Slide

1-1
 CHAPTER
CHAPTER 11
Financial
Financial Reporting
Reporting and
and Accounting
Accounting Standard
Standard

LEARNING OBJECTIVE

After studying this chapter, you shoulg be able to:

1.Describe the global financial markets and their relation to financial

reporting.

2.Identify the objective of financial reporting.

3.Identifythe major policy-setting bodies and their role in the standard-

setting process.

4.Describe the challenges facing financial reporting.

Slide
1-2
 Financial
Financial Reporting
Reporting and
and Accounting
Accounting Standards
Standards

Objective of Financial
Standard-Setting
Global Markets Financial Reporting
Organizations
Reporting Challenges

Financial General-purpose IOSCO IFRS in Political

statements and financial (International environment
financial reporting statements Organization of Expectations gap
Accounting and Equity investor Sscurities Significant financial
capital allocation and Creditors Commision) reporting issues
High-quality Entity perspective IASB (International Ethics in
standards Decision- Accounting environment of
usefulness Standard board) financial accounting
Hierarchy of IFRS International
convergence
Conclusion

Slide
1-3
 Global
Global Markets
Markets
World markets are becoming increasingly intertwined.

Slide
1-4
 Global
Global Markets
Markets
Significant number of foreign companies are found on national exchanges.

Slide
1-5
 Global
Global Markets
Markets

Financial Statements and Financial Reporting

Characteristics of accounting are:

(1) the identification, measurement, and communication

of financial information about

(2) economic entities to

(3) interested parties.

Slide
1-6
LO 1 Identify the major financial statements and other means of financial reporting.
 Global
Global Markets
Markets
Economic Entity Financial Statements Additional Information

Financial Statement of President’s letter

Information Financial Position
Prospectuses
Accounting? Income Statement
Reports filed with
or Statement of
Identify governmental
Comprehensive
agencies
and Income
Measure News releases
Statement of Cash
and Flows Management
Forecasts
Communicate Statement of
Changes in Equity Environmental
impact statements
Note Disclosures
Slide
1-7 LO 1 Identify the major financial statements and other means ofEtc.
financial reporting.
 Global
Global Markets
Markets

Accounting and Capital Allocation

Resources are limited. Efficient use of resources often

determines whether a business thrives.
Illustration 1-3
Capital Allocation Process

Slide
1-8
LO 2 Explain how accounting assists in the efficient use of scare resources.
 Global
Global Markets
Markets
High Quality Standards
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.
(Continued)
Slide
1-9
LO 3 Explain the need for high-quality standards.
 Global
Global Markets
Markets
High Quality Standards
Globalization demands a single set of high-quality
international accounting standards. Some elements:
7. Common delivery systems (e.g., eXtensible Business
Reporting Language—XBRL).
8. Common approach to corporate governance and legal
frameworks around the world

Slide
1-10
LO 3 Explain the need for high-quality standards.
 Objective
Objective of
of Financial
Financial Accounting
Accounting

Objective: Provide financial information about the reporting

entity that is useful to
present and potential equity investors,
lenders, and
other creditors
in making decisions about providing recources to the entity.

Slide
1-11
LO 4 Identify the objectives of financial reporting.
 Objective
Objective of
of Financial
Financial Accounting
Accounting

General-Purpose Financial Statements

Provide financial reporting information to a wide variety

of users.
Provide the most useful information possible at the
least cost.

Capital Providers (Investors)

Investors are the primary user group.

Slide
1-12
LO 4 Identify the objectives of financial reporting.
 Objective
Objective of
of Financial
Financial Accounting
Accounting

Entity Perspective
Companies viewed as separate and distinct from their owners.

Decision-Usefulness
Investors are interested in assessing the company’s
1. ability to generate net cash inflows and
2. management’s ability to protect and enhance the
capital providers’ investments.

Slide
1-13
LO 4 Identify the objectives of financial reporting.
 Standard-Setting
Standard-Setting Organizations
Organizations

Two Major Organizations:

International Accounting Standards Board (IASB)
 Issues International Financial Reporting Standards
(IFRS).

 Standards used on most foreign exchanges.

 Standards used by foreign companies listing on U.S.

securities exchanges.

 IFRS used in over 149 countries.

Slide LO 5 Identify the major policy-setting bodies and

1-14 their role in the standard-setting process.
 Standard-Setting
Standard-Setting Organizations
Organizations

Two Major Organizations:

Financial Accounting Standards Board (FASB)
 Issues Statements of Financial Accounting
Standards (SFAS).

 Required for all U.S.-based companies.

Slide LO 5 Identify the major policy-setting bodies and

1-15 their role in the standard-setting process.
 Standard-Setting
Standard-Setting Organizations
Organizations

International Organization of Securities

Commissions (IOSCO)

 Does not set accounting standards.

 Dedicated to ensuring that global

markets can operate in an efficient
and effective basis.

http://www.iosco.org/

Slide LO 5 Identify the major policy-setting bodies and

1-16 their role in the standard-setting process.
 Standard-Setting
Standard-Setting Organizations
Organizations

International Accounting Standards Board (IASB)

Composed of four organizations—

 International Accounting Standards
Committee Foundation (IASCF)
 International Accounting Standards
Board (IASB) http://www.iasb.org

 Standards Advisory Council

 International Financial Reporting

Interpretations Committee (IFRIC)
Slide LO 5 Identify the major policy-setting bodies and
1-17 their role in the standard-setting process.
 Standard-Setting
Standard-Setting Organizations
Organizations
Illustration 1-4
International Standard-Setting Structure

Slide LO 5 Identify the major policy-setting bodies and

1-18 their role in the standard-setting process.
 Due
Due Process
Process

The IASB due process has the following elements:

1. Independent standard-setting board;

2. Thorough and systematic process for developing
standards;
3. Engagement with investors, regulators, business leaders,
and the global accountancy profession at every stage of
the process; and
4. Collaborative efforts with the worldwide standard-setting
community.

Slide LO 5 Identify the major policy-setting bodies and

1-19 their role in the standard-setting process.
 Due
Due Process
Process
Illustration 1-4
International
Standard-Setting
Structure

Slide LO 5 Identify the major policy-setting bodies and

1-20 their role in the standard-setting process.
 Types
Types of
of Pronouncements
Pronouncements

Issued by the IASB:

International Financial Reporting Standards.
Conceptual Framework for financial reporting.
International financial reporting interpretations.

Slide LO 5 Identify the major policy-setting bodies and

1-21 their role in the standard-setting process.
 Types
Types of
of Pronouncements
Pronouncements

Hierarchy of IFRS
Companies first look to:
1. International Financial Reporting Standards’
International Accounting standard (issued by the
predecessor to the IASB),and IFRS Interpretation
originated by the IFRS Interpretations Committee (and
its Predecessor, the IAS Interpretations Committee)
2. The Conceptual Framework for Financial Reporting;;
and
3. Pronouncement of other standard setting bodies that
use a similar conceptual framework ( e.g., US GAAP).

Slide
1-22
LO 6 Explain the meaning of IFRS.
 Financial
Financial Reporting
Reporting Challenges
Challenges

IFRS in a Political Environment Illustration 1-6

User Groups that Influence the
Formulation of Accounting Standards

Slide
1-23
LO 7 Describe the challenges facing financial reporting.
 Financial
Financial Reporting
Reporting Challenges
Challenges

The Expectations Gap

What the public thinks accountants should do vs. what

accountants think they can do.

Significant Financial Reporting Issues

 Non-financial measurements
 Forward-looking information
 Sort assets
 Timeliness

Slide
1-24
LO 7 Describe the challenges facing financial reporting.
 Financial
Financial Reporting
Reporting Challenges
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.

IFRS does not always provide an answer.

Doing the right thing is not always easy or obvious.

Slide
1-25
LO 7 Describe the challenges facing financial reporting.
 Financial
Financial Reporting
Reporting Challenges
Challenges

International Convergence

In 2002 the IASB and the FASB formalized their commitment

to the convergence of U.S. GAAP and international
standards. The Boards agreed to:

1. Make their existing financial reporting standards fully

converged as soon as practicable, and

2. Coordinate their future work programs to ensure that

once achieved, convergence is maintained.

Slide
1-26
LO 7 Describe the challenges facing financial reporting.
  The fact that there are differences between IFRS and U.S. GAAP
should not be surprising because standard-setters have developed
standards in response to different user needs.
 IFRS tends to be simpler and more flexible in its accounting and
disclosure requirements.
 The U.S. SEC recently eliminated the need for foreign companies
that trade shares in U.S. markets to reconcile their accounting with
U.S. GAAP.

Slide
1-27
 Appendix 1A THE U.S. STANDARD-SETTING ENVIRONMENT

Organizations responsible for developing financial

accounting standards (GAAP) in the United States:

1. Securities and Exchange

http://www.sec.gov/
Commission (SEC).

2. Financial Accounting http://www.fasb.org/

Standards Board (FASB).

Slide
1-28
 Securities
Securities and
and Exchange
Exchange Commission
Commission

Established by federal government

Accounting and reporting for public companies

Securities
Securities Act
Act Securities
Securities Act
Act
of
of 1933
1933 of
of 1934
1934

Encouraged private standard-setting body

SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority

Slide LO 8 Identify the major policy-setting bodies and their

1-29 role in the standard-setting process.
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Wheat Committee’s recommendations resulted in the creation of a the
Financial Accounting Standards Board (FASB) in 1973.

Financial Selects members of the FASB

Accounting Funds their activities
Foundation Exercises general oversight.

Financial Mission to establish and improve

Accounting standards of financial accounting
Standards Board and reporting.

Financial Accounting
Standards Advisory Consult on major policy issues.
Council

Slide LO 8 Identify the major policy-setting bodies and their

1-30 role in the standard-setting process.
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Missions is to establish and improve standards of financial
accounting and reporting. Differences between FASB and
APB include:

Smaller Membership
Full-time, Remunerated Membership
Greater Autonomy
Increased Independence
Broader Representation

Slide LO 6 Identify the major policy-setting bodies and their

1-31 role in the standard-setting process.
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board

Due Process
FASB relies on two basic premises:
(1) Responsive to entire economic community
(2) Operate in full view of the public

Step 1 = Topic placed on agenda

Step 2 = Research conducted and Discussion Memorandum issued.
Step 3 = Public hearing
Step 4 = Board evaluates research, public response and issues
Exposure Draft
Step 5 = Board evaluates responses and issues final Statement of
Financial Accounting Standard
Slide LO 8 Identify the major policy-setting bodies and their
1-32 role in the standard-setting process.
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board

Types of Pronouncements

Standards, Interpretations, and Staff Positions.

Financial Accounting Concepts
Emerging Issues Task Force Statements

Slide LO 8 Identify the major policy-setting bodies and their

1-33 role in the standard-setting process.
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board

U.S. Generally Accepted Accounting Principles

Principles that have substantial authoritative support.

Major sources of GAAP:

FASB Standards, Interpretations, and Staff Positions
APB Opinions
AICPA Accounting Research Bulletins

When the Board approves a new standard, staff position, etc., the results are
included in the Codification through an Accounting Standards Update.

Slide LO 8 Identify the major policy-setting bodies and their

1-34 role in the standard-setting process.
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Illustration 1A-2

The
Codification
Framework

Slide LO 8 Identify the major policy-setting bodies and their

1-35 role in the standard-setting process.
 International
International Accounting
Accounting Convergence
Convergence

Improvements in Accounting Standards

IASB and FASB have set up an extensive work plan to achieve
one set of international standards.
Illustration 1A-3
IFRS Adoption Timeline

Slide LO 8 Identify the major policy-setting bodies and their

1-36 role in the standard-setting process.
 International
International Accounting
Accounting Convergence
Convergence

SEC Work Plan

Sufficient development and application of IFRS.

Independent standard-setting for the benefit of investors.

Investor understanding and education.

Regulatory environment.

Impact on large and small financial statement preparers.

Human capital readiness.

Slide LO 8 Identify the major policy-setting bodies and their

1-37 role in the standard-setting process.