3.2 Financial Reporting Standards

Question 1

The Conceptual Framework

Answer 1

defines the purpose of financial reporting as providing information that can be used to help current and potential investors and lenders make investment decisions.

Question 2

International Accounting Standards Board (IASB)

Answer 2

The IASB is the standard-setting body of the International Financial Reporting Standards (IFRS) organization.

Question 3

Financial Accounting Standards Board (FASB)

Answer 3

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.

Question 4

International Organization of Securities Commissions (IOSCO)

Answer 4

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.

Question 5

The Securities and Exchange Commission (SEC)

Answer 5

The SEC was established to regulate US capital markets after the stock market crash of 1929

It is a member of IOSCO

Question 6

some of the most significant pieces of legislation that are administered and enforced by the SEC include:

Answer 6

1. Securities Act of 1933
2. Securities Exchange Act of 1934
3. Sarbanes-Oxley Act of 2002

Question 7

Securities Act of 1933

Answer 7

This act specifies what information investors must receive

prohibits misrepresentation

requires initial registration of public securities.

Question 8

Securities Exchange Act of 1934

Answer 8

This act created the SEC and gave it the authority to require periodic reporting of public companies.

Question 9

Sarbanes-Oxley Act of 2002

Answer 9

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.

Question 10

Common disclosures that listed companies are required to file with the SEC include:

Answer 10

1. Securities Offerings Registration Statement
2. Forms 10-K, 20-F, and 40-F
3. Annual Report
4. Proxy Statement / Form DEF-14A
5. Forms 10-Q and 6-K

Question 11

Securities Offerings Registration Statement

Answer 11

This relates to new securities offerings and is required by the 1933 Act.

Question 12

Forms 10-K, 20-F, and 40-F

Answer 12

These forms must be filed annually, containing information about a company’s business, financial disclosures, and legal proceedings.

Question 13

Annual Report

Answer 13

Most companies provide an annual report to shareholders, but it is not required by the SEC

It is usually a user-friendly report.

Question 14

Proxy Statement / Form DEF-14A

Answer 14

Shareholders must be sent a proxy statement prior to a shareholder meeting.

A proxy gives another party the right to cast a vote.

Question 15

Forms 10-Q and 6-K

Answer 15

These are interim period (quarterly or semi-annual) reports.

Question 16

Other SEC filings by a company or its officers include:

Answer 16

1. Form 8-K
2. Form 144
3. Forms 3, 4, and 5
4. Form 11-K

Question 17

Form 8-K

Answer 17

This must be filed for major events such as acquisitions and matters related to accounting and financial statements.

Question 18

Form 144

Answer 18

This form is a notice for the sale of restricted security relying on Rule 144.

Question 19

Forms 3, 4, and 5

Answer 19

These forms report the beneficial ownership of securities.

Question 20

Form 11-K

Answer 20

This is the annual report for employee stock purchases and similar plans.

Question 21

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.

Answer 21

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.

Question 22

The Conceptual Framework specifies two fundamental qualitative characteristics that make financial information useful for capital providers:

Answer 22

1. Relevance
2. Faithful representation

Question 23

Relevance

Answer 23

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.

Question 24

Faithful representation

Answer 24

To the greatest extent possible, the information presented in financial reports should be complete, neutral (unbiased), and free from error.

Question 24

In addition to these two fundamental characteristics in The Conceptual Framework, there are four enhancing characteristics:

Answer 24

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 24

Comparability

Answer 24

allows users to understand similarities and differences.

The information should be consistent across time and entities.

Question 24

Verifiability

Answer 24

means observers agree the information presented represents the economic phenomena.

Question 24

Timeliness

Answer 24

implies the information is available before the decision must be made.

Question 24

Understandability

Answer 24

comes from a clear and concise presentation.

The information should be understandable by users with a reasonable knowledge of the business.

Question 24

The elements of a company’s financial position are:

Answer 24

Assets

Liabilities

Equity

Question 25

The elements of financial performance are:

Answer 25

Income

Expenses

Question 26

Accrual accounting

Answer 26

implies financial statements should reflect transactions in the period in which they occurred, regardless of the cash flow.

Question 27

Going concern

Answer 27

assumes the company will continue in business.

Question 28

An item should be recognized on the financial statements if:

Answer 28

it is probable any economic benefit associated with the item will flow to the enterprise; and

the cost or value can be reliably measured.

Question 29

Presentation of Financial Statements

Required Financial Statements from the International Accounting Standard (IAS) No. 1

Answer 29

Statement of financial position

Statement of comprehensive income

Statement of changes in equity

Statement of cash flows

Notes

Question 30

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.

Answer 30

B
does not require income to be reported in a single statement.

Question 31

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.

Answer 31

B
required to provide an explicit statement of compliance with IFRS in the notes to its financial statements