Regulatory Framework and Accounting Standards
What the domain tests
This domain tests the legal and professional rules that shape financial statements: company law, accounting standards, enforcement and fair presentation. You must know how a standard is applied and when a change is a policy change or an estimate change.
Core rules
- The Companies Act or equivalent statute governs incorporation, directors' duties, financial statements, audit, filing and distributable profits.
- Accounting standards (IFRS, or locally adopted IFRS such as SLFRS/LKAS) set recognition, measurement, presentation and disclosure. SMEs may use a separate standard.
- Other regulators include the securities regulator, stock exchange listing rules, tax authority and the professional accountancy body.
- Financial statements must give a fair presentation or true and fair view. Compliance with standards is normally presumed to achieve this, but additional disclosure may be needed.
- A change in accounting policy is applied retrospectively, with comparatives restated, unless impracticable. A change in estimate is applied prospectively.
- Standard-setting follows due process: exposure draft, comment period, redeliberation and issue.
Worked example
A company changes the useful life of machinery from 10 to 8 years. This is a change in estimate. Depreciation is recalculated prospectively over the remaining life; prior years are not restated. The effect is disclosed. If the company instead changed from cost to revaluation for a class of assets, that is a policy change and is applied retrospectively where practicable.
Traps
Do not say standards are optional if adopted by law. True and fair is not just an arithmetic check. Do not treat a change in estimate as a prior-period error. Materiality affects disclosure, not the existence of a liability.