Standard Setting: ©2018 John Wiley & Sons Australia LTD
Standard Setting: ©2018 John Wiley & Sons Australia LTD
Standard Setting: ©2018 John Wiley & Sons Australia LTD
Standard setting
• The FRC:
– The FRC is a statutory body operating within a
framework set out in the ASIC Act.
• The AASB:
– Functions of the AASB are to make accounting
standards under the Corporations Act 2001.
– This accomplishes by promoting international
standards.
Institutional framework
• Rules-based standards:
– sets of detailed rules
– must be followed when preparing financial
statements.
Rules-based versus principles-based
standards
• Principles-based standards:
– based on a conceptual framework
– provides a broad basis for accountants to follow
– focus on:
• economic substance of a transaction
• engaging professional judgement and expertise.
Advantages of rules-based standards
• Advantages:
– Improved guidance:
• when there is a lack of a clear and appropriate
principle
• where standards are inconsistent with the
conceptual frameworks.
– Increased comparability between financial
statements.
Advantages of rules-based standards
• Advantages:
– Improved accuracy with communication of:
• intentions
• requirements.
– Reduced:
• imprecision (affecting reporting)
• opportunities for earnings managements
through judgements
• exposure to litigation.
Advantages of rules-based standards
• Advantages:
– Increased:
• verifiability for auditors and regulators.
Disadvantages of rules-based standards
• Disadvantages:
– Rules-based standards can be very complex.
– Organisations can structure transactions to
circumvent unfavourable reporting.
– Standards are likely to be incomplete or even
obsolete by the time they are issued.
– Manipulated compliance with rules makes
auditing more difficult.
Advantages of principles-based standards
• Advantages:
– Principles‐based standards should be simpler.
– Broad guidelines:
• applicable to many situations
• improve the representational faithfulness of
financial statements.
– Allows use of professional judgement in assessing
the substance of a transaction.
Disadvantages of principles-based standards
• Disadvantages:
– 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
• Capture theory:
– regulation is supplied in response to the demands of
self-interested groups
– who are trying to maximise their incomes or
interests.
• People are rational utility maximisers.
• The coercive power of government can be used to give
valuable benefits to particular groups.
• Regulation can be viewed as a product that is governed
by the laws of supply and demand.
‘Bushfire’ theory
• Bushfire theory:
– The political and public nature of regulatory
influences.
– Takes into account:
• the reactions of users
• society in general
• ‘failures’ of regulatory processes.
‘Bushfire’ theory
• Advantages:
– Increased efficiency in allocating capital.
– Cheaper production.
– Check on perquisites.
– Public confidence.
– Standardisation:
• comparability
• understandability.
– Public good.
Disadvantages of regulation
• Disadvantages:
– Difficult to achieve efficiency and equity.
– Determining the optimal quantity of information is
problematic.
– Regulation is difficult to reverse.
– Communication is restricted.
– Reporting entities are different.
– There is lobbying.
– Monopolisation of accounting standards.
Theory and accounting regulation research
• Academics:
– Lack of comment on exposure drafts.
Lobby groups in Australia