MODULE 2 ACCOUNTING AND REPORTING STANDARDS I

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Introduction
This module examines the IFRS Foundation/IASB structure and organs involved in the
standard setting process. It also discusses the due process and goes further to look at the role
of the Financial Reporting Council in financial reporting in Nigeria. The module finally looks
at two standards that are foundational in financial reporting, that is, IAS 8 and IFRS 1.

General Objectives
By the end of this module, students should be able to:
1. Identify and explain the organs involved in the standard setting process and their
respective roles.
2. Describe the required accounting process for first time adoption of IFRS.

3. Distinguish between change in accounting policy and change in estimates

4.account for changes in accounting policies, changes in estimates and prior period errors.

Unit 1 IASB STRUCTURE AND DUE PROCESS

Introduction

In this unit, we examine the history of IASB, its structure, the organs involved in setting
accounting standards and the roles of these organs in the process. It also examines the pros and
cons of harmonisation. The unit finally presented the stages involved in setting accounting
standards – the due process.

Specific Objectives
By the end of this unit, students should be able to:

1. Explain the relationship between the local standard and international standards.
2. Trace the history of IASB
3. Explain the reason for converging to IFRS and the pros and cons of the move
4. Discuss the IASB structure;
5. Discuss the standard setting processes.

1.1 Preamble

The CAMA 2020 gives general provisions for the preparation and presentation of financial
statements. It does not give guidelines on the treatment/presentation of items subject to
alternative treatments in the financial statements. Therefore, to ensure uniformity in the
presentation of financial statements and to enhance comparability of the financial statements
of entities within the same industry and between periods, the accounting standards become
relevant, provided such standards do not conflict with the provisions of the Companies Act.
The application of the standards also helps to ensure that minimum financial information is
provided to users of financial statements to enable them make reasonable economic decisions.

All IAS and IFRS adopted by FRCN, where relevant and appropriate need be applied by
reporting entities in Nigeria in the preparation and presentation of their financial statements.

Accounting standards are rules/principles that govern the manner in which specific
items/business transactions of entities are reported to users of financial information.

1.2 Brief History of IASB

The International Accounting Standards Committee (IASC) was set up in 1973 as an

independent, private sector body to set Accounting standards to be used by preparers of
financial statements around the world. The membership consisted of representatives from
accountancy bodies from various parts of the world – 152 organizations from 112 countries by
2000.

In 1997, a strategy working party was formed to re-examine the IASC’s structure and strategy.
In 1999, the Working Party recommended replacing the part-time IASC with a full-time
International Accounting Standards Board, strengthened due process, greater resources and
complete independence. By July 1 2000, a new IASC constitution took effect. On April 1,
2001, the IASB assumed accounting standard-setting responsibilities. On 1 July 2001, the
IASC foundation was re-named the IFRS Foundation.
1.3 Objectives of IASB

The objectives of IASB are:

1. To develop in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and
comparable information in financial statements and other financial reporting to help
participants in the world’s capital markets and other users make economic decisions.
2. To promote the use and rigorous application of those standards
3. To take account of the special needs of small and medium sizes entities and emerging
economies; and
4. To bring about convergence of national accounting standards and international financial
reporting standards of high quality.

1.4 Convergence of accounting standards

Convergence of accounting standards refers to the goal of establishing a single set of

accounting standards that will be used internationally. This is also described as the international
harmonisation of accounting standards. Harmonisation of accounting would result in all
companies anywhere in the world reporting financial position and financial performance in the
same way with the belief being that this would lead to greater market efficiency through the
quality of the information and should make raising finance cheaper and easier.

Advantages and disadvantages of harmonisation

There are some strong arguments in favour of the harmonisation of accounting standards in all
countries of the world, and in particular for the convergence of US GAAP and IFRSs. There
are also some arguments against harmonisation - even though these are probably not as strong
as the arguments in favour.

Advantages of harmonisation

1. Investors and analysts of financial statements can make better comparisons between the
financial position, financial performance and financial prospects of entities in different
countries. This is very important, in view of the rapid growth in international investment by
institutional investors.

2 For international groups, harmonisation will simplify the preparation of group accounts. If
all entities in the group share the same accounting framework, there should be no need to make
adjustments for consolidation purposes.

3 If all entities are using the same framework for financial reporting, management should find
it easier to monitor performance within their group.
4 Global harmonisation of accounting framework may encourage growth in cross-border
trading, because entities will find it easier to assess the financial position of customers and
suppliers in other countries.

5 Access to international finance should be easier, because banks and investors in the
international financial markets will find it easier to understand the financial information
presented to them by entities wishing to raise finance.

6 Harmonisation could also lead to a reduction in cost of capital as a result of 4 and 5 above.

Disadvantages of harmonisation

1. National legal requirements may conflict with the requirements of IFRSs. Some countries
may have strict legal rules about preparing financial statements, as the statements are prepared
mainly for tax purposes. Consequently, laws may need re-writing to permit the accounting
policies required by IFRSs.

2. Some countries may believe that their framework is satisfactory or even superior to IFRSs.
This has been a problem with the US, although currently is not as much of an issue as in the
past.

3. Cultural differences across the world may mean that one set of accounting standards will not
be flexible enough to meet the needs of all users

1.5 IASB Structure

The principal body within the IFRS Foundation is the IASB, which has the sole responsibility
for establishing IFRS. Other components of the structure are the Trustees, the Monitoring
Board of capital market regulatory authorities that oversees the Foundation, the IFRS
interpretations committee and the IFRS Advisory Council.
 MONITORING BOARD
Approve and oversee Trustees

IFRS FOUNDATION
22 TRUSTEES Appoint, oversee
Review Effectiveness, Funding

BOARD 16 (max. 3 part-time)

Set technical agenda, Approve standards,
Exposure Drafts and Interpretations

IFRS Advisory Council IFRS INTERPRETATION C’TTEE14 members

SMEImplementation Grp 21 Members
Approx. 40 members

Working Groups Appoints

For major Agenda
Advises
projects
Reports to

1.5.1 IFRS FOUNDATION

The governance of the IFRS Foundation rests with its 22 members drawn from Asia/Oceania
(6), Europe (6), North America (6) and 4 from any area (subject to maintaining geographical
balance).
The IFRS Foundation’ constitution requires an appropriate balance of professional
backgrounds, including auditors, preparers, users, academics and other officials serving the
public interest.
1.5.2 MONITORING BOARD
This serves as a mechanism for formal interaction between capital markets authorities and the
IFRS Foundation. The objective is to facilitate capital market authorities that allow or require
the use of IFRSs in their jurisdictions to discharge effectively their mandate relating to investor
protection, market integrity and capital formation.
The responsibilities of the Monitoring board include:
 1. Participating in the process of appointing trustees and approving the appointment of
Trustees according to guidelines set out in the IFRS Foundation constitution.
2. Reviewing and providing advice to the trustees on their fulfillment of the
responsibilities set out in the constitution
3. Referring matters of broad public interest related to financial reporting to the IASB
through the IFRS Foundation.
1.5.3 THE IASB
The IASB is responsible for establishing IFRSs. Membership is 16: 13 will serve full time, 3
part time. The Board’s principal responsibilities are to:
Ø Develop and issue IFRSs in accordance with established due process; and
Ø Approve interpretations developed by IFRIC.
Key qualification for Board membership is professional competence and practical experience.
1.5.4 IFRS ADVISORY COUNCIL
The Advisory council provides a forum for organizations and individuals with an interest in
international financial reporting and having diverse geographical and functional backgrounds
to participate in the standard-setting process with the objectives of:
Ø Advising the board on agenda decisions and priorities in the Board’s work;
Ø Informing the board of the views of organizations and individuals on the Council on
major standard-setting projects; and
Ø Giving advice on other matters to the board and to the Trustees.
1.5.5 IFRS INTERPRETATION COMMITTEE
The interpretations Committee (formerly called IFRIC) has 14 voting members appointed by
the Trustees for terms of 3 years. Members are required to have technical expertise, possess
diversity of international business and market experience, be experienced in practical
application of IFRSs and analysis of financial statements prepared in accordance with IFRSs.
Members are not paid salaries but their expenses are reimbursed.
The committee’s responsibilities are to:
1. Interpret the application of IFRSs and provide timely guidance on financial reporting
issues not specifically addressed in IFRSs in the context of the IASB’s Conceptual
Framework for Financial Reporting in accordance with established due process and
undertake other tasks at the request of the Board.
2. Report to the Board and obtain Board approval for final interpretation.

The Local Standard Board (NASB now replaced by FRCN)

History
The NASB was formally inaugurated on September 9, 1982 with an initial membership of 8
organizations/establishments namely: CBN; FMF; NATA; NACCIMA; NBA; NSE; SEC and
ICAN.
The status (and the composition) of the Board was changed by CAMA Cap C20 LFN 2004.
Sect. 335(1) of CAMA requires that every financial statement comply with the Accounting
Standards laid down in the Statements of Accounting Standard issued from time to time by the
NASB. S.356 states that the Minister after consultation with NASB may alter accounting
requirements for the preparation and presentation of financial statements.
The Board was consequently expanded to 13 establishments and later to 14 following the
provisions of NASB Act 2003. The members up to June, 2011 were: ICAN; ANAN; FMC;
CBN; FMF; CAC; FIRS; NDIC; SEC; Auditor-General for the Federation; Accountant-
General of the Federation; CITN; NAA and NACCIMA
The NASB Act was repealed and replaced by The Financial Reporting council of Nigeria Act,
No.6, 2011, which took over the functions of the Board

Financial Reporting Council Act No.6, 2011.

This Act was enacted to take over the Standard setting and oversight functions of the Nigerian
Accounting Standards Board(NASB) but with enhanced functions. The council has 7
Directorates with functions, some of which impact directly accounting and auditing practices.
The Directorates are:

a). Directorate of Accounting Standards – Private Sector, with the responsibility of developing
accounting and financial reporting standards to be observed in the preparation of financial
statements in the private sector and SMEs.

b). Directorate of Accounting Standards – Public Sector: develops accounting and financial
reporting standards for the public sector.

c). Directorate of Auditing practices Standards: develops or liaise with relevant professional
bodies on auditing and ethical standards set by it.

d). Directorate of Actuarial Standards: develops an appropriate conceptual framework to guide

the setting of relevant actuarial standards.

e). Directorate of Inspection and Monitoring: Monitors compliance with auditing, accounting,
actuarial and valuation standards and guidelines reviewed and adopted by the council as well
as recommend sanctions to council and implement sanctions and fines approved by council.

f). Directorate of Valuation Standards: develops an appropriate conceptual framework to guide

the setting of relevant actuarial standards.

g). Directorate of Corporate Governance: Develops principles and practices of Corporate

Governance as well as promote the highest standards of corporate Governance.

See ss.24 -29, 50 for detailed and specific functions of these directorates
Membership of FRC comprises: CBN; CAC; FIRS; FMC; FMF; NAA; NACCIMA; NDIC;
SEC; ICAN; Auditor-General for the Federation; Accountant-General of the Federation;
ANAN; CITN; NSE; NAICOM; PENCOM; CIS and NIESV.

STANDARD SETTING PROCESS (DUE PROCESS)

Six Stages are involved namely:

1. Setting the agenda

The IASB evaluates the merits of adding a potential item to its agenda, also known as the work
plan, mainly by reference to the needs of investors.

The IASB considers:

• the relevance to users of the information and the reliability of information that could be
provided;
• whether existing guidance is available;
• the possibility of increasing convergence;
• the quality of the standard to be developed; and
• resource constraints.

Issues that may form the subject matter of a new standard may come from:

i. IASB’s technical staff: To help the IASB in considering its future agenda, its staff are asked
to identify, review and raise issues that might warrant the IASB’s attention.

ii. A change in the IASB’s Conceptual Framework a change in the IASB’s Conceptual
Framework.

iii. Comments from other standard-setters and other interested parties, the IFRS Advisory
Council and the IFRS Interpretations Committee, and staff research and other
recommendations. The IASB receives requests from constituents to interpret, review or amend
existing publications. The staff consider all such requests, summarise major or common issues
raised, and present them to the IASB from time to time as candidates for when the IASB is
next considering its agenda

2. Planning the project

When adding an item to its active agenda, the IASB also decides whether to:

• conduct the project alone; or

• jointly with another standard-setter.

Similar due process is followed under both approaches.

After considering the nature of the issues and the level of interest among constituents, the IASB
may establish a Consultative group at this stage.

A team is selected for the project by the two most senior members of the technical staff:

• The Director of Technical Activities; and

• The Director of Research.

The project manager draws up a project plan under the supervision of those Directors. The
team may also include members of staff from other accounting standard-setters, as deemed
appropriate.

3. Development and publication of a Discussion Paper

Although a Discussion Paper is not mandatory, the IASB normally publishes it as its first
publication on any major new topic to explain the issue and solicit early comment from
constituents.

If the IASB decides to omit this step, it will state why.

Typically, a Discussion Paper includes:

• a comprehensive overview of the issue;

• possible approaches in addressing the issue;
• the preliminary views of its authors or the IASB; and
• an invitation to comment.

This approach may differ if another accounting standard-setter develops the research paper.

Discussion Papers may result either from:

• a research project being conducted by another accounting standard-setter; or

• as the first stage of an active agenda project carried out by the IASB.

In the first case, the Discussion Paper is drafted by another standard-setter and published by
the IASB. Issues related to the Discussion Paper are discussed in IASB meetings, and
publication of such a paper requires a simple majority vote by the IASB.

If the Discussion Paper includes the preliminary views of other authors, the IASB reviews the
draft Discussion Paper to ensure that its analysis is an appropriate basis on which to invite
public comments.

All discussions of technical issues related to the draft paper take place in public session.

4. Development and publication of an Exposure Draft

Publication of an Exposure Draft is a mandatory step in due process.

Irrespective of whether the IASB has published a Discussion Paper, an Exposure Draft is the
IASB’s main vehicle for consulting the public.
Unlike a Discussion Paper, an Exposure Draft sets out a specific proposal in the form of a
proposed Standard (or amendment to an existing Standard).

The development of an Exposure Draft begins with the IASB considering:

• issues on the basis of staff research and recommendations;

• comments received on any Discussion Paper; and
• suggestions made by the IFRS Advisory Council, Consultative groups and accounting
standard-setters, and arising from public education sessions.

After resolving issues at its meetings, the IASB instructs the staff to draft the Exposure Draft.

When the draft has been completed, and the IASB has balloted on it, the IASB publishes it for
public comment.

5. Development and publication of an IFRS

After resolving issues arising from comments received on the Exposure Draft, the IASB
considers whether it should expose its revised proposals for public comment, for example by
publishing a second Exposure Draft.

In considering the need for re-exposure, the IASB:

• identifies substantial issues that emerged during the comment period on the Exposure
Draft that it had not previously considered;
• assesses the evidence that it has considered;
• evaluates whether it has sufficiently understood the issues and actively sought the views
of constituents; and
• considers whether the various viewpoints were aired in the Exposure Draft and
adequately discussed and reviewed in the basis for conclusions.

Drafting the IFRS

If the IASB decides that re-exposure is necessary, the due process to be followed is the same
as for the first Exposure Draft. When the IASB is satisfied that it has reached a conclusion on
the issues arising from the Exposure Draft, it instructs the staff to draft the IFRS.

Pre-ballot draft

A pre-ballot draft is usually subject to external review, normally by the IFRIC. Shortly before
the IASB ballots the Standard, a near-final draft is posted on eIFRS.

Finally, after the due process is completed, all outstanding issues are resolved, and the IASB
members have balloted in favour of publication, the IFRS is issued.
6. Procedures after an IFRS is issued

After an IFRS is issued, the staff and the IASB members hold regular meetings with interested
parties, including other standard-setting bodies, to help understand unanticipated issues related
to the practical implementation and potential impact of its proposals.

The IFRS Foundation also fosters educational activities to ensure consistency in the application
of IFRSs.

After a suitable time, the IASB may consider initiating studies in the light of:

• its review of the IFRS’s application;

• changes in the financial reporting environment and regulatory requirements; and
• comments by the IFRS Advisory Council, the IFRS Interpretations Committee,
standard-setters and constituents about the quality of the IFRS.

Those studies may result in items being added to the IASB’s work plan.

IN-TEXT QUESTIONS (ITQ’s)

1. Convergence to IFRS by a nation can be through harmonization, adoption or adaptation.

Which strategy was used by Nigeria?
2. ________ is the erstwhile standard setting body before the advent of IASB.

IN-TEXT ANSWERS (ITA’s)

1. Adoption
2. IASC