Prepared by Coby Harmon University of California, Santa Barbara Westmont College 1-1 CHAPTER Financial Reporting and Accounting Standards LEARNING OBJECTIVES After studying this chapter, you should be able to: Describe the growing importance of global financial markets and its relation to financial reporting 1-2 Explain the objective of financial reporting Identify the major policy-setting bodies and their role in the standard-setting process Discuss the challenges facing financial reporting PREVIEW OF CHAPTER Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ● Warfield 1-3 LEARNING OBJECTIVE Global Markets Describe the growing importance of global financial markets and its relation to financial reporting World markets are becoming increasingly intertwined Top 20 Global Companies In Terms of Sales ILLUSTRATION 1.1 1-4 LO LEARNING OBJECTIVE Global Markets Describe the growing importance of global financial markets and its relation to financial reporting World markets are becoming increasingly intertwined Top 20 Global Companies In Terms of Sales ILLUSTRATION 1.1 1-5 LO Global Markets Significant number of foreign companies are found on national exchanges ILLUSTRATION 1.2 International Exchange Statistics 1-6 LO Global Markets Financial Statements and Financial Reporting Essential characteristics of accounting are: 1-7 the identification, measurement, and communication of financial information about economic entities to interested parties LO Global Markets Economic Economic Entity Entity Financial Financial Information Information Accounting? Accounting? Identify Identify Financial Financial Statements Statements Additional Additional Information Information Statement Statement of of Financial Financial Position Position President’s President’s letter letter Income Income Statement Statement or or Statement Statement of of Prospectuses Prospectuses Comprehensive Comprehensive Income Income Reports Reports filed filed with with governmental governmental Statement Statement of of Cash Cash Flows Flows agencies agencies Measure Measure Statement Statement of of Changes Changes in in Equity Equity News News releases releases and and Note Note Disclosures Disclosures Forecasts Forecasts and and Communicate Communicate Environmental Environmental impact impact statements statements Etc Etc 1-8 LO Global Markets Accounting and Capital Allocation Resources Resources are are limited limited Efficient Efficient use use of of resources resources often often determines determines whether whether aa business business thrives thrives ILLUSTRATION 1.3 Capital Allocation Process 1-9 LO Global Markets High Quality Standards Globalization demands a single set of high-quality international accounting standards Some elements: Single set of high-quality accounting standards established by a single standard-setting body Consistency in application and interpretation Common disclosures Common high-quality auditing standards and practices Common approach to regulatory review and enforcement Education and training of market participants (Continued) 1-10 LO Standard-Setting Organizations Hierarchy of IFRS Companies first look to: International Financial Reporting Standards; International Financial Reporting Standards, International Accounting Standards (issued by the predecessor to the IASB), and IFRS interpretations originated by the IFRS Interpretations Committee (and its predecessor, the IAS Interpretations Committee); The Conceptual Framework for Financial Reporting; and Pronouncements of other standard-setting bodies that use a similar conceptual framework (e.g., U.S GAAP) 1-27 LO Standard-Setting Organizations Question IFRS is comprised of: a International Financial Reporting Standards and FASB financial reporting standards b International Financial Reporting Standards, International Accounting Standards, and International Accounting Standards Interpretations 1-28 c International Accounting Standards and International Accounting Standards Interpretations d FASB financial reporting standards and International Accounting Standards LO Financial Reporting Challenges LEARNING OBJECTIVE Discuss the challenges facing financial reporting IFRS in a Political Environment ► Considering the economic consequences of many accounting rules, special interest groups are expected to vocalize their reactions to proposed rules ► The Board should not is issue standards that are primarily politically motivated ► While paying attention to its constituencies, the Board should base IFRS on sound research and a conceptual framework that has its foundation in economic reality 1-29 LO IFRS in a Political Environment ILLUSTRATION 1.6 User Groups that Influence the Formulation of Accounting Standards 1-30 LO Financial Reporting Challenges The Expectations Gap What the public thinks accountants should and what accountants think they can Significant Financial Reporting Issues 1-31 ► Non-financial measurements ► Forward-looking information ► Soft assets ► Timeliness LO Financial Reporting Challenges Ethics in the Environment of Financial Accounting ► Companies that concentrate on “maximizing the bottom line,” “facing the challenges of competition,” and “stressing short-term results” place accountants in an environment of conflict and pressure 1-32 ► IFRS not always provide an answer ► Technical competence is not enough when encountering ethical decisions LO Financial Reporting Challenges International Convergence Examples of how convergence is occurring: 1-33 China’s goal is to eliminate differences between its standards and IFRS Japan now permits the use of IFRS for domestic companies The IASB and the FASB have spent the last 12 years working to converge their standards Malaysia helped amend the accounting for agricultural assets Italy provided advice and counsel on the accounting for business combinations under common control LO Financial Reporting Challenges Question The expectations gap is: a what financial information management provides and what users want b what the public thinks accountants should and what accountants think they can c what the governmental agencies want from standard-setting and what the standard-setters provide d 1-34 what the users of financial statements want from the government and what is provided LO GLOBAL ACCOUNTING INSIGHTS LEARNING OBJECTIVE Compare IFRS and U.S GAAP and their standard-setting processes Most agree that there is a need for one set of international accounting standards Here is why: 1-35 • Multinational corporations • Mergers and acquisitions • Information technology • Financial markets LO GLOBAL ACCOUNTING INSIGHTS Relevant Facts Following are the key similarities and differences between U.S GAAP and IFRS related to the financial reporting environment Similarities • Generally accepted accounting principles (GAAP) for U.S companies are developed by the Financial Accounting Standards Board (FASB) The FASB is a private organization The U.S Securities and Exchange Commission (SEC) exercises oversight over the actions of the FASB The IASB is also a private organization Oversight over the actions of the IASB is regulated by IOSCO 1-36 LO GLOBAL ACCOUNTING INSIGHTS Relevant Facts Similarities • Both the IASB and the FASB have essentially the same governance structure, that is, a Foundation that provides oversight, a Board, an Advisory Council, and an Interpretations Committee In addition, a general body that involves the public interest is part of the governance structure • The FASB relies on the U.S SEC for regulation and enforcement of its standards The IASB relies primarily on IOSCO for regulation and enforcement of its standards • 1-37 Both the IASB and the FASB are working together to find common ground wherever possible LO GLOBAL ACCOUNTING INSIGHTS Relevant Facts Differences • U.S GAAP is more detailed or rules-based IFRS tends to simpler and more flexible in the accounting and disclosure requirements The difference in approach has resulted in a debate about the merits of principles-based versus rules-based standards • Differences between U.S GAAP and IFRS should not be surprising because standard-setters have developed standards in response to different user needs In some countries, the primary users of financial statements are private investors In others, the primary users are tax authorities or central government planners In the United States, investors and creditors have driven accounting-standard formulation 1-38 LO GLOBAL ACCOUNTING INSIGHTS About The Numbers IASB has looked to the United States to determine the structure it should follow in establishing IFRS Presented is FASB’s standardsetting structure 1-39 GLOBAL ACCOUNTING INSIGHTS On the Horizon Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major di fferences in the way certain transactions are accounted for and reported In fact, beginning in 2010, the IASB (and the FASB on its joint projects with the IASB) started its policy of phasing in adoption of new major standards over several years The major reason for this policy is to provide companies time to translate and implement international standards into practice 1-40 LO Copyright Copyright © 2018 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 1-41 ... International Accounting Standards Board (IASB) Composed of four organizations— 1-19 ► IFRS Foundation ► International Accounting Standards Board (IASB) ► IFRS Advisory Council ► IFRS Interpretations... standard-setting process Discuss the challenges facing financial reporting PREVIEW OF CHAPTER Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ● Warfield 1-3 LEARNING OBJECTIVE Global Markets Describe... International Accounting Standards Interpretations 1-28 c International Accounting Standards and International Accounting Standards Interpretations d FASB financial reporting standards and International Accounting