(23) Financial Reporting Standards

Question 1

LOS 23. a: Describe the objective of financial statements and the importance of financial reporting standards in security analysis and valuation.

Answer 1

The objective of financial statements is to provide economic decision makers with useful information about a firm’s financial performance and changes in financial position.

Question 2

LOS 23. a: Describe the objective of financial statements and the importance of financial reporting standards in security analysis and valuation.

Answer 2

Reporting standards are designed to ensure that different firms’ statements are comparable to one another and to narrow the range of reasonable estimates on which financial statements are based. This aids users of the financial statements who rely on them for information about the company’s activities, profitability, and creditworthiness.

Question 3

LOS 23. b: Describe roles and desirable attributes of financial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards, and describe the role of the International Organization of Securities Commissions.

Answer 3

Standard-setting bodies are private sector organizations that establish financial reporting standards. The two primary standard-setting bodies are the International Accounting Standards Board (IASB) and, in the United States, the Financial Accounting Standards Board (FASB).

Question 4

LOS 23. b: Describe roles and desirable attributes of financial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards, and describe the role of the International Organization of Securities Commissions.

Answer 4

Regulatory authorities are government agencies that enforce compliance with financial reporting standards. Regulatory authorities include the Securities and Exchange Commission (SEC) in the United States and the Financial Services Authority (FSA) in the United Kingdom.

Question 5

LOS 23. b: Describe roles and desirable attributes of financial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards, and describe the role of the International Organization of Securities Commissions.

Answer 5

Many national regulatory authorities belong to the International Organization of Securities Commissions (IOSCO).

Question 6

LOS 23. c: Describe the status of global convergence of accounting standards and ongoing barriers to developing one universally accepted set of financial reporting standards.

Answer 6

Efforts to achieve convergence of local accounting standards with IFRS are underway in most major countries that have not adopted IFRS.

Question 7

LOS 23. c: Describe the status of global convergence of accounting standards and ongoing barriers to developing one universally accepted set of financial reporting standards.

Answer 7

Barriers to developing one universally accepted set of financial reporting standards include difference of opinion among standard-setting bodies and regulatory authorities from different countries and political pressure within countries from groups affected by changes in reporting standards.

Question 8

LOS 23. d: Describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of financial statements, required reporting elements, and constraints and assumptions in preparing financial statements.

Answer 8

The IFRS “Conceptual Framework for Financial Reporting” defines the fundamental and enhancing qualitative characteristics of financial statements, specifies the required reporting elements, and notes the constraints and assumptions involved in preparing financial statements.

Question 9

LOS 23. d: Describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of financial statements, required reporting elements, and constraints and assumptions in preparing financial statements.

Answer 9

• The fundamental characteristics of financial statements are relevance and faithful representation. The enhancing characteristics include comparability, verifiability, timeliness, and understandability.

Question 10

LOS 23. d: Describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of financial statements, required reporting elements, and constraints and assumptions in preparing financial statements.

Answer 10

• Elements of financial statements are assets, liabilities, and owners’ equity (for measuring financial position) and income and expenses (for measuring performance).

Question 11

LOS 23. d: Describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of financial statements, required reporting elements, and constraints and assumptions in preparing financial statements.

Answer 11

• Constraints on financial statement preparation include cost versus benefit and the difficulty of capturing non-quantifiable information in financial statements.

Question 12

LOS 23. d: Describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of financial statements, required reporting elements, and constraints and assumptions in preparing financial statements.

Answer 12

• The two primary assumptions that underlie the preparation of financial statements are the accrual basis and the going concern assumption

Question 13

LOS 23. e: Describe general requirements for financial statements under International Financial Reporting Standards (IFRS). Required financial statements.

Answer 13

Required financial statements are the balance sheet, comprehensive income statement, cash flow statement, statement of changes in owners’ equity, and explanatory notes.

Question 14

LOS 23. e: Describe general requirements for financial statements under International Financial Reporting Standards (IFRS). Financial statement features.

Answer 14

The general features of financial statements according to IAS No. 1 are:

• Fair presentation
• Going concern
• Accrual accounting
• Consistency
• Materiality
• Aggregation
• No offsetting
• Reporting frequency
• Comparative information

Question 15

LOS 23. e: Describe general requirements for financial statements under International Financial Reporting Standards (IFRS). Other presentation requirements.

Answer 15

Other presentation requirements include a classified balance sheet and specific minimum information that must be reported in the notes and on the face of the financial statement.

Question 16

LOS 23. f: Compare key concepts of financial reporting standards under IFRS and US generally accepted accounting principles (US GAAP) reporting systems. Differences.

Answer 16

The IASB and FASB frameworks are similar but are moving towards convergence. Some of the remaining differences are:

• The IASB lists income and expenses as performance elements, while the FASB lists revenues, expenses, gains, losses, and comprehensive income.
• There are minor differences in the definition of assets. Also, the FASB uses the word probable when defining assets and liabilities.
• The FASB does not allow the upward revaluation of most assets.

Question 17

LOS 23. f: Compare key concepts of financial reporting standards under IFRS and US generally accepted accounting principles (US GAAP) reporting systems. Listing shares in the U.S reporting requirement.

Answer 17

Firms that list their shares in the United States but do not use U.S. GAAP or IFRS are required to reconcile their financial statements with U.S. GAAP. For IFRS firms listing their shares in the United States, reconciliation is no longer required.

Question 18

LOS 23. g: Identify characteristics of a coherent financial reporting framework and the barriers to creating such a framework.

Answer 18

A coherent financial reporting framework should exhibit transparency, comprehensiveness, and consistency.