FSA: Financial Reporting Standards

Question 1

Objective of financial statements and importance of standards =

Answer 1

• Provide useful information to potential investors/creditors
• Standards provide consistency (as companies’ transactions/assumptions can vary hugely and could be presented in many different ways)
• Standards must allow enough discretion for management to properly describe the economics of the firm.
• FR is not designed solely for valuation, but provides important inputs for valuation purposes

Question 2

Standard setting bodes vs Regulatory authorities =

Answer 2

SSBs are professional organizations that set FR standards:

• FASB in US sets GAAP
• IASB in rest of world sets IFRS
• Many are (incl FASB) are moving towards IFRS

Reg Auth are established by governments

• SEC (US), FSA (UK)
• Most belong to IOSCO
• IOSCO financial market regulation objectives: protect investors, ensure fairness/transparency/efficiency in markets, reduce systemic risk

Question 3

Desired attributes of standard setting bodies (FASB, IASB) =

Answer 3

• Observe high professional standards.
• Have adequate authority, resources, and competencies to accomplish its mission.
• Have clear and consistent standard-setting processes.
• Guided by a well-articulated framework.
• Operate independently while still seeking input from stakeholders.
• Should not be compromised by special interests.
• Decisions are made in the public interest.

Question 4

SEC Required Filings =

Answer 4

• S-1: registration before selling new securities to the public
• 10-K: Annual filing of FS (40-F for Canadian companies, 20-F for foreign)
• 10-Q: Quarterly update (do not have to be audited like a 10-K)
• DEF-14A: Filing of a proxy statement that will be used by shareholders
• 8-K: Disclosure of material events (significant acquisitions, changes to mgmt/FS/market in which it trades etc)
• 144: notification of issuance of securities to qualified buyers without registering with SEC
• 3, 4 and 5: beneficial ownership of securities by company’s officers and directors (anlaysts can use to learn about transactions by corporate insiders)

Question 5

Convergence of standards/barriers to a universal set of standards =

Answer 5

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

Barriers:

• differences of opinion
• political pressure within countries from groups affected by changes in reporting standards.

Question 6

IFRS “Conceptual Framework for Financial Reporting” (x3)

Answer 6

• fundamental and enhancing qualitative characteristics of financial statements
• specifies required reporting elements
• constraints and assumptions in preparing FS

Question 7

IFRS: Fundamentals/Enhancing factors of FS =

Answer 7

Fundamental characteristics: relevance and faithful representation

Enhancing characteristics: comparability, verifiability, timeliness and understandability

Question 8

IFRS: Elements =

Answer 8

Assets, Liabilities, Owners’ equity (for measuring financial position)

Income and Expenses (for measuring performance)

Question 9

IFRS: Constraints and Assumptions =

Answer 9

Constraints: Cost vs Benefit (of including enhancing characteristics)

Difficulty of capturing non-quantifiable info (reputation, brand loyalty)

Assumptions: Accrual Basis

Going Concern Assumption - firm will sontinue to exist until management intends to/is forced to liquidate it (if this is not the case the presentation of financial statements requires adjustments)

Question 10

IFRS: General requirements =

Answer 10

5x Financial Statements: Balance sheet, income statement, cash flow statement, statement of change in owners’ equity, explanatory notes

Features:

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

Question 11

IFRS vs GAAP (x3) =

Answer 11

• 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 12

Characteristics of a coherent FR framework (x3) =

Answer 12

Transparency

Comprehensiveness

Consistency

Question 13

Barriers to a coherent FR framework =

Answer 13

Issues of valuation - ie historical cost vs fair value

Standard Setting - principles-based, rules-based or objectives oriented. IFRS = principles based, GAAP = more rule based, but moving to OO

Measurement - asset/liability approach focused on the BS vs revenue/expense approach focused on the IS

Question 14

Analysts POV - implications of different FRS and importance of monitoring changes =

Answer 14

An analyst should be aware of evolving financial reporting standards and new products and innovations that generate new types of transactions.

Question 15

LOS 24.i: Analyze company disclosures of significant accounting policies.

DRY MUCH

Answer 15

Under IFRS and U.S. GAAP, companies must disclose their accounting policies and estimates in the footnotes and MD&A. Public companies are also required to disclose the likely impact of recently issued accounting standards on their financial statements.