This is a guest post by CMA Devarajan Swaminathan. He has over 10 years post qualification experience in Accounting, Auditing, Finance as well as Management Accounting. He is the proprietor of Devarajan Swaminathan & Co - Cost Accountants.

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The International Accounting Standards Committee Foundation (IASC Foundation) Constitution mentions about the IASB Framework twice, once in paragraph 29 and another in paragraph 43.

Paragraph 29 of the IASC Foundation Constitution reads like this:

 

Each full time and part time member of the IASB shall agree contractually to act in public interest and to have regard to the IASB Framework (as amended from time to time) in deciding on and revising standards.

Paragraph 43(a) of the IASC Foundation Constitution reads like this:

The International Financial Reporting Interpretation Committee (IFRIC) shall interpret the application of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) and provide timely guidance on financial reporting issues not specifically addressed in the IAS’s and the IFRS’s with the context of the IASB Framework and undertake other tasks at the request of the IASB.

The International Accounting Standards Board Framework or the IASB Framework or the Conceptual Framework is the framework for the preparation and presentation of Financial Statements.

The IASB Framework was approved by the IASC Board in April 1989 and adopted by the IASB in April 2001.

The purpose of the IASB Framework is to assist and guide the IASB to develop new or revised standards and to assist the preparers of financial statements in applying the standards and dealing with issues that are not specifically addressed by the Standards.

The Framework does not have the force of a Standard. Therefore, in case of a conflict between the Standard and the Framework, the Standard will prevail over the Framework.

The Framework deals with:

1.    The objective of financial statements

2.    The assumptions on the basis of which the financial statements are prepared.

3.    The qualitative characteristics that determine the usefulness of information in financial statements.

4.    The definition, recognition and measurement of the elements from which the financial statements are constructed and

5.    Concepts of capital and capital maintenance.

Objective of Financial Statements are:

The objective of financial statements is to provide information about

Financial Position:

The balance sheet presents this information. The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates.

Performance:

Performance is the ability of an enterprise to earn a profit on the resources that have been invested in it. Information about the amounts and variability of profits helps in forecasting future cash flows from the enterprise's existing resources and in forecasting potential additional cash flows from additional resources that might be invested in the enterprise. The Framework states that information about performance is primarily provided in an income statement.

Changes in the financial position of an entity.

Users of financial statements seek information about the investing, financing and operating activities that an enterprise has undertaken during the reporting period. This information helps in assessing how well the enterprise is able to generate cash and cash equivalents and how it uses those cash flows. The cash flow statement provides this kind of information

The Assumptions on which the financial statements are prepared include:

Accrual basis of accounting: The effects of transactions and other events are recognized when they occur, rather than when cash or its equivalent is received or paid, and they are reported in the financial statements of the periods to which they relate

Going Concern: The financial statements presume that an enterprise will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are required.

The qualitative characteristics that determine the usefulness of information in financial statements are:

Understandability

Information should be presented in a way that is readily understandable by users who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.

Relevance

Information in financial statements is relevant when it influences the economic decisions of users. It can do that both by

(a) Helping them evaluate past, present, or future events relating to an enterprise and by

(b) Confirming or correcting past evaluations they have made. 

Materiality is a component of relevance. Information is material if its omission or misstatement could influence the economic decisions of users. Timeliness is another component of relevance. To be useful, information must be provided to users within the time period in which it is most likely to bear on their decisions.

Reliability

Information in financial statements is reliable if it is free from material error and bias and can be depended upon by users to represent events and transactions faithfully. Information is not reliable when it is purposely designed to influence users' decisions in a particular direction. There is sometimes a tradeoff between relevance and reliability - and judgement is required to provide the appropriate balance. Reliability is affected by the use of estimates and by uncertainties associated with items recognized and measured in financial statements. These uncertainties are dealt with, in part, by disclosure and, in part, by exercising prudence in preparing financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgement needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, prudence can only be exercised within the context of the other qualitative characteristics in the Framework, particularly relevance and the faithful representation of transactions in financial statements. Prudence does not justify deliberate overstatement of liabilities or expenses or deliberate understatement of assets or income, because the financial statements would not be neutral and, therefore, not have the quality of reliability.

Comparability

Users must be able to compare the financial statements of an enterprise over time so that they can identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises. Disclosure of accounting policies is essential for comparability.

Elements of Financial Statements

Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics.

Recognition of the Elements of Financial Statements

An item is recognized when it is included in the financial statements. It is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition:

•    It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and

•    The item's cost or value can be measured with reliability.

Matching principle is a useful concept where it considers whether an asset arises when liability is recognized and vice versa. It is the principle of matching expenses with income.

The following elements are directly related to financial position (balance sheet) are: 

Assets 

Definition: An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. 

Recognition: An Asset is recognized in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably. 

Liability:

Definition: A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 

Recognition: A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.

Equity:

Definition: Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. 

The following elements relates to performance:

Income. 

Definition: Income is the increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an enterprise and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an enterprise. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in the IASC Framework.

Recognition:

Income is recognized in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities (for example, the net increase in assets arising on a sale of goods or services or the decrease in liabilities arising from the waiver of a debt payable).

Expense.

Definition: Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the enterprise. Expenses that arise in the course of the ordinary activities of the enterprise include, for example, cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, property, plant and equipment. Losses represent other items that meet the definition of expenses and may, or may not, arise in the course of the ordinary activities of the enterprise. Losses represent decreases in economic benefits and as such they are no different in nature from other expenses. Hence, they are not regarded as a separate element in this

Framework.  

Recognition:

Expenses are recognized when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (for example, the accrual of employee entitlements or the depreciation of equipment). 

Measurement of the Elements of Financial Statements

It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and the item's cost or value can be measured with reliability. Based on these general criteria:

Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognized and reported.

The Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements, including: 

Historical cost

• Current cost
• Net realizable (settlement) value
• Present value (discounted)

Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. The Framework does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances. However, the qualitative characteristics do provide some guidance.

Concept of Capital and Capital Maintenance:

The framework distinguishes between a financial capital and a physical concept of capital.

Under Financial Capital maintenance, profit is earned if the financial amount of the net assets at the end of the period exceeds the financial amount at the beginning of that period, after excluding distributions to and contributions from the owners during the period.

Under physical capital maintenance concept, a profit is earned if the physical productive capacity (or operating capabilities) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the productive capacity at the beginning of that period after excluding any distributions to and contributions from the owners during that period.

Conclusion: The above framework is subject to amendment. The IASB along with FASB is working on a Conceptual Framework which is expected to be ready by 2010.

References have been heavily drawn from:

1.    www.iasb.org

2.    http://www.iasplus.com/agenda/framework.htm

3.    IFRS Practical implementation, guide and workbook by Abbas Ali Mirza, Magus Orell, Graham.J.Holt, Second Edition, a John Wiley Publication.

Further reading on IFRS


Author:

CMA.Devarajan Swaminathan

Devarajan Swaminathan & Co.

Cost and Management Accountants

Thane-Mumbai

http://sites.google.com/site/cmadevarajanswaminathan/

cmadevarajan@gmail.com

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I was reading the provisions and objectives of the Competition Act 2002 and then relating it with how accountancy is regulated in India by Acts of Parliament like ICAI Act, ICWAI Act and ICSI Act.

An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto.

(c) "cartel" includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services;

(f) "consumer" means any person who—

(ii) hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first-mentioned person whether such hiring or availing of services is for any commercial purpose or for personal use;

(m) "practice" includes any practice relating to the carrying on of any trade by a person or an enterprise;

u) "service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial matters such as banking, communication, education, financing, insurance, chit funds, real estate,transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, repair, conveying of news or information and advertising;

Will ICAI, ICWAI and ICSI Act, fall under the definition of cartel ?

ICAI Act: The institute of Chartered Accountants of India is a statutory body established under Chartered Accountants, 1949 for regulation of profession of Chartered Accountants in India. ( ICAI Website).

ICWAI Act: An Act to make provision for the regulation of the profession of cost and works accountants. BE it enacted by Parliament in the Tenth Year of the Republic of India. See ICWAI website.

The scope of the accountants under the respective act is defined in Clause 2 of Section 2 of their respective Acts. Moreover the council of the institutes issue notification to their members for recommended minimum fees to be charged.

1. As per provision of clause 2 of Section 2 of the Chartered Accountants Act 1949, reproduced below--
“A member of the Institute shall be deemed “to be in practice”, when individually or in partnership with chartered accountants [in practice], he, in consideration of remuneration received or to be received—
(i) engages himself in the practice of accountancy; or
(ii) offers to perform or performs services involving the auditing or verification of financial transactions, books, accounts or records, or the preparation, verification or certification of financial accounting and related statements or holds himself out to the public as an accountant; or
(iii) renders professional services or assistance in or about matters of principle or detail relating to accounting procedure or the recording, presentation or certification of financial facts or data; or]
(iv) renders such other services as, in the opinion of the Council, are or may be rendered by a chartered accountant [in practice]; and the words “to be in practice” with their grammatical variations and cognate expressions shall be construed accordingly.”


And

As per provision of Section 2 of the Cost and Works accountants Act 1959, reproduced below—
“Save as otherwise provided in this Act, a member of the Institute shall be deemed “to be in practice” when, individually or in partnership with one or more members of the Institute in practice, he, in consideration of remuneration received or to be received
(i) engages himself in the practice of cost and works accountancy; or
(ii) offers to perform or performs services involving the costing or pricing of goods or service or the preparation, verification or certification of cost accounting and related statements or holds himself out to the public as a cost accountant in practice; or
(iii) renders professional services or assistance in or about matter of principle or details relating to cost accounting procedure or the recording, presentation or certification of costing facts or date; and interpretation thereof or,
(iv) renders such other services as, in the opinion of the Council, are or may be rendered by a cost accountant in practice;
and the words “to be in practice”, with their grammatical variations and cognate expressions, shall be construed accordingly.”

Members of the respective institutes have defined areas of practice vide the provisions of the respective Acts under the administration of the Ministry of Corporate Affairs

Recommended Fees

See ICAI website for Revision of Recommended scale of fee chargeable for the work done by the members of the Institute. Other guidelines on ICAI website.

In a competitive environment, you can fix Maximum Retail Price and producers are free to charge price less than MRP. However it is not the case with Accounting bodies in India where they have published the minimum fees to be charged and members are bound by the notification from their respective body.

 
The other objective of the Competition Act is "to ensure freedom of trade carried on by other participants in markets, in India".

 
Accountancy is regulated in almost all the developed countries and India is no exception. Most of the rules in India are derived from the UK or best the practices across the world. UK also a Competition Commission

 
The Accounting Framework is more developed in the UK so that no single body has an influence on the Accountancy profession. The public/consumers have a choice of availing services from any 6 accounting bodies. Moreover they can practise accountancy by being member of any of the accounting body. In India, there are only two accounting bodies and their role are mutually exclusive (more or less).

The Accounting Standards are set by an independent board, ASB, in the UK. In India, the accounting standards are recommended by ICAI and then approved by NACAS. So ICAI calls the shots in all the aspects of Accounting. Moreover Press notification No. 1/5/2001-CL.V dt 13th May, 2008 from Ministry of Corporate Affairssubscribes to the view that not enough have done for checks and balance of regulation of accountancy profession in India. ICAI took the task of framing accounting standards and the Companies Act was amended in 1999 to provide a statutory backing. and Indian Competition Act has been drawn in similar lines as the UK.

2. The work of formulating down accounting standards for the companies operating in India was initiated when the Institute of Chartered Accountants of India (ICAI), a statutory body regulating the accounting profession in the country, first took up this task in 1977. However, the accounting standards prepared and issued by the ICAI were mandatory only for its members, who, while discharging their audit function, were required to examine whether the said standards of accounting were complied with. With the amendment of the Companies Act, 1956 through the Companies (Amendment) Act, 1999, accounting standards as well as the manner in which they were to be prescribed, were provided a statutory backing.

Competition Act 2007 is a recent addition of rules to protect the interest of consumers and public in India. In the UK, the accounting profession is regulated and no single accounting body can influence the profession. However with the advent of Competition Act in India, the acts enacted earlier needs to be relooked or else they would fall under "Cartel" by definition under Competition Act. Having two accounting bodies with mutual exclusive objectives is not in public interest in India as there is little or no competition within the meaning of the Competition Act.

 

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From 1 June 2009 if you held, or hold, full membership of a professional body recognised by CPA Australia you can apply for Associate membership.

An assessment of your professional qualifications will be conducted to determine your eligibility. The examinations you completed as part of your membership will be considered in regards to our core knowledge requirements, and the result of your eligibility for Associate membership will be advised accordingly.

Recognised professional bodies

* The Association of Chartered Certified Accountants (ACCA)

* The American Institute of Certified Public Accountants (AICPA)

* Chartered Institute of Management Accountants (CIMA)

* The Chartered Institute of Public Finance and Accountancy (CIPFA)

* Certified General Accountants Association of Canada (CGA-Canada)

* The Society of Management Accountants of Canada (CMA Canada)

* The Hong Kong Institute of Certified Public Accountants (HKICPA)

* The Institute of Certified Public Accountants of Kenya (ICPAK)

* Institute of Certified Public Accountants of Singapore* (ICPAS)

* The Institute of Chartered Accountants in England and Wales (ICAEW)

* The Institute of Chartered Accountants of India (ICAI)

* The Institute of Chartered Accountants in Ireland (ICAI)

* The Institute of Chartered Accountants of Pakistan (ICAP)

* The Institute of Chartered Accountants of Scotland (ICAS)

* The Institute of Chartered Accountants of Sri Lanka (ICASL)

* The Institute of Cost and Management Accountants of Pakistan (ICMAP)

* The Institute of Cost and Works Accountants of India (ICWAI)

* Malaysian Institute of Accountants* (MIA)

* Southern Africa Institute of Chartered Secretaries and Administrators (SAICSA)

* The South African Institute of Chartered Accountants (SAICA)

*CPA Australia will require to see your degree qualification(s). You will be required to supply a certified true copy of your degree and transcripts with your application form.

For CPA Australia to determine your eligibility you will be required to provide:

• an Associate application form
• a certified true copy of a membership certificate or letter of good standing explaining you held / hold full membership (the letter or certificate does not need to be current)
• a certified true copy of your examinations and results for your professional qualifications
• 100 points of identification
• the membership fee

Source: CPA Australia

17-April-10: I noticed a change in recognition as CPA no longer recognises accounting bodies from the above list. See international affiliates.

The Institute of Chartered Accountants in Australia is yet to recognise ICWAI qualification for the purpose of skilled migration assessment. 

Members of ICWAI who wish to migrate to Australia should apply with CPA Australia for a successful outcome. 

This is a great news of members of ICWAI and ICWAI for recognition of qualifications abroad.

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