Introduction to Accounting Regulation And Standard Setting Process
The adoption of the International Financial Reporting Standards (IFRS) has made a big change in the production of the financial report by the large public companies. The accounting standards are now being considered to be highly influenced by the politics hence the development of an international accounting standard for the financial report and extractive industries are analyzed in the assignment. The first part of the assignment here deals with the Standard setting process that was established to reduce the disparity within the accounting reporting of the extractive industries like the Royal Dutch group, BP, Exxon etc (Cortese et al.2013). The second part of the assignment deals with the evaluation of the comment letters and the identification of the best accounting theory that supports the comment letters.
Task 1
1. Evaluation of the standard-setting process and analysis of the existing doubt on the independence and faithful representation of the process
The International accounting standard setting process which is developed by the International Financial Reporting Standards (IFRS) is a process that was formally commenced in the year 1998 and was published in the year 2000 and was present for public comments till the year 2001 Deegan (2013). The main steps engaged in the standard-setting process are as follows in the financial report:
- Setting of the agenda
- Planning of the project
- Developing and publishing the discuss the paper
- Development and publishing of Exposure draft
- Developing and publishing the standard
- Process after the standard is issued
The standard setting paper considered two major types of accounting methods namely the full cost versus the successful efforts (Chen & Deng, 2011). When the paper was presented for public comment in the year 2000 than many of the extractive industries supported the successful efforts method, however, two of the industry lobbies opposed the theory and proposed that the full cost method is more effective.
Although IASB proposed that they wanted to narrow down the accounting standards to bring about a consistency of the accounting reporting procedure of the extractive industries still in the year 2004 when the actual standard was issued there was no scope of narrowing down the accounting method.
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According to Deegan (2013), IFRS was established as an independent body but the actions of the body are monitored by the committee members, the stakeholders, and the funding bodies. The accounting theory states that IFRS is a useful body for the compilation of the accounting standards. Hence the standard-setting process is also influenced by the decision of these parties as well. The group of the trustees regularly monitors the due process of IASB and reviews complain regarding the standards set by the body, assess the effectiveness of the norms mentioned in the standard-setting process. Moreover, Das et al (2006) are of the opinion that the activities of the trustees are further monitored by the stakeholders of the company. The trustees feel that the confidence of the stakeholders will increase if they get a detailed report on the daily interaction between the trustee and the IASB committee members.
Hence the regulations made by ISAB in regard to the extracting companies needed to be passed by two groups before it was published. After the publication of the report the committee had to invite the comment letters from the public which led to the rejection of some more norms by the group of extracting companies. Hence the end result was that IASB was not able to formulate the proposed accounting standards (www.ifrs.org, 2014).
According to Droms (2010), the five main accounting firms that have contributed to the accounting knowledge of the IASB are the PWC, KPMG, Ernest and Young, Deloitte and Arthur and Andersen. These accounting firms act as the funding groups for IASB. They provide the accounting body with the resources like the financial report, personnel, technical as well as new accounting provisions for the development of the new regulations in respect of the different accounting standards.
According to Abdel-Kader & Luther (2008), the committee after the publication of the issues paper undertook to review the public responses and used the responses to develop the exposure draft. The exposure draft was further provided for comment letters. After the analysis of the comment letters, the IASC board finalized the Standard setting norms. Thus in this respect, it may be said that the IASB does not operate on independent terms. It has to abide by the decisions of these regulating bodies as well.
Deegan (2006), are of the opinion that the terms comparability and transparency as mentioned in the IFRS norms are not actually followed in the real scenario. There is a difference in the view of the political and the technical practitioners regarding the accounting standard setting. The technical view supports that the best accounting expert standards should be adopted by all the firms in order to keep a consistency in the accounting practices however the political view supports that the policy decisions may be better served by the use of different practices. Hence it is seen that when IFRS proposed to use the successful efforts method for the standard accounting practices of the extracting companies then the proposed norm was not accepted by companies because they wanted to adopt the method of full costing which will help them to take the policy decisions more easily. Thus it may be analyzed that the decisions of the IFRS is highly influenced by the politics of the participating groups.
Ottaviani & Sorensen (2009), are of the opinion that previously the purpose of the IFRS board was to maintain reliability in the process of setting the standards. However, the board introduced the concept of faithful representation in the later years. The board in this respect mentioned that by the faithful representation of the facts the board meant that the board will present the information in the financial report which will be helpful for the companies to make all crucial decisions. However, Bierman (2010), are of the opinion that the decisions implemented in the standard-setting process were not done abiding the norm of faithful representation. If the process of standard setting undergoes so many changes than the faithful representation of the facts is not possible.
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Task 2
2.1. Analysis of the issues dealt with the exposure drafts or the comment letters
This part of the assignment is based on the analysis of the issues that are present in the comment letters. Five comment letters are taken for the analysis purpose. The common major issue that is present in all the comment letters is the disagreement regarding the proposed Accounting standard for revenue recognition: revenue from contracts with customers.
FASB has established a range of revenue recognition principles under the GAAP. Some of these standards as set by IFRS are the standards mentioned in the IAS18 and IAS 11 for revenue contracts. Some of the revenue standards are also made by the IASB and the FASB together.
The first comment letter as selected is the comment letter sent by G.Sean Sobers of Cadence design systems on 12th March. In accordance with the exposure draft of (ED/2011/6), the comment letter deals with the issue of time-based license agreements. Although the exposure draft explains the mentioned area, however, Cadence highlights that the recognizing revenue at a particular point in time would not reflect the economic significance of the time-based license agreement.
Issues:
The major issue that is faced by G. Sean Sobers is related to identifying the revenue at a point of time that does not reflect the economic substance.
Agreement:
Cadence has an agreement with customers and shareholders. The complexity of the financial report and project is one of the issues that highlight the revenue recognition wrongly. Therefore, change in the revenue can lead to misleading of information to the shareholders. The design system of Cadence is not much reliable to increase the risk and while negotiating with the consumers, Cadence may have the administrative burden.
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Theory:
Private Interest Theory can be effective for illustrating the above comment letters in the financial report. The private interest theory is much more reliable as Cadence is strongly focusing on the protection of the private interest of the shareholders by providing correct information about the financial report and maintaining transparency. Cadence abides by the regulation in providing best interest to shareholders. Therefore, the theory of private interest is apt for the above-mentioned comment letter.
The second comment letter was given by the Cloud computing companies who are producing service rather than the product to the customers. The comment letter company shows that they agree with the proposal made by the FASB. The comment letter also states that the companies are agreeing to the adoption of the capitalizing and amortizing of the incremental cost. However, the company expresses an issue regarding the fear of the loss incurred due to sales and commissions.
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Issues:
The issue that has been identified in the second comment letter is related to the fear of loss due to high expenses on sales and commissions.
Agreement:
The Cloud made an agreement with the board in capturing and paying the incremental cost. For meeting the costs of incremental the board has contracted with the insurance that can help in gaining contracts. Therefore, the company can be able to earn a better return on revenue that can be effective for considerably attaining the expenses of commissions and sales.
Theory:
The economic interest theory can best explain the second comment letter. The Cloud Computing Companies design the regulations themselves that can benefit the people associated with the company. The rule and regulation are set by the company itself for providing software and information to the clients. Therefore, the company can easily invite the shareholders in the decision-making process that can positively affect the sales revenue of the company.
The selected third comment deals with the comment given by Singapore accounting Standards Council in response to the draft mainly deals with the development of the proposal and includes certain reviews and amendments that should be done to the proposal. The Accounting standard board is mainly concerned about the issues like the performance obligations.
Issues:
In this comment letter, the major issues are concerned with the performance obligations that affect the perception of the consumers towards the company and their contract types. Therefore, it has been identified that the company has a robust control over the performance of the company.
Agreement:
The customers and shareholders are in agreement with the Singapore Accounting Standards Council. The customers of the company have a problem with the performance of the company that they do not fully disclose the accounting information to the shareholders of the company. For instance, the declaration of a dividend to the senior management of the company is not disclosed to the external shareholders of the company that questions the true and transparent performance of the company on the part of the other shareholders.
Theory:
The theory of private and economic interest can be used for describing the third comment. As the council is effectively working with the entities and with the related concerns thus, it can be helpful in providing the best interest of the entities and the shareholders.
The fourth comment is given Virginia society of CPA’s which is an association of 10,000 members from the different fields like the accounting, private industry, education and government sectors (Virginia Society of CPAs, 2012). The society supports the proposal but it expresses that the standards given in the proposal should be in accordance with the welfare of the public.
Issues:
The key issue that is related to the fourth comment of Virginia Society focuses on the well-being of the society. In spite of trying hard, the Virginia Society is facing problem in developing the educational sector and enhancing the quality of the society.
Agreement:
The major partner that is associated with Virginia Society is the society. The major difficulty that is faced is related to increasing the standards of the society. For instance, the second draft of Virginia has shown improvements in improving the standards of the social environment but was not fully successful as the people are least bothered towards the development of society.
Theory:
The capture theory can be applied to the explanation of fourth comment letter. The capture theory reveals that the regulatory capture occurs when the agency of regulatory works for the interest of the public and society. Therefore, Virginia society is effectively manipulating the regulations that can positively affect the public interest that can lead to the growth of the society and ultimately the economy.
The fifth comment was given by the Joint accounting bodies that are the Institute of the Chartered Accountants Australia, which includes more than 190,000 accountants internationally (Joint Accounting bodies, 2012,).The Feedback statement which was published by IASB in the year may 2014, focused on some of the issues in the project like the performance obligations, identifying credit risk, identifying significant financing components, disclosure requirements like the licensing of the property and other obligations. The issues given by this comment letter includes the premature recognition of the revenue, the meaning of the term reasonably assured in respect of the audit terms.
Issues:
The issue that is registered in the exposure draft is related to the early recognition of revenue and the performance obligation are the major concerns for the Joint Accounting bodies.
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Agreement:
There is an association between Institute of public accounts and Institute of Charted Accountants. Therefore, they are effectively working for the interest of the public and private practice and towards the governments and educational sectors all over Australia. For example, the Joint Accounting Bodies are disclosing all the investment made such as for infrastructure development, educational institute, etc for the growth of the community.
Theory:
The public interest theory can be implemented for the illustration of fifth comment letter. The Joint Accounting Bodies comprehensively focusing on sustainability for achieving the welfare community that can improve the standard and quality of the public. Therefore, the theory of public interest best describes the aspects of the exposure draft that is ED/2011/6.
Conclusion
The IFRS is the financial report body that makes the different norms and propositions in the accounting standards to provide a generally accepted accounting principle to formulate a consistency in the regulation of the accounting activities all over the world. However, the workings of IFRS are influenced largely by the political influence of the different concerned companies and regulatory bodies that will be affected by the formulation of the policy. Hence by analyzing the different comment letters and the various issues of the letters, it can be said that the IFRS needs to make the decisions independently rather than taking the opinion of the public at large because the opinion of the public is influenced by the self-interest factors.