1. FINANCIAL REPORTING AND ACCOUNTING STANDARDS Flashcards
How can we compare companies?
numbers are comparable → international accounting standards = rules to make judgements in an international environment
Do we need to protect investors? What is their risk?
Insolvency and FRAUD (= main risk)
if you invested, no buffer, you lose everything → you have to see the risk to protect investors
IFRS is mandatory for who?
listed companies
BUT a private non-listed company can decide to adopt IFRS → to be more effective in delivering information to investors and to have discounts on taxes
essential characteristics of accounting
-identification, measurement, and communication of financial information about
-economic entities to
-interested parties
1st financial statement?
income statement
high-quality international accounting standards
to avoid frauds → consistency
for all sectors →comparability
elements of high-quality standards
- Single set of high-quality accounting standards established by a single standard-setting body
- Consistency in application and interpretation
- Common disclosures
- Common high-quality auditing standards and practices
- Common approach to regulatory review and enforcement
- Education and training of market participants
- Common delivery systems (eXtensible Business Reporting Language—XBRL)
- Common approach to corporate governance and legal frameworks around the world
Objective of financial reporting
provide financial info 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
primary user group
–> investors need info to assess the amount of cash flow the firm can generate
Entity perspective
Companies are considered separate from their owners (shareholders)
Investors are interested in assessing:
-company’s ability to generate net cash inflows and
-management’s ability to protect and enhance the capital providers’ investments
objective of financial reporting places most emphasis on:
reporting to capital providers (=investors)
Standard-setting organizations
-IASB (international accounting standards board)
-IOSCO (international organization of securities commissions)
IASB composed of 4 organizations
- IFRS foundation
- International accouting standards board
- IFRS advisory council
- IFRS interpretations committee
how much IFRS is close to IASB (USA)?
really close, but big difference:
-IFRS: principle-based –> sort of discretion on how to apply the principles, discretionary approach
-IASB: rules-based → go through the rules and abide perfectly
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
4. collaborative efforts with the worldwide standard-setting community
–> show if new rules are effective and achieve the accounting objectives
Accounting standard-setters use the following process in establishing international standards
- Research
- discussion paper
- exposure draft
- standard
Types of Pronouncements
-International Financial Reporting Standards
-Conceptual Framework for Financial Reporting
-International Financial Reporting Standards Interpretations
Conceptual Framework for Financial Reporting
give us the way in which the standards are built (characteristics, measures)
International Financial Reporting Standards Interpretations
issuance interpretation (important when big change)
Hierarchy of IFRS
companies first look to:
- 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.Conceptual Framework for Financial Reporting
- Pronouncements of other standard-setting bodies that use a similar conceptual framework (U.S. GAAP)
IFRS is comprised of:
- International Financial Reporting Standards
- International Accounting Standards
- International Accounting Standards Interpretations
Expectations gap
what the public thinks accountants should do and what accountants think they can do
IOSCO
international organization of securities commissions
-does not set accounting standards
-dedicated to ensuring that global markets can operate efficiently and effectively
-supports using IFRS as the single set of international standards in cross-border offerings and listings
IFRS stands for
international financial reporting standards
major key players on international side of standard-setting are
-IASB (international accounting standards board)
-IOSCO (international organization of securities commissions)
