWEEN RULES-
BASED AND PRINCIPLES-BASED STANDARDS
 Advantages of Rules-Based Standards:
 Improved guidance

 Increased comparability between financial statements

 Improved accuracy

 Reduced imprecision

 Reduced opportunities

 Increased verifiability

 Reduced exposure to litigation

EVALUATE THE DISTINCTION BETWEEN
RULES-BASED AND PRINCIPLES-BASED
STANDARDS
 Disadvantages of Rules-Based Standards:
 Complex, can allow confusion and even manipulation

 Circumvent unfavourable reporting.

 Standards are incomplete or even obsolete

 Auditing more difficult.

EVALUATE THE DISTINCTION BETWEEN
RULES-BASED AND PRINCIPLES-BASED
STANDARDS
 Advantages of Principles-Based Standards:
 More simple

 Supply broad guidelines

 Improve the representational faithfulness of financial

statements
 Professional judgement

 Managers are less likely to attempt earnings

management
EVALUATE THE DISTINCTION BETWEEN
RULES-BASED AND PRINCIPLES-BASED
STANDARDS
 Disadvantages of Principles-Based Standards:
 Managers may select treatments that do not reflect the
underlying economic substance.

 The judgement and choice involved in many of the

decisions mean that comparability among financial
statements may be reduced.
THEORIES OF REGULATION
 Defining Regulation:“Regulation is the policing,
according to a rule, of a subject’s choice of activity, by
an entity not directly party to or involved in the activity.”

 According to this definition , Elements of regulation

 Intention to intervene
 Restriction on choice to achieve certain goals
 Exercise of control by a party independent of those directly
involved in the activity.
SIGNALLING THEORY
 Also known as (disclosure regulation).
 Can increase their value through financial
reporting
 Companies face a competitive capital market
 Above-average better than non-reporting
 Non-reporting poorer quality than before.
 Creates a virtuous cycle
PUBLIC INTEREST THEORY
 Perfect, free-market economy.
 Economic markets are not perfect.

 Regulation is costless.

 regulation is supplied in response to the demands

CAPTURE THEORY
 Build on the evidence
 holds that regulation is supplied in response to the
demands
 People are rational utility maximisers.

 Give valuable benefits to particular groups.

 Regulation governed by the supply and demand.

BUSHFIRE THEORY
 highlights the political and public nature
 Regulations tend to arise from crises
 Resulting rules do not necessarily deal with the issues
that caused the crisis.
 Rather they gain media exposure so that politicians
are more likely to gain re-election.
IDEOLOGY THEORY OF REGULATION
 Market failure
 The role of lobbying
 Mechanism through which regulators are informed
 The effectiveness of regulation will depend on:
 The political ideologies

 The special interest lobby groups

ADVANTAGES AND DISADVANTAGES OF
REGULATION
Advantages Disadvantages
Increased efficiency in allocating Various problems arise when using
capital. regulation to achieve efficiency and
equity.

Cheaper production. Determining the optimal quantity of

information is problematic.
Check on perquisites. Regulation is difficult to reverse.

Public confidence. Communication is restricted.

Standardisation. Reporting entities are different.

Public good. There is lobbying.

Monopolisation of accounting standards.

THEORY AND ACCOUNTING
REGULATION RESEARCH
 few accounting studies applying regulatory theories to
standards setting
 The majority of such studies support a version of regulatory
capture
 The shift of accounting regulation to the private “IASB”
THE POLITICAL NATURE OF SETTING
ACCOUNTING STANDARDS

 In most democratic countries, public and private sector

participate in the process of standards setting.
CONFLICTING INTERESTS
 Management seeks favorable accounting, while
shareholders prioritize genuine performance , creating
tension. Auditors strive for objectivity, but limited
choices may be disliked by management.
IASB AND FASB DIFFERENCES
 They have distinct approaches to standards and focus on
different sectors.
CRITICISMS AGAINST IASB
 It has been accused of giving inadequate attention to the
not-for-profit and public sectors.
LOBBYING AND HARMONIZATION
 Stakeholders affected by accounting standards engage in
lobbying efforts for favorable outcomes.
 This had led to concerns over a proposed government
reporting standard, complex formats, and debates about
consolidation.
AUSTRALIAN GOVERNMENT
ACCOUNTING
 The AASB has been given the task of developing a
unified accounting standard to replace existing
government accounting rules in Australia. This
represents a significant change in government financial
reporting since the adoption of accrual accounting.
ADOPTION OF IFRS
 Australia‘S decision to adopt IFRS instead of
harmonizing with AASB standards was influenced by
political lobbying, with the ASX playing a role in
promoting IFRS adoption. This has resulted in variations
and longer financial statements.
THANK YOU