The regulatory framework
In an earlier chapter, we established that financial reporting follows a structured regulatory framework. That framework helps ensure financial statements are prepared consistently, transparently, and in a way that allows comparison across organizations and jurisdictions. This chapter looks at the international regulatory system that governs financial reporting, with a focus on the key institutions and standards that shape how companies prepare and present financial information.
Learning objectives
By the end of this chapter, you should be able to:
- Explain the purpose and objectives of the regulatory system, including the roles of the IFRS Foundation, International Accounting Standards Board (IASB), IFRS® Advisory Council, IFRS Interpretations Committee (IFRIC), and International Sustainability Standards Board (ISSB™).
- Explain the role of IFRS® Accounting Standards in preparing financial statements.
Purpose of regulatory framework
The regulatory system for financial reporting exists for several practical reasons. It helps different organizations report in a way that users can understand, trust, and compare.
The regulatory system for financial reporting exists to serve several critical purposes:
- Establishes uniform accounting principles, ensuring consistent financial statement preparation methods.
- Ensures all necessary disclosures that help in building stakeholder trust in financial information.
- Enables comparison of financial statements across organizations, industries, and countries.
- Ensures accurate, complete, timely information for investors, creditors, and the public.
- Promotes worldwide accounting uniformity, facilitating international investment and cross-border trade.
The international financial reporting regulatory system is mainly composed of the IFRS Foundation and its related bodies. Understanding how these organizations fit together helps you see where standards come from and how they are supported in practice.
The IFRS Foundation
IFRS is an acronym for International Financial Reporting Standards. The IFRS Foundation is an independent, not-for-profit organization established to develop a single set of high-quality, understandable, enforceable, and globally accepted accounting standards. The Foundation oversees its standard-setting bodies, which are the International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB).
The objectives of the Foundation are to:
- Provide oversight and strategic direction for standard-setting activities
- Ensure the independence and accountability of standard-setting processes
- Secure funding for the organization’s operations
- Promote the adoption and consistent application of IFRS Standards worldwide
- Engage with stakeholders to understand emerging financial reporting issues
The Foundation operates through a governance structure that includes a 22-member Board of Trustees responsible for strategic oversight, funding, and governance arrangements. Among other responsibilities, they:
- Appoint the members of the IASB and establish their contracts of service and performance criteria;
- Appoint the members of the IFRS Interpretations Committee (the Interpretations Committee) and the IFRS Advisory Council (the Advisory Council);
- Foster and review the development of educational programmes and materials that are consistent with the IFRS Foundation’s objectives.
For further reading, the IFRS Foundation provides additional insight into its structure and mandate; however, all examination-relevant content has been comprehensively covered in this chapter.
International Accounting Standards Board (IASB)
The IASB is the primary accounting standard-setting body of the IFRS Foundation. It is responsible for developing and publishing accounting standards, including the Accounting Standards for SMEs. Members of the board include experienced preparers, auditors, users of financial statements, and accounting educators from different jurisdictions. They are appointed by the Trustees of the IFRS Foundation.
Standards issued by the IASB’s predecessor, the International Accounting Standards Committee (IASC), are referred to as International Accounting Standards (IASs). When the IASB replaced the IASC in 2001, it adopted these IASs, and the new standards it has issued since are referred to as International Financial Reporting Standards (IFRSs). Together, the IASs still in issue, the IFRSs, and their interpretations are collectively referred to as IFRS Standards. The IASB’s decision to adopt, rather than replace, the existing IASs shows the continuity of the standard-setting process.
We will later explore some of these standards, both IASs and IFRSs.
For further reading, the IASB provides additional insight into its structure and mandate; however, all examination-relevant content has been comprehensively covered in this chapter.
The transition from IAS to IFRS
The International Accounting Standards Committee (IASC), formed in 1973, issued standards known as International Accounting Standards (IASs). In April 2001, the International Accounting Standards Board (IASB) replaced the IASC as the standard-setter and adopted all the IASs then in force. The IASB did not rename these standards: the IASs retained their titles and numbers, and many, such as IAS 1 and IAS 16, remain in force today.
New standards issued by the IASB are called International Financial Reporting Standards (IFRSs), beginning with IFRS 1 in 2003. Over time, some IASs have been replaced by new IFRSs on the same subject; for example, IFRS 9 replaced IAS 39, IFRS 15 replaced IAS 18, and IFRS 16 replaced IAS 17. Together, the IASs still in issue, the IFRSs, and their related interpretations (SIC and IFRIC) are collectively referred to as IFRS Standards.
Below is a list of effective IAS standards (issued by the IASC and adopted by the IASB) and IFRS standards (issued by the IASB).
| IAS no. | Title |
|---|---|
| IAS 1 | Presentation of financial statements (to be replaced by IFRS 18 effective 1 January 2027) |
| IAS 2 | Inventories |
| IAS 7 | Statement of cash flows |
| IAS 8 | Accounting policies, changes in accounting estimates and errors |
| IAS 10 | Events after the reporting period |
| IAS 12 | Income taxes |
| IAS 16 | Property, plant and equipment |
| IAS 19 | Employee benefits |
| IAS 20 | Accounting for government Grants and disclosure of government Assistance |
| IAS 21 | The effects of changes in foreign exchange rates |
| IAS 23 | Borrowing costs |
| IAS 24 | Related party disclosures |
| IAS 26 | Accounting and reporting by retirement benefit plans |
| IAS 27 | Separate financial statements |
| IAS 28 | Investments in associates and joint ventures |
| IAS 29 | Financial reporting in hyperinflationary economies |
| IAS 32 | Financial instruments: presentation |
| IAS 33 | Earnings per share |
| IAS 34 | Interim financial reporting |
| IAS 36 | Impairment of assets |
| IAS 37 | Provisions, contingent liabilities and contingent assets |
| IAS 38 | Intangible assets |
| IAS 40 | Investment property |
| IAS 41 | Agriculture |
| IFRS no. | Title |
|---|---|
| IFRS 1 | First-time adoption of International Financial Reporting Standards |
| IFRS 2 | Share-based payment |
| IFRS 3 | Business combinations |
| IFRS 5 | Non-current assets held for sale and discontinued operations |
| IFRS 6 | Exploration for and evaluation of mineral resources |
| IFRS 7 | Financial instruments: disclosures |
| IFRS 8 | Operating segments |
| IFRS 9 | Financial instruments |
| IFRS 10 | Consolidated financial statements |
| IFRS 11 | Joint arrangements |
| IFRS 12 | Disclosure of interests in other entities |
| IFRS 13 | Fair value measurement |
| IFRS 14 | Regulatory deferral accounts |
| IFRS 15 | Revenue from contracts with customers |
| IFRS 16 | Leases |
| IFRS 17 | Insurance contracts |
| IFRS 18 | Presentation and disclosure in financial statements |
International Sustainability Standards Board (ISSB)
As sustainability reporting expanded and more jurisdictions and regional blocs created sustainability-related reporting requirements, the Trustees of the IFRS Foundation announced the formation of the International Sustainability Standards Board (ISSB) on 3rd November 2021 in response to strong market demand. The ISSB plays a role similar to the IASB, but its focus is on developing and publishing sustainability standards.
At the time this material was developed, IFRS S1 and IFRS S2 were the only sustainability disclosure standards issued by the ISSB.
- IFRS S1 - Requires companies to disclose general sustainability-related financial information.
- IFRS S2 - Requires companies to disclose climate-related financial risks and opportunities.
For further reading, the ISSB provides additional insight into its structure and mandate; however, all examination-relevant content has been comprehensively covered in this chapter.
IFRS Advisory Council
The IFRS Advisory Council provides strategic advice to the IFRS Foundation, the IASB, and the ISSB. For further reading, the IFRS Advisory Council provides additional insight; however, all examination-relevant content has been comprehensively covered in this chapter.
IFRS Interpretations Committee (formerly IFRIC)
The committee works with the IASB to maintain and support the consistent application of IFRS Accounting Standards. They support consistency by:
- Developing interpretations of existing IFRS standards (usually called IFRIC Interpretations)
- Addressing financial reporting issues not explicitly covered in current standards
- Providing timely clarifications on complex accounting treatments
For further reading, the IFRS Interpretations Committee provides additional insight; however, all examination-relevant content has been comprehensively covered in this chapter.
Role of IFRS Accounting Standards
IFRS Accounting Standards provide a comprehensive global framework for financial reporting. They set out detailed requirements for recognizing, measuring, presenting, and disclosing financial information. By applying the same standards across different jurisdictions, financial statements become more transparent and comparable.
This comparability supports:
- Intra-entity comparisons (for example, year-on-year analysis within the same company)
- Inter-entity comparisons (for example, comparing different companies)
The regulations provide external users with a reliable basis for decision-making, which supports confidence in the content of the financial statements (notwithstanding the purpose of the audit). Through rigorous application, IFRS Standards promote a standardized approach to financial reporting and support clearer evaluation of firms’ financial performance across different jurisdictions.