Prepared by

Coby Harmon
University of California, Santa Barbara Westmont College

Financial Reporting

CHAPTER 1

and Accounting Standards

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the growing importance of global financial markets and its relation to
financial reporting.
2. Explain the objective of financial reporting.
3.
Identify the major policy- setting bodies and their role in the standard-setting
process.
4. Discuss the challenges facing financial reporting.

PREVIEW OF CHAPTER 1

Intermediate Accounting IFRS 3rd Edition

Kieso ? Weygandt ? Warfield

World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms of Sales

ILLUSTRATION 1.1

World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms of Sales

ILLUSTRATION 1.1

Significant number of foreign companies are found on national exchanges.

ILLUSTRATION 1.2
International Exchange Statistics
Financial Statements and Financial Reporting
Essential characteristics of accounting are:
1. the identification, measurement, and communication of
financial information about

2. economic entities to

3. interested parties.

Accounting and Capital Allocation

ILLUSTRATION 1.3
Capital Allocation Process

High Quality Standards

Globalization demands a single set of high-quality international accounting
standards. Some elements:
1. Single set of high-quality accounting standards established by
a single standard-setting body.
2. Consistency in application and interpretation.
3. Common disclosures.
4. Common high-quality auditing standards and practices.
5. Common approach to regulatory review and enforcement.
6. Education and training of market participants.
(Continued)

High Quality Standards

Globalization demands a single set of high-quality international accounting
standards. Some elements:
7. Common delivery systems (e.g., eXtensible Business Reporting Language-XBRL).
8. Common approach to corporate governance and legal
frameworks around the world.

Objective of Financial Reporting

Objective: Provide financial information about the reporting
entity that is useful to
? present and potential equity investors,
? lenders, and
? other creditors
in making decisions about providing resources to the entity.
General-Purpose Financial Statements
? Provide financial reporting information to a wide variety of users.
? Provide the most useful information possible at the
least cost.

Equity Investors and Creditors

? Investors and creditors are the primary user group.

Entity Perspective
? Companies viewed as separate and distinct from their owners (shareholders).

Decision-Usefulness
? Investors are interested in assessing
1. the company's ability to generate net cash inflows and
2. management's ability to protect and enhance the
capital providers' investments.

Question
The objective of financial reporting places most emphasis on:
a. reporting to capital providers.
b. reporting on stewardship.
c. providing specific guidance related to specific needs.
d. providing information to individuals who are experts in the field.

Question
General-purpose financial statements are prepared primarily
for:
a. internal users.
b. external users.
c. auditors.
d. government regulators.

Standard-Setting Organizations

Main international standard-setting organization:

? International Accounting Standards Board (IASB)
? Issues International Financial Reporting Standards (IFRS).
? Standards used on most foreign exchanges.
? IFRS used in over 149 countries.
? Two organizations that have a role in international standard-setting are the
International Organization of Securities Commissions (IOSCO) and the IASB.

International Organization of Securities Commissions (IOSCO)

? Does not set accounting standards.
? Dedicated to ensuring that global markets can operate
in an efficient and effective basis.
? Supports the use of IFRS as the single set of international standards in cross-
border offerings and listings.
http://www.iosco.org/

International Accounting Standards Board (CIAomSBpo)sed of four organizations-

? IFRS Foundation
? International Accounting Standards Board (IASB)
? IFRS Advisory Council
? IFRS Interpretations Committee

International Accounting Standards Board

ILLUSTRATION 1.4
International Standard-Setting Structure

Question
IFRS stands for:
a. International Federation of Reporting Services.
b. Independent Financial Reporting Standards.
c. International Financial Reporting Standards.
d. Integrated Financial Reporting Services.

Question
The major key players on the international side are the:
a. IASB and IFRS Advisory Council.
b. IOSCO and the U.S. SEC.
c. London Stock Exchange and International Securities Exchange.
d. IASB and IOSCO.

International Accounting Standards Board

Due Process
The IASB due process has the following elements:
1. Independent standard-setting board;
2. Thorough and systematic process for developing standards;
3. Engagement with investors, regulators, business leaders, and the global
accountancy profession at every stage of the process; and
4. Collaborative efforts with the worldwide standard-setting
community.

1-24

ILLUSTRATION 1.5
International Standard-Setting Structure LO 3
Question
Accounting standard-setters use the following process in establishing international
standards:
a. Research, exposure draft, discussion paper, standard.
b. Discussion paper, research, exposure draft, standard.
c. Research, preliminary views, discussion paper, standard.
d. Research, discussion paper, exposure draft, standard.

Types of Pronouncements
? International Financial Reporting Standards.
? Conceptual Framework for Financial Reporting.
? International Financial Reporting Standards Interpretations.

Hierarchy of IFRS
Companies first look to:
1. International Financial Reporting Standards; International Financial Reporting
Standards, International Accounting Standards (issued by the predecessor to the
IASB), and IFRS interpretations originated by the IFRS Interpretations Committee
(and its predecessor, the IAS Interpretations Committee);
2. The Conceptual Framework for Financial Reporting; and
3. Pronouncements of other standard-setting bodies that use a similar conceptual
framework (e.g., U.S. GAAP).

Question
IFRS is comprised of:
a. International Financial Reporting Standards and FASB
financial reporting standards.
b. International Financial Reporting Standards, International Accounting Standards,
and International Accounting Standards Interpretations.
c. International Accounting Standards and International
Accounting Standards Interpretations.
d. FASB financial reporting standards and International
Accounting Standards.

Financial Reporting Challenges

IFRS in a Political Environment

? Considering the economic consequences of many accounting rules, special interest
groups are expected to vocalize their reactions to proposed rules.
? The Board should not do is issue standards that are
primarily politically motivated.
? While paying attention to its constituencies, the Board should base IFRS on sound
research and a conceptual framework that has its foundation in economic reality.

IFRS in a Political Environment

ILLUSTRATION 1.6
User Groups that Influence the Formulation of Accounting Standards
The Expectations Gap
What the public thinks accountants should do and what accountants think they can
do.

Significant Financial Reporting Issues

? Non-financial measurements
? Forward-looking information
? Soft assets
? Timeliness

Ethics in the Environment of Financial Accounting

? Companies that concentrate on "maximizing the bottom line," "facing the

challenges of competition," and
"stressing short-term results" place accountants in an environment of conflict and
pressure.
? IFRS do not always provide an answer.

? Technical competence is not enough when encountering ethical decisions.

International Convergence
Examples of how convergence is occurring:
1. China's goal is to eliminate differences between its standards and
IFRS.
2. Japan now permits the use of IFRS for domestic companies.
3. The IASB and the FASB have spent the last 12 years working to
converge their standards.
4. Malaysia helped amend the accounting for agricultural assets.
5. Italy provided advice and counsel on the accounting for business combinations
under common control.

Question
The expectations gap is:
a. what financial information management provides and what users want.
b. what the public thinks accountants should do and what
accountants think they can do.
c. what the governmental agencies want from standard- setting and what the
standard-setters provide.
d. what the users of financial statements want from the government and what is
provided.

Most agree that there is a need for one set of international accounting standards.
Here is why:
� Multinational corporations
� Mergers and acquisitions
� Information technology
� Financial markets

Relevant Facts
Following are the key similarities and differences between U.S. GAAP and IFRS
related to the financial reporting environment.
Similarities
� Generally accepted accounting principles (GAAP) for U.S. companies are developed
by the Financial Accounting Standards Board (FASB). The FASB is a private
organization. The U.S. Securities and Exchange Commission (SEC) exercises oversight
over the actions of the FASB. The IASB is also a private organization. Oversight
over the actions of the IASB is regulated by IOSCO.

Relevant Facts
Similarities
� Both the IASB and the FASB have essentially the same governance structure, that
is, a Foundation that provides oversight, a Board, an Advisory Council, and an
Interpretations Committee. In addition, a general body that involves the public
interest is part of the governance structure.
� The FASB relies on the U.S. SEC for regulation and enforcement of its standards.
The IASB relies primarily on IOSCO for regulation and enforcement of its standards.
� Both the IASB and the FASB are working together to ?nd common ground wherever
possible.

Relevant Facts
Differences
� U.S. GAAP is more detailed or rules-based. IFRS tends to simpler and more
flexible in the accounting and disclosure requirements. The difference in approach
has resulted in a debate about the merits of principles-based versus rules-based
standards.
� Differences between U.S. GAAP and IFRS should not be surprising because standard-
setters have developed standards in response to different user needs. In some
countries, the primary users of financial statements are private investors. In
others, the primary users are tax authorities or central government planners. In
the United States, investors and creditors have driven accounting-standard
formulation.

About The Numbers

IASB has looked to the United States to determine the structure it should follow in
establishing IFRS. Presented is FASB's standard-setting structure.

On the Horizon
Both the IASB and the FASB are hard at work developing standards that will lead to
the elimination of major di?erences in the way certain transactions are accounted
for and reported. In fact, beginning in 2010, the IASB (and the FASB on its joint
projects with the IASB) started its policy of phasing in adoption of new major
standards over several years. The major reason for this policy is to provide
companies time to translate and implement international standards into practice.

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