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The International Accounting Standards Board is organized under an independent foundation named the IFRS Foundation. The IFRS Foundation is the legal entity under which the IASB operates. The Foundation is governed by a board of 22 trustees. The main objective of IFRS Foundation is to prepare a set of high quality standards and it performs via International Accounting Standards Board (IASB).
The whole IFRS Foundation structure include the three main different parts: the first part is Monitoring Board. And the second sub-structure is the part for IFRS Foundation and International Accounting Standards Board (IASB), then the final sub-structure is International Financial Reporting Interpretations Committee (IFRIC) IFRS Advisory Council and Working Groups.
As the picture showed, the whole IFRS Foundation structure are related and interaction with each other. These parts are bound together by their interdependence and make its system more effective and efficiency. It's a system and their interdependency is among the system. Such as the Monitoring Board can appointed and approve advice to trustees and meet trustees annually, and in opposite, the IFRS Foundation's trustees need to report to Monitoring Board annually. The IFRS Foundation also appointed members of IASB, the members of IASB inform trustees about the result of works. The IFRS Advisory Council and Working groups advise the trustees and IASB. Furthermore, the IFRIC provide the guidance for IFRS. As the picture showed, the whole system are relating and interacting to each other.
Next, it's the each constituent bodies' main function.
The Monitoring Board is to serve as a mechanism for common linking between capital markets authorities and IFRS Foundation, then it facilitates the ability of capital market authorities that allow or require the use of IFRS in their power range to efficency discharge their mandates relating to investor protection, market integrity and capital formation.
The Monitoring Board plays a very important role as it serves as an crucial linking between the Trustees and the Public Authorities. And it also approves and appoints Trustees according to the guidelines set out in the IFRS Foundation Constitution. The Monitoring Board also are responsible to review and provide the suggestions to the Trustees on their implement of the duty. The Trustees will also make an annual written report to the Monitoring Board.
IFRS Foundation is responsible for the financial and organizational aspects of setting and monitoring standards and overall policy issues. It need to oversees the work of the IASB but dies not get involved in the detail of standard setting.
The IASB is also under the IFRS Foundation Constitution, the IASB has complete responsibility for all technical matters of the IFRS Foundation. The IASB is responsible for all standard setting activities, including the development and adopting of IFRS. IASB is found in order to set the high quality, easy understandable and enforceable global accounting standards and then can prove the high quality, transparent and comparable information to investors and other users who need to make economic decisions.
IFRS Advisory Council
IFRS Advisory Council is also appointed by Trustees and serves as a structure that provides suggestions and advice to IFRS Foundation and IASB. First of all, it is part of Consitution to use it advice. Secondly, it also administers a forum for the IASB to consult a wide range of interested parties which affected by the IASB's work. So IFRS Advisory Council is very important to be consulted when there is a standard setting process or another major project.
IFRS Interpretations Committee
IFRS Interpretation is a body serves to interpret existing standards, to give guidance and gives guidance on areas of reporting not covered by an existing standard.
IASB also forms a Working Group that serve as minor advisory councils providing their advice and views on agenda projects.
Question 2: Evaluate the advantages to inventors of the international convergence of accounting standards.
The international convergence of accounting standards refers to the goal of establishing a single set of high-quality accounting standards to be used internationally, and the efforts of standard-setter, particularly the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), towards achieving that goal. (FASB, 2012) The international convergence of accounting standards is also important for the inventors; they would get more advantages following the accounting.
First, it is advantage for the inventors get financial information and compare the financial position and performance of companies. Information is important for the investors; it related them to make decision whether to buy, hold or sell investments in an entity and to assess the entity's ability to pay dividends. The information that especially from the financial statement has become the resource for investors, under the international convergence of accounting standards investors will easy and fast to achieve information because all firms show the information in their financial statement with same method. And also it increase investors ability to compare the financial position and performance of firms which in the different countries. For example, under the international accounting standard, a Malaysia investor can easy to invest in America. Because he can get the relevant information easy and keep the information is reliable, at the same time he can analysis the information and compare different firms' financial position and performance, then he can decide which company he would invest. However, if without standards, the information presented in financial statements is calculated using different methods. Investors will hard to get information or the information less reliable, and also making comparisons becomes less reliable unfair. It would affect investor make wrong investment decision.
Second, following the international convergence of accounting standards can help investors reduce risk during the investing. Investors cannot easily interpret the given countries' national financial reports. They are very reluctant to invest in companies without clear financials. This situation may give the high risk to invest in companies without easily accessible, clear financial reports. However, the international convergence of accounting standards gives investors benefit to easily understand the given countries' national financial reports and reduce potential investing risk. Because this standard is one size standard it be used in the whole world. The international convergence of accounting standard shows the accounting system more strong, and trend the companies following this standard will show their financial report that all investors who can more understandable, then the risk can be avoided.
Third, it benefits investors reduce transaction costs. Transaction cost is a cost incurred in making an economic exchange, and it covers a wide range: communication charges, legal fees, informational cost of finding the price, quality, and durability, etc. Actually, the increase of transaction cost may lead the investors make ineffective investing and get low profit. However, following the international convergence of accounting standard will help investors solve this problem. Because this is the system of accounting standard, it has more stringent management of transaction costs, and this management cause the transaction cost reduce, then increase the profit or potential opportunity for investors. For example: Applying international accounting standards may also decrease the costs of data processing systems since it supersedes to store and process differed data. Since the standardized the financial data is base on the higher the benefit gained. The date processing systems may affect stock prices since bring the profit. The international convergence of accounting standard may enhance cross-border investments, increasing their benefits. Since accounting standards may enhance the ability of forecasting profit rate, it could act as potential opportunity for investors.
In conclusion, the international convergence of accounting is advantage for the investors; it is giving them reliable information, helping them gain strong ability to analysis and compare, reducing the risk and cost for them. The adoption of the international convergence of accounting results open up a range of new investment opportunities to investor all over the world.
Question 3: The IASB conceptual framework ( revised September 2010) identifies the qualitative characteristics of relevance and faithful representation as attributes of useful financial information. Explain what is meant by relevance and faithful representation and how they contribute to making financial information useful.
The IASB and the FASB have a joint meeting on October 2004, they want to combine their respective agendas to a jonint project to become a common conceptual framework. Then then two of boards could use it as the common accounting standards. This accounting standards would based on both of IASB Framework and the FASB Conceptual Framework.
The Conceptual Framework is " a coherent system of interrelated objectives and fundamental concepts that prescribes the nature, function and limites of financial accounting and reporting and that is expected to lead to consistent guidance. It is intended to serve the public interest by providing structure and direction to financial accounting and reporting to facilitate the provision of unbiased financial and related information" (FASB,2010) THE Conceptual Framework pursues two main objectives: (1) to assist standard setters when developing a standard and (2) to be useful for prctitioners (Chirstensen,2010)
This Framework had formed the concepts of the preparation and presentation of financial statement for primary users. Furthermore, framework is purposely assist the board of IASB in developing new standards and reviewing existing ones, and assist in harmonising accounting standards and procedures. Assisting prepares of financial statements in applying Accounting Standards and in dealing with topics that have yet to form the subject of an Accounting Standards. In additional, it also assists auditors in forming an opinion as to whether financial statements conform to Accounting Standards. For the users, it is helping them in interpreting financial statement. Last, the Framework is providing those interested in the work of IASB with information about its processing to the formulation of accounting standards.
The purpose of the financial reporting is generally providing significant financial information to external users who are investors, employees, lenders, supplier and other creditors, customers, government, agencies and the public. The information presented is about the financial position, performance, and the changes in financial position.Most users use the information to make correct decision in which holding, selling, or buying equity or debt instruments and,settling or providing loans or other forms of credit.
In addition, a reporting entity's economic resources provided from the financial information isabout the financial position of the reporting entity. This information against the reporting entity is useful to external users in making economic decisions. From the IASB framework stated that, for making economic decision, the general purpose financial reports cannot provide enough all the information to the decision maker, because the relevant information from other sources also has to take into consideration.
Financial statement must be met the common information which is needed by all users.As providers of risk capital to the enterprise, investors need more comprehensive information than other users. Therefore, a prepared of financial statement can satisfy and meet the needs of all the users for taking corrective action in future.
According to framework, the qualitative characteristics are attributes to provideusefulness informationabout the reporting entity to external users tomakecorrect decisions in financial report. Presented financial information is relevant and represents faithfully if it is to be useful.
The other usefulness qualitative characteristics which enhancing the financial information, they are comparable, verifiable, timely and understandable. Furthermore, financial information must be approached by the fundamental decision-specific qualities of relevance and faithful representation if it is to be useful.
In accounting, the term relevance means it will make a difference to a decision maker.The information can help the users to evaluate the past, present or future events to make a corrective decision which benefit them with their evaluation.Financial information hasthe capability of predictive value, confirmatory value in different decision-making.
The confirmatory value andpredictive value are interrelated from financial information. For example, users can estimate the adverse situation of the company and take corrective action to obtain advantages from the financial information in which the structure and current level of assets holdings in the company. Furthermore, a confirmatory value is playing a role in respect of past predictions about the information of the enterprise. For instance, how the enterprise be structuredand the outcomesof operation have been planned. (AccountingCoach, 2004)
The relevant information is influenced by its materiality. Materiality is a part of specific entity basedon the relevant items to which the relevance information shown in the entity's financial report.
There is an agreement between description, measurement and the phenomenon that they are going to concern. For instance, the term of inventory in the Statement of Financial Position (SOFP) is understood by primary users that it represents the main goods of sale in the business. However, it may be short of faithful representation if it represents the machines used to produce inventory.
For more details of faithful representation,the information is required to be complete, neutral, and free from material error. A depiction of an economic phenomenon is completed when all necessary information is faithfully representing the economic phenomena. In additional, users can be misleading by the error portion of the information into fault depiction.
Faithful representation also indicates the free from bias in the financial information which will not affect the predetermined in the result of decision making. Though neutrality is an important term of reliability on accounting standards, users may estimate uncertainty financial information included in financial statement which the information present in the financial statement cannot be perfectly accurate. Therefore, useful information should be free from material error since we could not expect all measurement is free-error.
To sum up, a statement of financial position should represent faithfully in the transactions and other events that give rise to assets, liability and owners' equity and an income statement should represent faithfully the transactions that give rise to income and expenditure in the period. Therefore, a transaction or other event is faithfully represented in the financial statement if the way in which it is recognized, measured and presented in those statements corresponds closely to the effect of the transaction or event.
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