Reading 24 Financial Reporting Standards


  1. 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,…
  1. 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.
  1. 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.



  • Assumptions:


Accrual accounting: record transactions occur, not when cash is paid.

Going concern: company continue to exist for the foreseeable future.

  1. 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.
  1. 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.
  1. 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)
  1. 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.