3.2 Financial Reporting Standards Flashcards
The Conceptual Framework
defines the purpose of financial reporting as providing information that can be used to help current and potential investors and lenders make investment decisions.
International Accounting Standards Board (IASB)
The IASB is the standard-setting body of the International Financial Reporting Standards (IFRS) organization.
Financial Accounting Standards Board (FASB)
FASB and its predecessors have issued financial reporting standards in the United States since the 1930s.
The Financial Accounting Foundation oversees, administers, and finances the organization.
The process is designed to be independent. Input on new and revised standards is gathered from various stakeholders.
The FASB Accounting Standards Codification is the basis for the U.S. generally accepted accounting principles (GAAP). The SEC recognizes GAAP as authoritative.
International Organization of Securities Commissions (IOSCO)
IOSCO is not a regulatory authority, but its members collectively regulate more than 90% of the world’s financial capital markets.
The principles of securities regulation are based on protecting investors, ensuring markets are fair, efficient, and transparent, and reducing systematic risk.
The principles of financial reporting are full, accurate, and timely disclosure of financial results along with highly and internationally acceptable quality.
The Securities and Exchange Commission (SEC)
The SEC was established to regulate US capital markets after the stock market crash of 1929
It is a member of IOSCO
some of the most significant pieces of legislation that are administered and enforced by the SEC include:
- Securities Act of 1933
- Securities Exchange Act of 1934
- Sarbanes-Oxley Act of 2002
Securities Act of 1933
This act specifies what information investors must receive
prohibits misrepresentation
requires initial registration of public securities.
Securities Exchange Act of 1934
This act created the SEC and gave it the authority to require periodic reporting of public companies.
Sarbanes-Oxley Act of 2002
This act created the Public Company Accounting Oversight Board, which addresses auditor independence and strengthens corporate responsibility for financial reports. Internal controls over financial reporting must also be reported.
Common disclosures that listed companies are required to file with the SEC include:
- Securities Offerings Registration Statement
- Forms 10-K, 20-F, and 40-F
- Annual Report
- Proxy Statement / Form DEF-14A
- Forms 10-Q and 6-K
Securities Offerings Registration Statement
This relates to new securities offerings and is required by the 1933 Act.
Forms 10-K, 20-F, and 40-F
These forms must be filed annually, containing information about a company’s business, financial disclosures, and legal proceedings.
Annual Report
Most companies provide an annual report to shareholders, but it is not required by the SEC
It is usually a user-friendly report.
Proxy Statement / Form DEF-14A
Shareholders must be sent a proxy statement prior to a shareholder meeting.
A proxy gives another party the right to cast a vote.
Forms 10-Q and 6-K
These are interim period (quarterly or semi-annual) reports.
Other SEC filings by a company or its officers include:
- Form 8-K
- Form 144
- Forms 3, 4, and 5
- Form 11-K
Form 8-K
This must be filed for major events such as acquisitions and matters related to accounting and financial statements.
Form 144
This form is a notice for the sale of restricted security relying on Rule 144.
Forms 3, 4, and 5
These forms report the beneficial ownership of securities.
Form 11-K
This is the annual report for employee stock purchases and similar plans.
The most likely reason that financial reports are not designed exclusively with asset valuation in mind is the:
A
diversity of users.
B
complexity of transactions.
C
increasing integration of global capital markets.
A
diversity of users.
Although capital providers are considered to be the primary users of financial reports, this information is relevant to a variety of users, including customers, employees, and regulators.
The Conceptual Framework specifies two fundamental qualitative characteristics that make financial information useful for capital providers:
- Relevance
- Faithful representation
Relevance
Information is considered to be relevant if it would potentially affect a user’s decisions.
It helps the user evaluate past, present, and future events. Information is material if its omission or misstatement would influence a user’s decisions.
Faithful representation
To the greatest extent possible, the information presented in financial reports should be complete, neutral (unbiased), and free from error.
In addition to these two fundamental characteristics in The Conceptual Framework, there are four enhancing characteristics:
- Comparability
- Verifiability
- Timeliness
- Understandability
Comparability
allows users to understand similarities and differences.
The information should be consistent across time and entities.
Verifiability
means observers agree the information presented represents the economic phenomena.
Timeliness
implies the information is available before the decision must be made.
Understandability
comes from a clear and concise presentation.
The information should be understandable by users with a reasonable knowledge of the business.
The elements of a company’s financial position are:
Assets
Liabilities
Equity
The elements of financial performance are:
Income
Expenses
Accrual accounting
implies financial statements should reflect transactions in the period in which they occurred, regardless of the cash flow.
Going concern
assumes the company will continue in business.
An item should be recognized on the financial statements if:
it is probable any economic benefit associated with the item will flow to the enterprise; and
the cost or value can be reliably measured.
Presentation of Financial Statements
Required Financial Statements from the International Accounting Standard (IAS) No. 1
Statement of financial position
Statement of comprehensive income
Statement of changes in equity
Statement of cash flows
Notes
Which of the following statements is most likely correct? According to IAS No. 1, a complete set of financial statements:
A
does not require a statement of changes in equity.
B
does not require income to be reported in a single statement.
C
requires share repurchases to be reported in a statement of comprehensive income.
B
does not require income to be reported in a single statement.
Which of the following statements is most accurate? A company that adheres to IFRS is:
A
prohibited from issuing financial statements that have not been prepared on a going concern basis.
B
required to provide an explicit statement of compliance with IFRS in the notes to its financial statements.
C
required to issue financial statements that meet all standards, but no explicit statement of compliance is necessary.
B
required to provide an explicit statement of compliance with IFRS in the notes to its financial statements
