Reading 22- Financial Reporting Standards

Question 1

Describe the objective of financial statements and the importance of financial reporting standards in security analysis and valuation.

Answer 1

Purpose of Financial Reporting for Security Analysis= aide investors/creditors to analyze a business to see if giving up their resources is worth it for them.

Objective of Financial Statements= to increase level of consistency, facilitate easy comparison, provide inputs for valuation, keep reliability for investors.

Question 2

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 2

Financial Reporting Standard-Setting Bodies= they set standards for financial reporting for the Private Sector, Not-for-Profit, and Self-Regulated Organizations

Desirable Attributes of Financial Reporting Standard Setting Body:

• each member of standard setting role should have standards-setting process
• adherence to professional standards and codes of ethics
• adequate authority, resources, and competencies to fulfill all responsibilities
• clearly defined and consistent processes for standard setting processes.
• well-articulated framework w/ clearly stated objective
• procedures & standards should align w/ “Accounting Standards Board”
• Should NOT be influenced by special interests/self-interests
• STANDARDS should be in public interest.

Ex: IASB and FASB; they set the rules for accounting principles like GAAP and IAAS.

Question 3

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

Answer 3

There is problem with convergence of both IASB and FASB boards on accounting principles.

Question 4

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 4

Objectives & Qualitative Characteristics of Financial Statements-
-core/central objective of IASB is to provide Financial Information which is useful to both CURRENT & POTENTIAL PROVIDERS OF RESOURCES in the making of decisions

Key Characteristics (4 Key Characteristics):

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

Assumptions:

1. ) Accrual Concept
2. ) Going Concern
3. ) Recognition

Question 5

Describe general requirements for financial statements under International Financial Reporting Standards (IFRS).

Answer 5

IFRS- states that a complete set of financial statements should include:

1. ) Statement of Financial Position (Balance Sheet)
2. ) Statement of Comprehensive Income (Income Sheet)
3. ) Statement of Changes in Equity (SHE Statement)
4. ) Statement of Cash Flows
5. ) Notes- (for all aspects of everything for reporting standards)

General Features:

1. ) Fair presentation
2. ) Going concern
3. ) accrual basis
4. ) materiality and aggregation
5. ) no offsetting
6. ) frequency of reporting
7. ) comparative information
8. ) consistency

Question 6

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

Answer 6

IASB lists income and expenses as elements related to performance while FASB framework includes revenues, expenses, gains, losses, and comprehensive income.

FASB defines an asset as a future economic benefit, where as IASB sees it as an asset that has “expected earnings to flow.”

Question 7

Identify characteristics of a coherent financial reporting framework and the barriers to creating such a framework.

Answer 7

Best Accounting frameworks include the following:

• Transparency
• Comprehensiveness
• Consistency

Barriers to merging IASB and FASB frameworks include:

• valuation
• standard setting
• measurements

Question 8

Describe implications for financial analysis of differing financial reporting systems and the importance of monitoring developments in financial reporting standards.

Answer 8

FASB and IASB have journals that discuss relevant information in journal articles. Those journal articles can be looked up when you continually find new assets, liabilities that you don’t know how to account for.

Question 9

Analyze company disclosures of significant accounting principles.

Answer 9

Significant policies and estimates that require management judgement are addressed in Management’s Discussion and Analysis of a Financial Report. (LOOK HERE!)