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Lesson 2: Financial Reporting Standards

The document provides an overview of financial reporting standards. It discusses that standards provide principles for preparing financial reports and determining required information. The most popular standards are US GAAP and IFRS. The objective of standards is to provide useful financial information to investors and creditors. It also outlines the International Financial Reporting Standards framework, key regulatory bodies, differences between IFRS and US GAAP, and the importance of monitoring changes to standards.

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Quyen Thanh Nguyen
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92 views

Lesson 2: Financial Reporting Standards

The document provides an overview of financial reporting standards. It discusses that standards provide principles for preparing financial reports and determining required information. The most popular standards are US GAAP and IFRS. The objective of standards is to provide useful financial information to investors and creditors. It also outlines the International Financial Reporting Standards framework, key regulatory bodies, differences between IFRS and US GAAP, and the importance of monitoring changes to standards.

Uploaded by

Quyen Thanh Nguyen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lesson

2: Financial Reporting Standards


The content
• Introduction
• The Objective of financial reporting
• Standard-setting bodies and Regulatory Authorities
• The International Financial Reporting Standard Framework
• Comparison of IFRS with Alternative Reporting Systems
• Monitoring Developments in Financial Reporting Standards
1. Introduction
What is financial reporting standards?

Financial reporting standards provide principles for preparing financial


reports. They also determine the types and amount of information that
must be provided to users of financial statements.

There are several financial reporting standards but the most popular
ones are the U.S. generally accepted accounting principles (US GAAP)
and International Financial Reporting Standards (IFRS).
2. The Objective of Financial Reporting

“The objective of financial reporting is to provide financial information


about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about
providing resources to the entity”

-- IASB’s Conceptual Framework 2010


• For the users of financial statements, financial reporting standards
facilitate comparison across companies (cross sectional analysis) and
over time for a single company (time-series analysis).

• The accounting standards must be flexible enough to recognize that


differences exist in the underlying economics between businesses.
Why do we need financial reporting standards?
Why do we need financial reporting standards?

Company A Company B

Buy Buy
Expenses Capitalizes

Income
Balance sheet
statement
3. Standard-Setting Bodies and Regulatory Authorities

Standard-setting bodies
Standard-setting bodies are private sector organizations that help develop
financial reporting standards. The two important standard-setting bodies
are:
• Financial Accounting Standards Board (FASB) – For the U.S. The standards
developed by FASB are called U.S. GAAP (Generally Accepted Accounting
Principles).
• International Accounting Standards Board (IASB) – For the rest of the
world. The standards developed by IASB are called IFRS (International
Financial Reporting Standards).
Standard-setting bodies simply set the standards but they do not have the
authority to enforce the standards.
Regulatory Authorities

Regulatory authorities are government entities that have legal


authority to enforce the financial reporting standards. The two
important regulatory authorities are:
• Securities and Exchange Commission (SEC) – For the U.S.
• Financial Services Authority (FSA) – For the UK
Regulatory authorities are also responsible for the regulation of capital
markets under their jurisdiction.
The International Organization of Securities Commissions (IOSCO)

IOSCO still regulates a significant portion of the world’s financial markets. This organization has
established objectives and principles to guide securities and capital market regulation.

Core objectives

• Protect investors.

• Ensure fairness, efficiency, and transparency in markets.

• Reduce systemic risk.

Principles

• There should be full, accurate, and timely disclosure of financial results and risks.

• Financial statements should be of a high and internationally acceptable quality.


4. The International Financial Reporting Standards Framework
The IFRS has prepared a framework for the preparation and
presentation of financial reports. The framework is shown in the
diagram below.
Objective of financial statements
The IASB Conceptual Framework for Financial Reporting is designed to:
• assist standard setters in developing and reviewing standards;
• assist preparers of financial statements in applying standards and in
dealing with issues not specifically covered by standard;
• assist auditors in forming an opinion on financial statements; and
• assist users in interpreting financial statement information.
Qualitative characteristics
The six fundamental qualitative characteristics are:
• Relevance: Financial statements should be useful, both for making
forecasts as well as to evaluate past forecasts. They should be timely
and sufficiently detailed and important facts should not be omitted.
• Faithful representation: Information presented should be complete,
neutral, and free from errors.
• Comparability: Financial statements should be consistent over time
and across firms to facilitate comparisons.
• Verifiability: Independent observers should be able to verify that
information reflects true economic reality.
• Timeliness: Information should be available in a timely manner.
• Understandability: Information should be presented in a simple
manner, such that even users with basic business knowledge can
understand it.
Reporting elements

Elements related to measurement of financial position are:


• Assets
• Liabilities
• Equity

Elements related to measurement of financial performance are:


• Revenue
• Expenses
Constraints
• Tradeoff between reliability and timeliness: If a firm tries to make
statements that have no errors and are highly reliable it will need a
lot of time. Similarly, if a firm tries to make statements in the least
amount of time they will more errors and be less reliable.
• Cost: The benefit that the users gain from using the reports should be
more than the cost of preparing the reports.
• Intangible aspects: Intangible information such as brand name and
customer loyalty cannot be captured directly in financial statements.
Assumptions

• Accrual basis: Revenue should be recognized when earned and


expenses should be recognized when incurred, irrespective of when
the cash is actually paid.
• Going concern: Assumption that the company will continue operating
for the foreseeable future.
General Requirements for Financial Statements (IASB)
Required financial statements
The required financial statements are:
• Balance sheet.
• Income statement.
• Cash flow statement.
• Statement of changes in owners’ equity.
• Explanatory notes.
General features for preparing financial statements

The general features for preparing financial statements are:


• Fair presentation: Faithful representation of transactions.
• Going concern: Assume firm will continue to exist for the
foreseeable future.
• Accrual basis: Recognize revenue when earned and expense
when incurred.
• Materiality and aggregation: Important information should not
be omitted. Similar information should be grouped together.
General features for preparing financial statements

• No offsetting: Assets and liabilities, and revenue and expenses


should not be offset against each other.
• Frequency of reporting: Prepare statements at least annually.
• Comparative information: Comparable information for prior
periods should be included.
• Consistency: Prepare reports in the same manner for every
period.
Structure and content requirements

Firms should use the classified balance sheet structure (which shows
current and non- current assets and liabilities separately.) Certain
minimum information must be presented in the notes and on the face
of the financial statements.
5. Comparison of IFRS with Alternative Reporting Systems

• A significant percentage of listed companies use either IFRS or US


GAAP. An analyst must be cautious when comparing financial
measures between companies reporting under IFRS and companies
reporting under US GAAP. If needed, specific adjustments need to be
made to achieve comparability.
• US GAAP uses standards issued by FASB while IFRS uses standards
issued by IASB. While the two organizations are working towards
convergence, significant differences still remain.
Differences between IFRS and US GAAP:
6. Monitoring Developments in Financial Reporting Standards
Analysts must be aware that reporting standards are evolving rapidly.
They need to monitor developments in financial reporting and assess
their implications for security analysis and valuation.

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