FINANCIAL REPORTING AND ACCOUNTING STANDARDS

C H A P T E R 1

FINANCIAL REPORTING AND ACCOUNTING STANDARDS

Intermediate Accounting IFRS

Amy Zang

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Learning Objectives

1.  Identify the major ?inancial statements and other means of ?inancial reporting.

2.  Explain how accounting assists in the ef?icient use of scarce resources.

3.  Explain the need for high-‐quality standards.

4.  Identify the objective of ?inancial reporting.

5.  Identify the major policy-‐setting bodies and their role in the standard-‐setting process.

6.  Explain the meaning of IFRS.

7.  Describe the challenges facing ?inancial reporting.

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Global Markets

World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms Of Sales

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Global Markets

Signi?icant number of foreign companies are found on national exchanges.

Illustration 1-‐2 International Exchange Statistics

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LO 1 Identify the major 3inancial statements and other means of 3inancial reporting.

Financial Reporting

Financial Statements and Financial Reporting

Characteristics of accounting are:

(1)  the identiGication, measurement, and communication of ?inancial information about

(2)  economic entities to

(3)  interested parties.

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Financial Information

Accounting?

Identify and

Measure and

Communicate

Statement of Financial Position

Income Statement or Statement of

Comprehensive Income

Statement of Cash Flows

Statement of Changes in Equity

Note Disclosures

President’s letter

Prospectuses

Reports Giled with governmental

agencies

News releases

Forecasts

Environmental impact statements

Etc.

Financial Statements Additional Information Economic Entity

Financial Reporting

LO 1 Identify the major 3inancial statements and other means of 3inancial reporting.

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Resources are limited. Ef?icient use of resources often determines whether a business thrives.

LO 2 Explain how accounting assists in the ef3icient use of scare resources.

Illustration 1-‐3 Capital Allocation Process

Accounting and Capital Allocation

Global Markets 7

LO 3 Explain the need for high-‐quality standards.

High Quality Standards

Global Markets

Globalization demands a single set of high-‐quality international accounting standards. Some elements:

1.  Single set of high-‐quality accounting standards established by a single standard-‐setting body.

2.  Consistency in application and interpretation.

3.  Common disclosures.

4.  Common high-‐quality auditing standards and practices.

5.  Common approach to regulatory review and enforcement.

6.  Education and training of market participants.

7.  Common delivery systems

8.  Common approach to corporate governance and legal frameworks around the world

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LO 3 Explain the need for high-‐quality standards.

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Objective of Financial Accounting

LO 4 Identify the objectives of 3inancial reporting.

Objective: Provide ?inancial information about the reporting entity that is useful to

"   present and potential equity investors,

"   lenders, and

"   other creditors

in making decisions in their capacity as capital providers.

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Major Organizations:

" International Accounting Standards Board (IASB)

Ø  Issues International Financial Reporting Standards (IFRS).

Ø  Standards used on most foreign exchanges.

Ø  Standards used by foreign companies listing on U.S. securities exchanges.

Ø  IFRS used in over 115 countries. LO 5 Identify the major policy-‐setting bodies and their

role in the standard-‐setting process.

Standard-‐Setting Organizations 11

International Organization of Securities Commissions (IOSCO)

►  Does not set accounting standards.

►  Dedicated to ensuring that global markets can operate in an ef?icient and effective basis.

►  Supports the use of IFRS as the single set of international standards in cross-‐border offerings and listings.

http://www.iosco.org/

LO 6

Standard-‐Setting Organizations

Types of Pronouncements ►  International Financial Reporting Standards.

►  Conceptual Framework for Financial Reporting.

►  International Financial Reporting Standards Interpretations.

LO 6

Standard-‐Setting Organizations

Hong Kong Institute of CertiGied Public Accountants (HKICPA):

" The HKICPA issues HKFRS and non-‐mandatory guidance documents including Accounting Guidelines and Accounting Bulletins.

" The HKICPA is the only statutory accounting body in existence in Hong Kong responsible for the establishment of accounting and auditing standards and guidelines, as well as for the administration and regulation of the accounting profession in Hong Kong.

LO 5 Identify the major policy-‐setting bodies and their role in the standard-‐setting process.

Hong Kong Main Regulatory Bodies 14

Stock Exchange of Hong Kong (SEHK) Ltd:

" The principal function of the SEHK is to provide a fair, orderly and ef?icient market for the trading of securities.

" Currently, there are two established exchanges under the SEHK, the Main Board and the Growth Enterprise Market (GEM) Board, on which companies are listed in Hong Kong.

" The SEHK regulates the ?inancial reporting compliance of listed companies.



Securities and Futures Commission (SFC):

" The SFC is responsible for administering the laws governing the securities and futures markets in Hong Kong and facilitating and encouraging the development of these markets. " To maintain and promote the fairness, ef?iciency, competitiveness, transparency and

orderliness of the securities and futures industry;

" To promote understanding by the public of the operation and functioning of the securities and futures industry;

" To provide protection for members of the public investing in or holding ?inancial products;

" To minimize crime and misconduct in the securities and futures industry;

" To reduce systemic risks in the securities and futures industry; and

" To assist the Financial Secretary in maintaining the ?inancial stability of Hong Kong by taking appropriate steps in relation to the securities and futures industry.



Financial Reporting Council (FRC):

" Conduct independent investigations into possible auditing and reporting irregularities in relation to listed entities

" Enquire into possible non-‐compliances with ?inancial reporting requirements on the part of listed entities.

" Require listed entities to remove any non-‐compliance identi?ied.



" Mostly similar

" Slight difference in HKAS 16 (PP&E), HKAS 19 (Employee Bene?its), HKAS 20 (Government Grants), HKAS 32 & 39 (Financial Instruments), HKAS 36 (Impairment of Assets), HKAS 37 (Contingent Liabilities), HKAS 38 (Intangible Assets), HKAS 40 (Investment Property)

" For details, see: http://www.hkicpa.org.hk/?ile/media/section6_standards/standards/FinancialReporting/rm/2012/comparison_%20dec11.pdf


Comparison of HKFRS and IFRS 18

Financial Reporting Challenges

LO 7 Describe the challenges facing 3inancial reporting.

IFRS in a Political Environment Illustration 1-‐6 User Groups that InGluence the Formulation of Accounting Standards

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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 con?lict and pressure.

"   IFRS does not always provide an answer.

"   Doing the right thing is not always easy or obvious.

Financial Reporting Challenges

LO 7 Describe the challenges facing 3inancial reporting.

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At the peak of the +inancial crisis in October 2008, the IASB forwent any regular due process to issue emergency amendments to IAS 39 and IFRS 7 in order to relax fair value accounting. These amendments leave commercial banks reporting under IFRS with the choice to retroactively reclassify +inancial assets that were previously measured at fair value into categories which require measurement at amortized cost, i.e. to effectively suspend fair value accounting for these assets. This decision sharply contrasted the IASB’s general strategy in reporting for +inancial instruments (IASB, 2008a) and its strong initial position against reclassi+ications. However, the board eventually surrendered to severe political pressure by the EU Commission and EU leaders, most prominently the French president Nicolas Sarkozy.

-‐-‐Bischof et al. 2011

FINANCIAL REPORTING AND ACCOUNTING STANDARDS

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