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CFA > Book 2: Chpater 17 > Flashcards

Book 2: Chpater 17 Flashcards

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1
Q

According to the IASB’s conceptual framework for financial reporting what is the objective of financial reporting?

A

To provide information about the firm to current and potential investors and creditors to help them with their decisions about investing or lending to the firm

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2
Q

What is the conceptual framework for financial reporting used in?

A

The development of accounting standards

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3
Q

Why are financial reporting standards needed?

A

To provide consistency by narrowing the range of acceptable financial reports (think of the complexity of possible transactions and the estimates and assumptions a firm must make when presenting its performance)

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4
Q

What ensures that transactions are reported by firms similarly?

A

Reporting standards

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5
Q

Why must reporting standards remain flexible?

A

To allow discretion to management to properly describe the economics of the firm

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6
Q

What is the relationship between the design of financial reporting and valuation?

A

Financial reporting wasn’t designed specifically for valuation purposes but it does provide important inputs for it!

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7
Q

What is a standard setting body?

A

A professional organisation of accountants and auditors that establishes financial reporting standards

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8
Q

What is a regulatory authority?

A

Government agencies that have the legal authority to enforce compliance with financial reporting standards

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9
Q

Who are the two primary standard-setting bodies?

A

The financial accounting standards board (FASB) (US) and the international accounting standards board (IASB) (outside the US)

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10
Q

What does the FASB set?

A

Generally accepted accounting principles (GAAP)

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11
Q

What does the IASB establish?

A

International financial reporting standards (IFRS)

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12
Q

True or false, there are no other national standard-setting bodies other than the FASB and IASB?

A

False

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13
Q

What are some of the older IASB standards referred to as?

A

International accounting standards (IAS)

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14
Q

Name the regulatory authorities in the US and the UK established by their respective national governments

A

Securities and exchange commission (SEC) and the financial conduct authority (FCA)

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15
Q

What do most national authorities belong to?

A

The international organisation of securities commissions (IOSCO)

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16
Q

What % of the world’s financial markets does the international organisation of securities commissions (IOSCO) regulate?

A

95%

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17
Q

Is IOSCO a regulatory body?

A

No but its members work together to make national regulation and enforcement more uniform across the world

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18
Q

List the SEC’s requirements for financial reporting by US companies

A

Form S-1, form 10-K, form 10-Q, form DEF-14A, form 8-K, form 144, forms 3,4 and 5

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19
Q

Which act does the SEC have the responsibility of enforcing?

A

The Sarbanes-Oxley Act of 2002

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20
Q

What does the Sarbanes-Oxley Act of 2002 entail?

A

1) prohibits a company’s external auditor form providing additional paid services to the company (to avoid conflicts fo interest and to promote auditor independence)
2) executive management must certify that the financial statements are presented fairly and make a statement about the effectiveness of the company’s internal controls of financial reporting
3) the external auditor must provide a statement confirming the effectiveness of the company’s internal controls

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21
Q

What is a Form S-1?

A

Registration statement filed prior to the sale of new securities to the public, including audited financial statements, risk assessment,t underwriter identification and the estimated amount and use of the offering proceeds

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22
Q

What is a Form 10-K?

A

A required annual filing that includes info about the business and its management, audited financial statements and disclosures, disclosures about legal matters. Similar info so that in an annual report to shareholders but the annual report isn’t a substitute to the Form 10-K!

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23
Q

What are equivalent SEC forms to a Form 10-K for foreign issuers in US markets?

A

Form 40-F for Canadian companies
Form 20-F for other foreign issuers

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24
Q

What is a Form 10-Q?

A

US firms are required to file this form quarterly, with updated financial statements (but they don’t need to be audited) and disclosures about certain events eg significant legal proceedings or changes in accounting policy

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25
Q

What are non-US companies typically required to file semiannually that’s the equivalent of a Form 10-Q?

A

Form 6-K

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26
Q

What is a form DEF-14A?

A

When a firm prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it files the statement with the SEC too (as a From DEF-14A)

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27
Q

What is a form 8-K?

A

Companies must file this form to disclose material events eg significant asset acquisitions and disposals, change in management or corporate governance or matters relating to accountants, financial statements or the markets in which its securities trade

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28
Q

What is a Form-144?

A

A company can issue securities to certain qualified buyers without registering the securities with the SEC, but it must notify the SEC that it intends to do so, with a Form-144

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29
Q

What are Forms 3, 4 and 5?

A

They involve the beneficial ownership of securities by a company’s officers and directors. Analysts use these forms to learn about the purchase and sales of company securities by corporate insiders

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30
Q

True or false, in the European Union each member state uses the same securities regulations and all countries are required to report using IFRS?

A

False, they all report using IFRS but each member state has its own securities regulations

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31
Q

Which 2 bodies did the European Commission set up and why?

A

1) the European Securities Commission which advises the European Commission on securities regulation issues
2) the European securities and market authority (ESMA) which coordinates regulation within the EU

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32
Q

Where are the ideas that the IASB (international accounting standards board) bases its standards on expressed?

A

In the conceptual framework for financial reporting

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33
Q

When did the IASB adopt the conceptual framework for financial reporting? And when was it revised?

A

In 2010, revised in 2018

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34
Q

What does the IASB framework detail?

A

The qualitative characteristics of financial statements and it specifies the required reporting elements

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35
Q

What is at the centre of the IASB conceptual framework?

A

The objective to provide financial information that is useful in making decisions about providing resources to an entity (these resource providers include investors, lenders and other creditors)

36
Q

What do users of financial statements want to find out?

A

Information about the firm’s performance, financial position and cash flow

37
Q

Which 2 fundamental characteristics make financial information useful?

A

Relevance and faithful representation

38
Q

Define relevance of a financial statement

A

If the information can influence users’ economic decisions or affect their evaluations of past events or forecast future events.
Information should have predictive value, confirmatory value (confirm prior expectations) or both.
Materiality is also an aspect of relevance

39
Q

Define faithful representation of a financial statement

A

The information contained is complete, neutral (no bias) and free from error

40
Q

Which 4 characteristics enhance relevance and faithful representation?

A

Comparability, verifiability, timeliness and understandability

41
Q

Define comparability

A

Financial statement presentation should be consistent among firms and across time periods

42
Q

Define verifiability

A

Independent observers using the same methods obtain similar results

43
Q

Define timeliness

A

Information is available to decision makers before the information is stale

44
Q

Define understandability

A

Users with a basic knowledge of business and accounting and who make a reasonable effort to study the financial statements should be able to readily understand the information the statements present.
Useful information shouldn’t be omitted just because it’s complicated

45
Q

What are the 5 required reporting elements of the conceptual framework for financial reporting?

A

Assets, liabilities, equity, income and expenses

46
Q

What do assets, liabilities and owners’ equity get you to measure?

A

Financial position

47
Q

What do income and expenses get you to measure?

A

Performance

48
Q

How does the conceptual framework for financial reporting define assets?

A

Resources controlled as a result of past transactions that are expected to provide future economic benefits

49
Q

How does the conceptual framework for financial reporting define liabilities?

A

Obligations as a result of past events that are expected to require an outflow of economic resources

50
Q

How does the conceptual framework for financial reporting define equity

A

The owner’s residual interest in the assets after deducting the liabilities

51
Q

How does the conceptual framework for financial reporting define income

A

An increase in economic benefits either increasing assets or decreasing liabilities in away that increases owner’s equity (but not including contributions by owners)
Includes revenues and gains

52
Q

How does the conceptual framework for financial reporting define expenses?

A

A decrease in economic benefits either decreasing assets or increasing liabilities in a way that decreases owners’ equity (but not including distributions to owners)
Includes losses

53
Q

What does the amount at which items are reported in the financial statement elements depend on?

A

Their measurement base

54
Q

When should an item be recognised in its financial statement element?

A

If a future economic benefit (flowing to or from the firm) is probable pand the item’s value or cost can be measured reliably

55
Q

Measurement bases include…

A

Historial cost
Amortised cost
Current cost
Net realizable value
Present value
Fair value

56
Q

Define historical cost

A

The amount originally paid for the asset

57
Q

Define amortised cost

A

Historial cost adjusted for depreciation, amortisation, depletion and impairment

58
Q

Define current cost

A

The amount the firm would have to pay today for the same asset

59
Q

Define net realisable value

A

The estimated selling price of the asset in the normal course of business minus the selling costs

60
Q

Define present value

A

The discounted value of the asset’s expected future cash flows

61
Q

Define fair value

A

The price at which the asset could be sold, or a liability transferred, in an orderly transaction between willing parties

62
Q

According to the conceptual framework what has a cost-benefit trade off?

A

The 4 enhancing characteristics, so the benefit that users gain from the information should be greater than the cost of presenting it

63
Q

What is a constraint not specifically mentioned in the conceptual framework for financial reporting?

A

That’s non-qualifiable information about a company (its reputation, brand loyalty, capacity for innovation etc) cant be captured directly in financial statements

64
Q

What are 2 important underlying assumptions of financial statements

A

Accrual accounting and going concern

65
Q

Define accrual accounting

A

It means financial statements should reflect transactions at the time they actually occur not necessarily when cash is paid

66
Q

What is going concern

A

The assumption that the company will continue to exist for the foreseeable future

67
Q

Which financial statements are required to be reported under IFRS?

A

Balance sheet (statement of financial position)
Statement of comprehensive income
Cash flow statement
Statement of changes in owners’ equity
Explanatory notes, including a summary of accounting policies

68
Q

What are the general features for preparing financial statements under IFRS?

A

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

69
Q

Define fair presentation of financial statements according to the IFRS

A

Faithfully representing the effects of the entity’s transactions and events according to the standards for recognising assets, liabilities, revenues and expenses

70
Q

Define going concern bias of financial statements according to the IFRS

A

The financial statements are based on the assumption that the firm will continue to exist unless its management intends to (or must) liquidate it

71
Q

Define accrual bias of accounting according to the IFRS

A

This is used to prepare the financial statements other than the statement of cash flows

72
Q

Define consistency of financial statements according to the IFRS

A

Consistency between periods in how items are presented and classified, with prior-period amounts disclosed for comparison

73
Q

Define materiality of financial statements according to the IFRS

A

They should be free of misstatements or omissions that could influence the decisions of users of financial statements

74
Q

Define aggregation of financial statements according to the IFRS

A

Aggregation of similar items and separation of dissimilar items

75
Q

Define no offsetting of financial statements according to the IFRS

A

No offsetting of assets against liabilities or income against expenses unless a specific standards permits or requires it

76
Q

Define the reporting frequency of financial statements according to the IFRS

A

Must be at least annually

77
Q

Define comparative information of financial statements according to the IFRS

A

Comparative information for prior periods should be included unless a specific standard states otherwise

78
Q

What are the 3 requirements for structure and content of financial statements according to the IFRS

A

Classified balance sheet
Minimum information
Comparative information

79
Q

Define a classified balance sheet according tot he ISFR

A

Balance sheet includes current and non current assets and liabilities

80
Q

Define minimum information according to IFRS

A

This si required on the face of each financial statement and in the notes.
Eg the face of the balance sheet must show specific items such as cash and cash equivalents, PP&E and inventories
The face of the comprehensive income statement needs to include revenue, profit or loss, tax expense, finance cost etc

81
Q

Define comparative information according to the IFRS

A

This ensures that prior periods should be included unless a specific standard states otherwise

82
Q

What should an analyst do about the fact that financial reporting standards continue to evolve?

A

Monitor how these developments will effect the financial statements they use.
Be aware or new products and innovations in the financial markets that generate new types of transactions because these might not fall neatly into the existing financial reporting standards

83
Q

What can an analyst use as a guide for evaluating what effect new products or transactions might have on financial statements?

A

Financial reporting framework

84
Q

What can an analyst use to keep up to date on the evolving financial reporting standards?

A

They can monitor professional journals and other sources such as IASB and FASB websites

85
Q

Where does the CFA institute produce position papers on financial reporting issues?

A

The CFA institute centre for financial market integrity

86
Q

What must analysts monitor company disclosures for?

A

Significant accounting standards and estimates

CFA (3 decks)

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