5.

11 Setting of IFRS Sustainability Disclosure Standards

The ISSB will initially build on the work of existing organisations which have issued guidance on
voluntary disclosures relating to sustainability and value creation. Building on the work of others
will give the ISSB a ‘running start’ when it comes to developing and issuing IFRS Sustainability
Disclosure Standards.
Prior to the formation of the ISSB, the IFRS Foundation Trustees formed a Technical Readiness
Working Group comprising members of the main existing organisations to create
recommendations for the ISSB and to develop two disclosure prototypes relating to climate-
related disclosures and general disclosure requirements for consideration by the ISSB.
The ISSB issued the exposure drafts IFRS S1 General Requirements for Disclosure of
Sustainability- related Financial Information and IFRS S2 Climate-related Disclosures for public
consultation in March 2022.
IFRS Sustainability Disclosure Standards will follow the ‘normal’ standard-setting process as
used by the IASB.

6 Inherent limitations of financial statements

Section overview

• There are limitations inherent in financial statements, including the fact that they are:
– a conventionalised representation, involving classification, aggregation and the
allocation of items to particular accounting periods;
– historical (backward-looking); and
– based almost exclusively on financial data.
• The formation of the ISSB and the development of IFRS Sustainability Disclosure
Standards will help in overcoming some of these limitations.

6.1 Conventionalised representation

Financial statements are highly standardised in terms of their overall format and presentation
although businesses are very diverse in their nature. This may limit the usefulness of the
information.
Financial statements are highly aggregated in that information on a great many
transactions and balances is combined into a few figures in the accounts, which can often
make it difficult for the reader to evaluate the components of the business.
Allocation issues include, for example, the application of the accrual concept and
depreciation of non-current assets, where management’s judgements and estimates affect
the period in which expenses or income are recognised.
6.2 Backward-looking
Financial statements are backward-looking whereas most users of financial information base
their decisions on expectations about the future. Financial statements contribute towards this
by helping to identify trends and by confirming the accuracy of previous expectations, but
cannot realistically provide the complete information set required for all economic decisions by
all users.
6.3 Omission of non-financial information
By their nature, financial statements contain financial information. They do not generally
include non-financial data such as:

28 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 • narrative description of the major operations and operating practices;
• discussion of business risks and opportunities, including those that are climate-related;
• narrative analysis of the entity’s performance and prospects; and
• management policies and how the business is governed and controlled.
Financial statements include the elements as defined in the Conceptual Framework. This means
that items which do not meet those definitions are not included. For example, the value of the
entity’s internally generated goodwill ie, through its reputation, loyalty and expertise of its
management and employees, or its client portfolio. While some companies do experiment with
different types of disclosure for such items, these disclosures are considered unsuitable for
inclusion in the financial statements (precisely because such items do not fall within its definition of
assets).
6.4 Other sources of information
Some of the limitations of financial statements are addressed in the other information which is
often provided along with the financial statements. Many entities now provide voluntary
information relating to climate-related issues, and others are subject to regulatory requirements
to report non- financial information.

6.5 IFRS Sustainability Disclosure Standards

The development of IFRS Sustainability Disclosure Standards will help in overcoming some of the
limitations inherent in financial statements as application of the standards should result in
companies providing transparent, consistent disclosure on sustainability-related matters.
IFRS Sustainability Disclosure Standards will require companies to provide all material
information related to significant sustainability matters that are relevant to investors’
decision-making. The information needed by investors about the effects of sustainability
extends beyond that information included in the financial statements, including forward-
looking sustainability matters that can be reasonably expected to affect enterprise value
creation, preservation or erosion over the short, medium and long term and which therefore
would impact investors’ investment decisions.
The first exposure drafts issued by the ISSB build on the voluntary disclosures recommended
by existing organisations. The organisations involved in the Technical Readiness Working
Group which prepared recommendations and prototypes for the ISSB were:
• IASB
• TCFD
• Climate Disclosure Standards Board
• Value Reporting Foundation
• World Economic Forum

6.5.1 Climate Disclosure Standards Board (CDSB)

The CDSB is an international consortium of businesses and environmental groups with a
single interest in aligning the mainstream corporate reporting model and its focus on financial
capital with natural and social capital such as water, soil, air and the knowledge and skills of
individuals. It offers a voluntary framework for reporting environmental information with the
same rigour as financial information. The CDSB was consolidated into the IFRS Foundation on
31 January 2022.

6.5.2 Value Reporting Foundation (VRF)

The VRF was formed in 2021 from the merger of the Sustainability Accounting Standards
Board (SASB) and the International Integrated Reporting Council (IIRC). The VRF was
consolidated into the IFRS Foundation in August 2022.

ICAB 2024 Reporting framework and ethics 29

 SASB was formed with the purpose of helping businesses and investors develop a common
language about the financial impacts of sustainability. The voluntary SASB Standards
provide guidance as to the disclosure of financially material sustainability information by
companies.
The IIRC developed the <IR> Framework to guide disclosure of how companies should
communicate the full range of factors that affect an organisation’s ability to create value over
time. Integrated reporting (IR) presents an organisation’s strategy, governance and
performance in terms of its wider social, environmental and economic context. It is focused on
a range of ‘capitals’ including financial, human and natural capital which are affected by the
decisions taken by a business. It is thought that IR can help an organisation to take more
sustainable decisions and enable stakeholders to understand how the organisation is really
performing.

6.5.3 World Economic Forum (WEF)

The WEF is an international organisation that aims to promote public-private cooperation.
The WEF considers that globally consistent and comparable performance metrics and
disclosures would support businesses in demonstrating long-term value creation for all
stakeholders. As a result, it is fully supportive of the ISSB and the development of IFRS
Sustainability Disclosure Standards.

7 Ethical and professional issues

Section overview

• ICAB has issued a Code of Ethics which is principles-based and centres

around fundamental principles.
• A professional accountant is responsible for recognising and assessing the potential
threats to these fundamental principles.
• A professional accountant must then implement safeguards to eliminate these threats or
reduce them to an acceptable level.

7.1 Conceptual framework

The Code provides a conceptual framework which professional accountants should apply in order
to identify, assess and address threats to compliance with the fundamental principles. The
conceptual framework specifies an approach for professional accountants to:
• identify threats to compliance with the fundamental principles;
• evaluate the threats identified; and
• address the threats by eliminating them or reducing them to an acceptable level.
The conceptual framework calls on the professional accountant to:
• exercise professional judgement;
• remain alert for new information and to changes in facts and circumstances; and
• use the reasonable and informed third party test.
The third-party test calls on the professional accountant to consider their proposed
actions and consider whether a ‘reasonable and informed third party’ would reach the
same conclusions. The conceptual framework also provides initial guidance (which is
developed in parts 2 and 3 of the Code) on evaluating threats and addressing these
threats.

30 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 Professional skills focus: Assimilating and using information

It is important that you are familiar with the Code and the following information regarding
fundamental principles, threats and safeguards. In the exam, you will be provided with a
scenario and you will need to apply your knowledge of the Code to the information
presented. Ensure that your answer is relevant to the given scenario and not a generic
answer regarding ethical behaviour.

7.2 Fundamental principles

Professional accountants are expected to follow the guidance contained in the fundamental
principles in all of their professional and business activities. The professional accountant
should also follow the requirements in the illustrations. However, he/she should be guided
not just by the terms but also by the spirit of the Code.
The Code sets out five fundamental principles, the spirit of which must always be complied with:

7.2.1 Integrity

Definition
Integrity: To be straightforward and honest in all professional and business relationships.
Integrity also means that members must not knowingly be associated with misleading
information.

Integrity implies fair dealing and truthfulness.

A professional accountant should not be associated with reports, returns, communications or other
information where they believe that the information:
• contains a materially false or misleading statement;
• contains statements or information furnished recklessly; and/or
• omits or obscures information required to be included where such omission or obscurity
would be misleading.

7.2.2 Objectivity

Definition
Objectivity: Not to compromise professional or business judgements because of bias,
conflict of interest or undue influence of others.

The professional accountant needs to remain impartial and independent, and not let the
potential for any financial, professional or personal gain affect their judgement. Objectivity
also requires the accountant to not be affected by undue influence of others, such as a
dominant superior or client interests.

7.2.3 Professional competence and due care

Definition
Professional competence and due care: To attain and maintain professional knowledge and
skill at the level required to ensure that a client or employing organisation receives
competent professional service, based on current technical and professional standards and

ICAB 2024 Reporting framework and ethics 31

 relevant legislation; and act diligently and in accordance with applicable technical and
professional standards.

The Code requires the professional accountant to be diligent in monitoring their requirements,
either on learning new skills or monitoring their progress on assignments in the workplace.
Professional competence may be divided into two separate phases:
• Attainment of professional competence – initial professional development
• Maintenance of professional competence – continuing professional development (CPD)
It is important that the accountant only undertakes work that they are qualified to do,
including ensuring that they have sufficient time and resources to do the work to the best of
their abilities. It may be that additional training from a team member or supervisor is required,
or a more realistic deadline.
CPD is a requirement for the Chartered Accountant, as it ensures that technical updates and new
accounting requirements are learnt and understood for application either in business or in
practice.

7.2.4 Professional behaviour

Definition
Professional behaviour: To comply with relevant laws and regulations and avoid any conduct that
the professional accountant knows or should know might discredit the profession.

A professional accountant should not engage in a business occupation or activity that impairs, or
might impair, the profession. They must avoid any actions, both professionally and personally,
that could bring the profession into disrepute.

7.2.5 Confidentiality

Definition
Confidentiality: To respect the confidentiality of information acquired as a result of professional
and business relationships. Confidential information must not be disclosed outside the
organisation without authority, unless there is a duty or right to disclose, or disclosure is in the
public interest and permitted by law.

The professional accountant must maintain confidentiality even in a social environment and
even after employment with the client/employer has ended. It is also vital that there is no
inadvertent breach of confidentiality, such as if you have two clients in a similar industry,
there is a risk that information gained on one could be used to inform or influence the other,
however unintended.
Exceptions to this principle are when the professional accountant is permitted by law or due
to a right to disclose to breach confidentiality:
• quality review undertaken by a professional body (such as Quality Assurance (QA) review
for those in public practice);
• in order to respond to an investigation by a professional or regulatory body (such as FCA);
• during legal proceedings against the accountant;
• to comply with technical and professional standards, including ethics requirements; or
• disclosure is required by law (such as Money Laundering disclosures in a Suspicious
Activity Report (SAR) or resulting from a criminal investigation of fraud).

32 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 The Code gives application guidance and examples of such occasions.
7.3 Threats and safeguards

Definitions
Threats: Threats to compliance with the fundamental principles might be created by a broad
range of facts and circumstances. The threats to compliance with the fundamental principles fall
into one more of the following categories: self-interest, self-review, advocacy, familiarity and
intimidation threats.
Safeguards: Safeguards are actions, individually or in combination, that the professional
accountant takes that effectively reduce threats to compliance with the fundamental principles
to an acceptable level.

Compliance with these fundamental principles may potentially be threatened by a broad range of
circumstances.
The Code provides details of a number of different threats, together with potential
safeguards which the professional accountant would need to implement in order to reduce
the risk of those threats to an acceptable level.
Where the threats cannot be reduced to an acceptable level, the professional accountant
should consider resignation from the role or the client.
The following table gives the five key threats identified by the Code, together with examples of
when the threats may arise (and the fundamental principle being threatened). Potential
safeguards are then proposed.
This list is not exhaustive and reference to the Code will provide further examples and guidance.

Ethical threat Key fundamental principle(s) Ethical safeguards

threatened
Self-interest Objectivity • Obtaining assistance or
Significant gifts or offers of training from someone
The threat that a
hospitality could influence the with the necessary
financial/other interest of
judgements made by the expertise
a professional accountant
will inappropriately professional accountant as they • Referring to the
influence the professional will create a personal bias. guidelines in the Code
accountant’s judgement Professional behaviour regarding appropriate
or behaviour. gifts
The potential for an accountant to
• Reporting the offers of
become involved in fraud or
gifts or hospitality to a
dishonest behaviour to conceal
senior member of the
any wrongdoing or to make
team or a secondary
financial gains.
review or opinion on the
Professional competence and potential conflict of
due care interest
An accountant may be tempted to • Disclosure of any referral
undertake work which they are not fees or commissions to
qualified to do (such as complex or the client or customer
specialist tax work in a small
practice for a significant fee). Or
potentially agreeing to undertake
a piece of work where time is
constrained.

ICAB 2024 Reporting framework and ethics 33

 Ethical threat Key fundamental principle(s) Ethical safeguards
threatened
Self-review Objectivity • If work is to be
undertaken by the same
The threat that a The same firm of accountants
firm, then ensuring strict
professional accountant producing the financial statements
separation of teams, files
will not appropriately and then, subsequently, auditing
and access to the
evaluate the results of a that same set will threaten the
information
previous judgement principle of objectivity (it is difficult
made/service performed to maintain objectivity over • Having a secondary or
by the professional something you yourself have senior partner review
accountant, or by another prepared). any significant
individual within the decisions
Confidentiality
professional accountant’s
firm or employing If a company is both producing
organisation on which the the information and reviewing it,
accountant will rely when there may be an inadvertent
forming a judgement as breach of confidentiality,
part of performing a especially in assurance
current activity. engagements.
Advocacy Objectivity • Any materials which
This is most appropriate for those promote the client, such
The threat that a
in public practice, as it is assumed as a prospectus for
professional accountant
that accountants in business will flotation, should be
will promote a client’s or
be expected to promote their reviewed by another
employer’s position to the
employer’s position or viewpoint. partner within the firm
point that the
professional accountant’s For those in public practice, this • Ensuring a firm which
objectivity is would potentially breach conflict undertakes both
compromised. of interest if there is a legal assurance work and
defence of a long standing or preparing for a flotation
highly profitable client (and by (for example) should
losing it, it may adversely affect have separate teams and
the finances of the firm). work independently of
each other
Familiarity Objectivity • Partner rotation on long
Professional judgement may be standing clients
The threat that due to a
long or close relationship affected by a potential conflict of • Review partner on
with a client or employer, interest (client with significant fees significant assurance
a professional accountant to the firm or longstanding client) engagements
will be too sympathetic to or undue influence by a • Reporting any family,
their interests or too demanding and significant client personal or financial links
accepting of their work. or customer. to the company or client
Professional competence and to the senior team
due care • Where competing
Being overfamiliar with a client, companies are served by
customer or supplier may provide the same public practice,
the accountant with a false sense making each party aware
of security, and therefore they may of the situation to enable
not act with sufficient diligence or transparency
ensure that technical and • Where new customers or
regulatory standards are met. suppliers are engaged,
Integrity ensuring that there is a

34 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 Ethical threat Key fundamental principle(s) Ethical safeguards
threatened

Members must not be knowingly second review

associated with misleading (segregation of duties) to
information. There is the risk that ensure that more
the familiarity may affect the favourable terms and
judgement of the accountant and conditions are not
any misleading information awarded by a member of
ignored or deemed to be the team
‘immaterial’ when it should be
dealt with correctly.
Intimidation Objectivity • Increasing the client
base to reduce the
The threat that a There may be a conflict of
impact of having a
professional accountant interest, such as the threat of the
financial reliance on
will be deterred from professional accountant losing
one client
acting objectively by their job or being overlooked for
threats, either actual or promotion. An accountant may • Reporting any
perceived, including be asked, with undue influence, intimidation (perceived
attempts to exercise to prepare the financial or otherwise) to a senior
undue influence over the statements in a way which member of the team,
accountant. provides a more profitable another partner or to the
position. ICAB helpline
Professional behaviour • Be prepared to resign
from the role or the
Undue influence may persuade client relationship if the
the accountant to prepare the intimidation cannot be
financial statements in a way avoided or negated
which breaches regulatory or
legal regulations. • Having a secondary
review of any significant
Integrity
decisions made by the
Members need to ensure that they entity, or a second
are not associated with information reviewer of the client files
which may be misleading, such as
improperly prepared financial
statements or not following
accounting standards.

7.4 Ethical conflict resolution

When evaluating compliance with the fundamental principles, a professional accountant may
be required to resolve a conflict in complying with the fundamental principles. ICAB has a
framework which assists members in resolving potential ethical problems. It is based upon
the Code of Ethics but is not included within it. It is a useful tool to resolving issues.
• Gather the relevant facts and identify the problems.
• Identify the affected parties.
• Consider the ethical issues involved.
• Identify which fundamental principles are affected.
• Refer to the employing organisation’s internal procedures.
• Consider and evaluate alternative courses of action.
• Implement the course of action and monitor its progress.

ICAB 2024 Reporting framework and ethics 35

 Professional skills focus: Structuring problems and solutions

In your exam, a good approach to answering questions which present an ethical problem would
be to:
• Identify the fundamental principle in question.
• Identify the threat.
• Suggest safeguards, relevant to the scenario.

7.5 Non-compliance with law or regulations (NoCLAR)

In the Code of Ethics, there are sections relevant for professional accountants in business
and practice on how to respond to non-compliance with laws and regulations.
Two sets of legislation which have a particular impact on the work of a professional accountant
are:
• Money laundering regulations
Money laundering is the process by which money from illegal sources is made to appear
legally derived and it is a criminal offence for a person to knowingly help another person
launder or conceal the proceeds of criminal activity.
In addition, there is a duty to report. Where a professional accountant discovers, in the
course of their work, information which makes them believe or suspect that money
laundering is occurring, or where a professional accountant has reasonable grounds for
being suspicious that it is occurring, this must be reported to the National Crime Agency.
It is a criminal offence not to make such a report.
Making such a report does not breach any duty of confidentiality owed by a
professional accountant.
• Bribery Act
Professional accountants have a duty to report breaches, or suspected breaches of the
Bibery Act. For individuals it is a criminal offence to:
– offer, promise or give a financial or other advantage to another person where the
advantage is intended to induce improper performance of an activity or a function or as a
reward for the improper performance of an activity or a function;
– request, agree to receive or accept a financial or other advantage intending that, in
consequence (or as reward for), a relevant function or activity be performed improperly
(even if performance is by another person); or
– offer, promise or give a financial or other advantage to a foreign public official in
order to obtain or retain business or retain or gain an advantage in the conduct of
business.

Worked example: Ethical considerations

You are a reporting accountant in a company. Your immediate manager is a very forceful,
domineering individual and you have generally accepted your manager’s views in respect
of preparation of the financial statements. Your manager has instructed you as to how to
recognise revenue in the year, which you do not believe complies with the relevant IFRS
Standard. According to your manager’s instructions, revenue has increased by 200%
during the current reporting period.
Your manager has stated that this is important for ensuring that the company meets its profit
targets and that bonuses will be paid to all staff if the targets are met.

36 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 Requirement
Explain the ethical issues that arise for you and determine the appropriate course of action
you should take.

Solution
Consider the fundamental principles most at risk in the scenario:
• Objectivity – Your objectivity is at risk (there is a self-interest threat) due to the
domineering personality of the manager and the fact that a bonus is available if
objectives are met.
• Professional competence and due care – if you are concerned that revenue has not
been recognised in accordance with technical and professional standards, your
professional competence may be called into question.
You should not comply with your manager’s request. You should politely decline to recognise
revenue per his instructions and try to explain your reasoning by reference to the IFRS
Standards. If your manager does not agree, you should escalate it within your organisation or
contact the ICAB helpline.

Interactive question 2: Ethical considerations

Your employer has put you in charge of a project which, when you considered it carefully,
requires expertise that you do not have. You are uneasy about doing the job given that you do
not have the necessary expertise and are uncertain about what to say to your employer.
Requirements
Consider the following points in your answer:
(a) What are the main fundamental principles being threatened in this scenario?
(b) What are your possible courses of action?

See Answer at the end of this chapter.

7.5.1 Practical significance

Accountants working within a financial reporting environment can come under pressure to
improve the financial performance or financial position of their employer. Finance managers
who are part of the team putting together the results for publication must be careful to
withstand pressures from their non-finance colleagues to indulge in reporting practices which
dress up short-term performance and position. Financial managers must be conscious of their
professional obligations and seek appropriate assistance from colleagues, peers or
independent sources.

ICAB 2024 Reporting framework and ethics 37

 Summary

38 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 Further question practice

1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following
questions having studied this chapter. If not, you are advised to revisit the relevant
learning from the topic indicated.

Confirm your learning

1 Ensure you can state the two fundamental qualitative characteristics and the four
enhancing qualitative characteristics in the Conceptual Framework. Can you explain
what these terms mean? (Topic 3)

2 How do the concepts of materiality, prudence and going concern work with the
Conceptual Framework, and can you define what is meant by these terms? (Topic 3)

3 What is the IASB and what are the four main stages to issuing a new IFRS Standard?
(Topic 4)

4 Can you explain how the convergence of accounting standards can help the
international investor? (Topic 5)

5 Can you give three examples of the inherent limitations of financial reporting, and
provide suggestions for improving the usability of financial statements for potential
investors? (Topic 6)

6 Can you define and explain the five fundamental ethical principles defined in the ICAB
Code of Ethics? (Topic 7)

7 Can you explain the different threats to the fundamental principles and what
safeguards could be applied to mitigate those threats? (Topic 7)

2 Question practice
Aim to complete all self-test questions at the end of this chapter. The following self-test
questions are particularly helpful to further topic understanding and guide skills application
before you proceed to the next chapter.

Question name Learning benefit from attempting this question

Tattenhoe plc This tests your knowledge and understanding of the definitions of true
and fair, fair presentation and substance over form.

An ethical dilemma A brief scenario asks for your comments regarding the ethical
principles, threats and actions which should be taken.

Darlat plc This looks at the impact of changing accounting standards and
some of the ethical issues which may arise.

Once you have completed these self-test questions, it is beneficial to attempt the following
questions from the Question Bank for this module. These questions have been selected to
introduce exam-style scenarios to help you improve knowledge application and professional
skills development before you start the next chapter.

ICAB 2024 Reporting framework and ethics 39

 Question Learning benefit from attempting this question

Giyani plc (part Short test of your knowledge of the definitions of elements (5 marks,
4 only) 7-8 minutes).

Laderas plc Question requiring you to explain the limitations of financial statements
(parts 4 and and a discussion of the ethical issues in the scenario (total of 9 marks, 16
5 only) minutes suggested timing).

Once you have attempted these questions, you can continue your studies by moving onto the
next chapter where you will be using the knowledge gained in Chapter 1.

40 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 Note: The whole of the Conceptual Framework and the ICAB Code of Ethics are
examinable. The paragraphs listed below are the key references you should be familiar
with.

1 Status and purpose of the Conceptual Framework

• The purpose of the Conceptual Framework is to assist preparers and users with
understanding and interpreting accounting standards. – Conceptual Framework
(SP1.1, SP1.5)
• The Conceptual Framework is not a Standard – Conceptual Framework (SP1.2)
• Financial statements comprise statement of financial position, statement of profit or loss
and other comprehensive income, statement of changes in equity, statement of cash
flows and notes – IAS 1 (10)

2 Objective, usefulness and limitations of general purpose financial reporting

• Users’ core need is for information for making economic decisions – Conceptual
Framework (1.2- 1.5)
• Objective of general purpose financial reporting is to provide information on
financial position about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions relating to providing
resources to the entity – Conceptual Framework (1.2)
• Information about a reporting entity’s economic resources, claims against the entity
and changes in resources and claims:
– Resources and claims
– Stewardship of the resources of the entity – Conceptual Framework (1.13)
• Economic resources and claims:
– Help assess prospects for future cash flows
– How well have management made efficient and effective use of the resources –
Conceptual Framework (1.13-1.16)
• Financial performance reflected by accrual accounting – Conceptual Framework (1.17)
• Financial performance reflected by past cash flows – Conceptual Framework (1.20)

3 Qualitative characteristics of useful financial information

• Two fundamental qualitative characteristics are relevance and faithful representation –
Conceptual Framework (2.5)
• Relevance = capable of making a difference to decisions – Conceptual Framework (2.6)
– Predictive and confirmatory values – Conceptual Framework (2.7-2.10)
– Materiality – Conceptual Framework (2.11)
• Faithful representation – Conceptual Framework (2.12-2.19)
– Complete, neutral and free from error
• Four enhancing qualitative characteristics – Conceptual Framework (2.23-2.38)
– Comparability, verifiability, timeliness and understandability

ICAB 2024 Reporting framework and ethics 41

 4 Cost constraint on useful financial reporting
Costs (of preparing and analysing) financial information must be justified by the benefits
of reporting it – Conceptual Framework (2.39-2.43)

5 Underlying assumption
Financial statements are normally prepared on the assumption that the reporting
entity is a going concern and will continue in operation for the foreseeable future –
Conceptual Framework (3.9)

6 Elements of financial statements

• Asset: a present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits –
Conceptual Framework (4.3-4.5)
• Rights to potential economic benefits – Conceptual Framework (4.6-4.18)
• Definition of control which links the economic resource to the entity – Conceptual
Framework
(4.19-4.25)
• Liability: A present obligation of the entity to transfer an economic resource as a result
of past events. The liability must have an obligation to transfer an economic resource
that exists as a result of past events – Conceptual Framework (4.26-4.27)
• Definition of obligation, the transfer of an economic resource and a present obligation as
a result of past events – Conceptual Framework (4.28-4.47)
• Equity: The residual interest in assets of the entity after deducting all its liabilities –
Conceptual Framework (4.63)
• Income Increases in assets or decreases in liabilities, other than contributions from
holders of equity claims – Conceptual Framework (4.68)
• Expenses Decreases in assets or increases in liabilities, other than distributions to
holders of equity claims – Conceptual Framework (4.69)

7 Recognition
• An asset or a liability should be recognised in financial statements if it meets the
definition of an element – Conceptual Framework (5.1, 5.6)
• The cost constraint also affects the recognition decisions, and assets or liabilities are
recognised if the benefit of the information provided is likely to justify the costs of
providing and using that information – Conceptual Framework (5.8)
• Derecognition normally occurs when the item no longer meets the definition of an
asset or liability – Conceptual Framework (5.26, 5.27)

8 Measurement
• Historical cost – Conceptual Framework (6.4-6.9)
• Current value: Fair value – Conceptual Framework (6.12-6.16)
• Value in use – Conceptual Framework (6.17-6.20)
• Fulfilment value – Conceptual Framework (6.17-6.20)
• Current cost – Conceptual Framework (6.21-6.22)
• Present value – Conceptual Framework (4.55)

42 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 9 Presentation and disclosure
• Presentation and disclosure as communication tools – Conceptual Framework (7.2)
• To facilitate effective communication of information in financial statements, providing
relevant information and information that is comparable from period to period, and specific
to the entity – Conceptual Framework (7.4-7.6)
• Classification of the elements – Conceptual Framework (7.7-7.22)

10 ICAB Code of Ethics

ICAB Code of Ethics, including definitions.

11 Fair presentation
• Financial statements are required to give a fair presentation of the financial position,
financial performance and cash flows of an entity – IAS 1 (15)

12 IASB
• Objectives of IASB – IFRS Foundation Constitution 2018 (para. 2)

ICAB 2024 Reporting framework and ethics 43

 Self-test questions

Answer the following questions.

1 Global accounting standards

Discuss whether the move towards global accounting standards has been successful.

2 Traditional Fruits Ltd

Traditional Fruits Ltd, a Herefordshire based fruit bottling and canning company, is
looking to expand its operations. The directors are hoping to increase the range of
preserved fruit products and in doing so will need to invest in new equipment. They are
also hoping to open a new facility in the South East near to the fruit farms of Kent and
Surrey.
The finance director has been asked to prepare a résumé of the financial performance
of the company in order that possible providers of finance can assess the future
potential of the company.
The finance director wants to address all issues in her résumé and has asked for your
assistance.
Requirements
Prepare brief notes for the finance director, addressing each of the following and using the
Conceptual Framework as a source of reference.
2.1 Identify potential providers of finance for Traditional Fruits Ltd and their
information requirements in respect of financial statements.
2.2 Explain the terms ‘performance’ and ‘position’ and identify which of the financial
statements will assist the user in evaluating performance and position.
2.3 Indicate why, for decision-making purposes, the financial statements alone are
insufficient.

3 An ethical dilemma
You are preparing the end of year financial statements for Book and Barter Ltd. This
requires the collation of divisional information in respect of revenue and costs. Your
colleague, Jago, has mentioned that this collation of data can be made more efficient
by uploading the information to a cloud-based service provider which is integrated with
a social media platform and releases information directly to the public via social media
posts. This cloud-based service provider is relatively new and not yet authorised for use
by Book and Barter Ltd as it cannot confirm that it complies with data protection laws.
Jago has suggested this method as the current tools for sharing the divisional
information is slow and causes a heavy workload.
Requirements
3.1 Referring to the ICAB Code of Ethics, explain the ethical principles that are at risk here.
3.2 State what actions could be appropriate in this circumstance to reduce the risk
to the ethical principles.

44 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 4 Tattanhoe plc
You are the financial controller of Tattanhoe plc, a holding company listed on the Dhaka
stock exchange. Together with the finance director, you have held conversations with
external consultants about accounting policy implementation issues. You have discussed
a number of areas where the finance director believes the application of the
requirements of an IFRS Standard would not give a ‘true and fair view’ for users.
The finance director has sent you the following extract from a note prepared by the
consultants.

Accounting policies
It is essential that the accounting policies selected when implementing IFRS Standards
result infinancial statements that give a fair presentation. The application of the principle
of substanceover form is integral in achieving this.
The choice of accounting policies is a matter of judgement and careful consideration is
requiredparticularly where you wish to override the requirements of an accounting standard.

The finance director wishes to discuss the above extract with you. The finance director has a
strong personality and is adamant that non-compliance with IFRS Standards may be justified
where it does not give a true and fair view.
Requirements
4.1 Prepare notes for your meeting with the finance director:
(a) Explaining the concept of ‘fair presentation’ and comparing it with ‘true and fair view’.
(b) Explaining the concept of ‘substance over form’ and its relationship to
‘faithful representation’.
(c) Explaining the circumstances in which non-compliance with the detailed provisions of
an IFRS Standard is justified.
4.2 Identify the ethical issues and actions, from the above scenario, that you should consider
arising from the adoption of IFRS Standards and your professional relationship with the
finance director.

ICAB 2024 Reporting framework and ethics 45

 Answers to Interactive questions

Answer to Interactive question 1

Question Answer

Oak plc has purchased a licence for This is an intangible asset, as the licence does
CU25,000. The licence gives the company not have physical substance and is a right that
the use of robotic delivery drones which has the potential to produce economic
will save CU60,000 a year for the next five benefits as a result of holding that licence – in
years. Should Oak plc classify the licence as this case, the costs savings.
an asset?
Pear Ltd acts as a trustee for shares held by No, these shares cannot be classified as an
Piper Ltd. Piper Ltd retains the voting rights asset by Pear Ltd as Piper Ltd retains the right
as well as receiving the dividends from the to the economic benefits (the dividends) and
shares. Pear Ltd receives a fee for the trustee the control of the shares.
services they provide to Piper Ltd. Can Pear
Ltd classify these shares as assets?
Sycamore Ltd provides a standard warranty These are liabilities which must be
with the purchase of every laptop it sells. recognised by Sycamore Ltd. The business
These standard warranties are not paid for has an obligation to fulfil the terms of the
by the purchaser and are valid for a period warranty within that post sale (24 month)
of 24 months from the date of sale. Does period and the liability would be recognised
Sycamore Ltd have to recognise these when the warranty is issued, as this is when
warranties as liabilities? Sycamore’s obligation arises, rather than
when a claim is made.

Answer to Interactive question 2

(a) Key fundamental principles
Professional competence and due care – Do you have the necessary skills and experience
to undertake the work?
Professional behaviour – How should you proceed so as not to discredit yourself?
(b) Possible courses of action
Discuss your lack of expertise with your employer and suggest clearly defining the
scope of the project and a course of action for addressing this issue, for example
employing a person with the necessary expertise.
If your employer does not agree to the suggested course of action, it may be appropriate
to discuss the matter with the next level of management or raise the issue using your
employer’s whistleblowing helpline. As a last resort, you can contact the ICAB helpline.

46 Financial Accounting and Reporting - IFRS Standards ICAB 2024

 Answers to Self-test questions

1 Global accounting standards

The move towards global accounting standards has taken great strides in the last decade.
International accounting standards themselves have improved, with the elimination of
contradictory alternatives and the creation of an open and independent standard setting
organisation. This in turn has led to greater acceptance of these standards, particularly in 2005
with the compulsory adoption of IFRS Standards for consolidated financial statements by all
quoted companies in the EU.
Since the EU successes there has been further progress on general global convergence,
particularly in Asian countries, such as Singapore, which have adopted IFRS Standards with
minimal change to be their own national GAAP. Other countries such as Ghana, Nigeria and Brazil
have adopted IFRS Standards as they stand to form local GAAP.
One major economy which has not, and seems unlikely to, adopt IFRS Standards is the USA.
Despite efforts between the IASB and the US standard setter FASB, full convergence has not been
achieved and joint projects have now ceased. Some success was achieved in the form of jointly
issued standards, such as IFRS 5 and IFRS 15, however even these jointly issued standards are not
fully converged.
There is no global system of enforcement, and so it is too early to say if IFRS Standards are being
adopted properly throughout the world. Some countries with their own highly developed
accounting standards see the adoption of IFRS Standards as a backward step, whereas other
countries see IFRS Standards as unnecessarily complicated.
There is also the assumption that the globalisation of accounting standards is a good thing.
Recent developments in IFRS Standards have focussed on quoted companies in the western
world; they may not be suitable for all types and sizes of business organisation, or for all stages of
economic development.

2 Traditional Fruits Ltd

2.1 Potential providers of finance for Traditional Fruits Ltd

Potential providers of finance Information requirements

• The existing shareholders of the • The profit before interest of Traditional

company and potential new Fruits Ltd (TF Ltd), to determine risk
shareholders • The trend of profitability of TF Ltd together
– through a new issue of share capital with a history of dividend payments. This will
enable them to assess return and risk of their
investment.
• Existing and future lenders and • The financial structure of TF Ltd, to determine
creditors to the company the level of debt finance as a measure of risk
• TF Ltd’s liquidity or ability to pay out
dividends and redeem share capital
• TF Ltd’s ability to generate cash and the
timing and certainty of its generation

ICAB 2024 Reporting framework and ethics 47