Standard-setting bodies, such as IASB and FASB, are self-regulated private organizations that develop accounting standards. Regulating authorities, such as the Securities and Exchange Commission (SEC), are government bodies who have the legal authority to enforce financial reporting requirements and adopt (or establish) accounting standards. Regulators can overrule the private sector standard-setting bodies.
Accounting standards boards
Accounting standard boards are typically independent, private, not-for-profit organizations. IASB has developed the International Financial Reporting Standards (IFRS) and International Accounting Standards (IASs). Its members are appointed by the IFRS Foundation and facilitated by advisory bodies. A typical standard-setting process involves identification of an issue, publishing an exposure draft, receipt of comments from stakeholders, discussion by the board and finalization and publishing of a new standard. FASB is the US equivalent of IASB which develops the FAS Accounting Standards Codification, the authoritative US GAAP. SEC provides the legal cover to FASB standards and may also issue Staff Accounting Bulletins.
Regulatory bodies ensure compliance by companies in accordance with the applicable accounting standards. International Organization of Securities Commission (IOSCO) is an umbrella organization of regulators. IOSCO has published Objectives and Principles of Securities Regulation, which is recognized as a global benchmark. It states that the objective of regulation is to protect investors, ensure fair, efficient, and transparent markets, and reduce systematic risk. It also states that there should be full, accurate and timely disclosure of financial results, risks, and other material information, and that accounting standards should be of internationally acceptable quality.
The Securities and Exchange Commission
SEC, the US regulator is a member of IOSCO. Any company involved in US capital markets is subject to SEC regulations. SEC is empowered through a range of laws, including the Sarbanes-Oxley Act of 2002, which created the PCAOB to oversee auditors.
SEC has developed standardized forms to help companies comply with US securities laws. These include:
Securities Offerings Registration Statement: A statement filed by companies issuing new securities which typically contains information about securities being offered, the relationship of the new securities to existing securities, audited financial statements, risk factors involved in the business, etc.
Form 10-K (for US companies), 20-F and 40-F (for others): These annual filings requiring a comprehensive overview of the company regarding business, financial disclosures, legal proceedings, historical summary, management discussion and analysis and audited financial statements. While Form 10-K is a legal document, many companies often integrate it with an annual report.
- Proxy Statement: Companies distribute statements to shareholders together with the invitation to the company’s meetings. They often allow shareholders to appoint a proxy to vote on their behalf. They contain information concerning the matter to be put to vote together with shareholding patterns, information about directors, etc.
Form 10-Q (and 6-K for non-US companies): They relate to interim periods and contain unaudited condensed financial statements for the interim period together with other information.
In addition to the periodic filings discussed above, companies file other forms and reports, such as Form 8-K, used to report material corporate events such as acquisitions or disposal of corporate assets, etc.; Form 3, 4, 5 and 144, used to report matters related to beneficial ownership of securities (such as directors, shareholders with greater than 10% stake); and Form 11-K, which is an annual report of employee stock purchases, etc.
In the European Union, each country regulates capital markets in its jurisdiction. Consolidated financial statements of listed companies in Europe are prepared in accordance with IFRS. New standards are adopted after a thorough consultation.
You are a member of a standard-setting body that uses the IASB Conceptual Framework as the guiding principle. Which of the following is most likely a valid reason why you should not require discounting of temporary differences in calculating deferred tax assets or liabilities?
- It would impair understandability of financial statements.
- The cost of such calculations would exceed any improvement in the relevance of the information.
- Such a complex calculation would impair timeliness of information.
B is correct. Financial reporting should be conducted in the context of cost-benefit analysis. A is incorrect because understandability does not require omission of some procedures just because they are complex and difficult to understand.
According to the IASB Conceptual Framework, which of the following is an enhancing qualitative characteristic of financial reports?
- Faithful presentation
C is correct. Relevant and faithful presentation are the fundamental qualitative characteristics while comparability, verifiability, timeliness, and understandability are the four enhancing qualitative characteristics.