Reading 24 Financial Reporting Standards
- Roles and desirable attributes of financial reporting standard – setting bodies and regulatory authorities in establishing and enforcing reporting standards, and describe the role of International Organization of Securities Commission
- Standard – setting bodies are professional organizations of accountants and auditors that establish financial reporting standards. 2 primary standard – setting bodies:
– Financial Accounting Standards Board (FASB) → US.GAAP (US Generally accepted Accounting principle)
– International Accounting Standards Board (IASB) → IFRS (International Financial Reporting Standard)
- Desirable attributes of standard – setters:
– Observe high professional standards
– Have adequate authority, resources and competencies to accomplish its mission
– Have clear and consistent Standard – setting process.
– Guided by a well – articulated framework
– Operate in dependently while still seeking input from stakeholders
– Should NOT be compromised by special interests.
– Decision are made in the public interest
- Regulatory authorities are established by national governments and enforcing reporting standard such as:
– Securities and Exchange Commission (SEC) in the US.
– Financial services Authority (FSA) in the UK.
- Most national authorities belong to the International Organization of Securities Commissions (IOSCO). 3 objectives of IOSCO:
– Protect investors.
– Ensure fairness, efficiency, transparency.
– Reduce system risk.
SEC required filings:
- Form S-1: registration statement ⇒ sale new securities.
- Form 10-K: annual filing ( about business, audited, management, legal matter…)
- Form 10-Q: quarterly, update financial statement (not audited)
- Form DEF-14A: proxy statement, annual meeting, other shareholder vote,…
- Form 8-K: material events, acquisition & disposal, changes in management,…
- The status of global convergence of accounting standards and on going barriers to developing one universally accepted set of financial reporting standards
IFRS: EU, Japan, China, & many other countries.
In most major countries that have NOT fully adopted IFRS ⇒ Setters attempt to converge IFRS.
- Standard-setting bodies & regulatory authorities: disagree on the best treatment.
- Political pressures from business groups & others who will be affected by changes.
- The International Accounting Standards Board’s conceptual framework, including objective and qualitative characteristics of financial statements, required reporting elements & constraints assumption in preparing financial statements
Qualitative Characteristics: include Relevance & faithful representation
- Relevance: Information should have predictive value, confirmatory value or both. Materiality is an aspect of relevance, influence user’s economic decision.
- Faithful representation: Information is complete, neutral and free from error.
4 characteristics that enhance Relevance & Faithful representation
- Comparability: consistent among firms & cross time periods.
- Verifiability: independent observes, using the same methods, obtain similar results.
- Timeliness: info is variable to decision makers before it is stale.
- Understandability: users should be able to readily understand the info of financial statements.
Required reporting elements:
5 elements: Assets, Liabilities, owner’s equity, incomes & expenses (IFRS)
Constraints and Assumptions
- Constraints: there is cost-benefit trade off ⇒ user’s gain benefit from the info should be greater than the cost of presenting it. Another constraint, non-qualifiable info about company (reputation, brand loyalty, capacity for innovation,…) NOT be in financial statements.
– Accrual accounting: record transactions occur, not when cash is paid.
– Going concern: company continue to exist for the foreseeable future.
- General requirements for financial statements under IFRS
- Balance sheet (Statement of financial position)
- Statement of comprehensive income
- Cash flows
- Statement of changes in owner’s equity
- Explanatory notes, including summary of accounting policies.
The features for preparing financial statements in IAS No1
- Fair presentation: faithful and according to standards.
- Going concern basis.
- Consistency: between periods
- Materiality: financial statement should be free of misstatements or omissions.
- Aggregation of similar items & separation of dissimilar items.
- No offsetting of assets against liabilities or incomes against expenses.
- Reporting frequency: at least annually.
- Comparative information for prior periods.
Structure & content of financial statement in IAS no1
- A classified balance sheet showing current and non-current assets & liabilities.
- Minimum information on the face of statements and notes.
- Comparative information for prior periods.
- Compare key concepts of financial reporting standards under IFRS & US. GAAP
FASB ⇒ US.GAAP ; IASB ⇒ IFRS. Differs in several respects
- IFRS: incomes & expenses: US.GAAP: revenue, gains, losses & comprehensive incomes.
- IFRS: defines an asset as a resource from which a future economic benefit in expected. US.GAAP defines an asset as a future economic benefit.
- US.GAAP does not allow the upward valuation of most assets.
⇒ The firm listed their share in US market:
- Do not use US.GAAP or IFRS ⇒ required to reconcile with US.GAAP
- Use IFRS ⇒ reconciliation is no longer required.
- Identify characteristics of a coherent financial reporting framework and the barriers to creating such a framework
- Transparency: full disclosures & fair presentation.
- Comprehensiveness: all types of transactions.
- Consistency: similar transaction & similar ways across companies, geographic areas, time periods.
- Valuation: measurement require little judgment (historical cost)
- Standard setting:
– “Principles – based” approach: rely on a broad framework.
– “Rules – based” approach: how to classify transactions.
– “Objectives – oriented” approach: blend the other two approaches.
- Measurement: elements at one point time (or balance sheet); changes between points in time (income statement)
- Analyze company disclosures of significant accounting policies
- As financial reporting standards continue to evolve, analyst need to monitor how these developments will effect the financial statements they use.
- Companies under IFRS or US.GAAP must disclose their accounting policies and estimates in the footnotes.
- Management judgment are else addressed in Management’s Discussion & Analysis (MD & A).
- Management can discuss the impact of adopting a new standard ⇒ conclude that standard does not apply or will not effect financial statements materially.