Financial Reporting CHAPTER 1

and Accounting Standards

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the growing 3. Identify the major policy-
importance of global financial setting bodies and their role
markets and its relation to in the standard-setting
financial reporting. process.

2. Explain the objective of financial 4. Discuss the challenges

reporting. facing financial reporting.

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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LEARNING OBJECTIVE 1
Global Markets Describe the growing importance
PREVIEW OF CHAPTER 1 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
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
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 LEARNING OBJECTIVE 1
Global Markets Describe the growing importance
of global financial markets and its
Global Markets
relation to financial reporting.

Significant number of foreign companies are found on

World markets are becoming increasingly intertwined.
national exchanges. ILLUSTRATION 1.2
International Exchange Statistics
Top 20 Global Companies In Terms of Sales

ILLUSTRATION 1.1

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Global Markets Global Markets

Financial Statements and Financial Reporting Economic Entity Financial Statements Additional Information

Essential characteristics of accounting are: Financial Statement of President’s letter

Information Financial Position
1. the identification, measurement, and communication of Prospectuses
Accounting? Income Statement
financial information about Reports filed with
or Statement of
Identify governmental
Comprehensive
2. economic entities to agencies
and Income
3. interested parties. Measure News releases
Statement of Cash
and Flows Forecasts
Communicate Statement of Environmental
Changes in Equity impact statements
Note Disclosures Etc.

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 Global Markets Global Markets

Accounting and Capital Allocation High Quality Standards

Globalization demands a single set of high-quality
Resources are limited. Efficient use of resources often
determines whether a business thrives. 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.
ILLUSTRATION 1.3
Capital Allocation Process 6. Education and training of market participants.
(Continued)

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Global Markets Objective of LEARNING OBJECTIVE 2

Explain the objective of
Financial financial reporting.

High Quality Standards Reporting

Globalization demands a single set of high-quality Objective: Provide financial information about the reporting
international accounting standards. Some elements: entity that is useful to
7. Common delivery systems (e.g., eXtensible Business ► present and potential equity investors,
Reporting Language—XBRL).
► lenders, and
8. Common approach to corporate governance and legal
frameworks around the world. ► other creditors

in making decisions about providing resources to the entity.

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 Objective of Financial Reporting Objective of Financial Reporting

General-Purpose Financial Statements Entity Perspective

► Provide financial reporting information to a wide variety ► Companies viewed as separate and distinct from their
of users. owners (shareholders).

► Provide the most useful information possible at the

Decision-Usefulness
least cost.
► Investors are interested in assessing
Equity Investors and Creditors 1. the company’s ability to generate net cash inflows and
► Investors and creditors are the primary user group. 2. management’s ability to protect and enhance the
capital providers’ investments.

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Objective of Financial Reporting Objective of Financial Reporting

Question Question
The objective of financial reporting places most emphasis on: General-purpose financial statements are prepared primarily
a. reporting to capital providers. for:
b. reporting on stewardship. a. internal users.
c. providing specific guidance related to specific needs. b. external users.
d. providing information to individuals who are experts in c. auditors.
the field. d. government regulators.

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 LEARNING OBJECTIVE 3
Standard-Setting Identify the major policy-setting
bodies and their role in the
Standard-Setting Organizations
Organizations standard-setting process.

International Organization of Securities

Main international standard-setting organization: Commissions (IOSCO)
► International Accounting Standards Board (IASB) ► Does not set accounting standards.

● Issues International Financial Reporting Standards ► Dedicated to ensuring that global markets can operate
(IFRS). in an efficient and effective basis.
● Standards used on most foreign exchanges. ► Supports the use of IFRS as the single set of

● IFRS used in over 149 countries. international standards in cross-border offerings and
listings.
● Two organizations that have a role in international
standard-setting are the International Organization of
http://www.iosco.org/
Securities Commissions (IOSCO) and the IASB.

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Standard-Setting Organizations International Accounting Standards Board

International Accounting Standards Board

(IASB)
Composed of four organizations—
► IFRS Foundation

► International Accounting Standards Board (IASB)

► IFRS Advisory Council

► IFRS Interpretations Committee

ILLUSTRATION 1.4
International Standard-Setting Structure

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 Standard-Setting Organizations Standard-Setting Organizations

Question Question
IFRS stands for: The major key players on the international side are the:
a. International Federation of Reporting Services. a. IASB and IFRS Advisory Council.
b. Independent Financial Reporting Standards. b. IOSCO and the U.S. SEC.
c. International Financial Reporting Standards. c. London Stock Exchange and International
d. Integrated Financial Reporting Services. Securities Exchange.
d. IASB and IOSCO.

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International Accounting Standards Board

Due 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.
ILLUSTRATION 1.5
International Standard-Setting Structure
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 International Accounting Standards Board
Question
Accounting standard-setters use the following process in
establishing international standards:
a. Research, exposure draft, discussion paper, standard.
b. Discussion paper, research, exposure draft, standard.
c. Research, preliminary views, discussion paper,
standard.
d. Research, discussion paper, exposure draft, standard.
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Standard-Setting Organizations
Hierarchy of IFRS
Companies first look to:
1. 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);
2. The Conceptual Framework for Financial Reporting; and
3. Pronouncements of other standard-setting bodies that use a
similar conceptual framework (e.g., U.S. GAAP).
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International Accounting Standards Board
Types of Pronouncements
► International Financial Reporting Standards.
► Conceptual Framework for Financial Reporting.
► International Financial Reporting Standards Interpretations.
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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.
c. International Accounting Standards and International
Accounting Standards Interpretations.
d. FASB financial reporting standards and International
Accounting Standards.
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 Financial Reporting LEARNING OBJECTIVE 4
Discuss the challenges
IFRS in a Political Environment
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 do 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.
ILLUSTRATION 1.6
User Groups that Influence the Formulation of Accounting Standards
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Financial Reporting Challenges Financial Reporting Challenges

The Expectations Gap Ethics in the Environment of Financial

What the public thinks accountants should do and what Accounting
► Companies that concentrate on “maximizing the bottom
accountants think they can do. line,” “facing the challenges of competition,” and
“stressing short-term results” place accountants in an
Significant Financial Reporting Issues environment of conflict and pressure.

► Non-financial measurements ► IFRS do not always provide an answer.

► Forward-looking information ► Technical competence is not enough when encountering

► Soft assets ethical decisions.

► Timeliness

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 Financial Reporting Challenges Financial Reporting Challenges

International Convergence Question

Examples of how convergence is occurring:
1. China’s goal is to eliminate differences between its standards and
IFRS.
2. Japan now permits the use of IFRS for domestic companies.
3. The IASB and the FASB have spent the last 12 years working to
converge their standards.
4. Malaysia helped amend the accounting for agricultural assets.
5. Italy provided advice and counsel on the accounting for business
combinations under common control.
The expectations gap is:
a. what financial information management provides and
what users want.
b. what the public thinks accountants should do and what
accountants think they can do.
c. what the governmental agencies want from standard-
setting and what the standard-setters provide.
d. what the users of financial statements want from the
government and what is provided.

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GLOBAL ACCOUNTING INSIGHTS GLOBAL ACCOUNTING INSIGHTS

LEARNING OBJECTIVE 5 Relevant Facts

Compare IFRS and U.S. GAAP and their standard-setting processes.
Following are the key similarities and differences between U.S. GAAP and
IFRS related to the financial reporting environment.
Most agree that there is a need for one set of international accounting
Similarities
standards. Here is why:
• Generally accepted accounting principles (GAAP) for U.S. companies are
• Multinational corporations
developed by the Financial Accounting Standards Board (FASB). The FASB
• Mergers and acquisitions is a private organization. The U.S. Securities and Exchange Commission
• Information technology (SEC) exercises oversight over the actions of the FASB. The IASB is also a
• Financial markets private organization. Oversight over the actions of the IASB is regulated by
IOSCO.

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 GLOBAL ACCOUNTING INSIGHTS GLOBAL ACCOUNTING INSIGHTS

Relevant Facts 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.
• Both the IASB and the FASB are working together to find common ground
wherever possible.
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.

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GLOBAL ACCOUNTING INSIGHTS GLOBAL ACCOUNTING INSIGHTS

About The Numbers On the Horizon

IASB has looked to the United States to determine the structure it should
follow in establishing IFRS. Presented is FASB’s standard-setting structure.
Both the IASB and the FASB are hard at work developing standards that will
lead to the elimination of major differences 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.

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