INTERMEDIATE ACCOUNTING PART 3
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.
Global Markets
Accounting and Capital Allocation
Resources are limited. Efficient use of resources often determines whether a business thrives.
INTERMEDIATE ACCOUNTING PART 3
CAPITAL ALLOCATION PROCESS
1. FINANCIAL REPORTING
The financial information a company provides to help users with capital allocation decisions
about the company.
2. USERS (present and potential)
Investors and creditors use financial reports to make their capital allocation decisions.
3. CAPITAL ALLOCATION
The process of determining how and at what cost money is allocated among competing
interests.
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.
Objective of Financial 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 in their capacity as capital providers.
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.
Objective of Financial 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
INTERMEDIATE ACCOUNTING PART 3
Review Question
1. The objective of financial reporting places most emphasis on:
a.) reporting to capital providers.
2. General-purpose financial statements are prepared primarily for:
b.) external users.
STANDARD SETTING ORGANIZATION
Two Major Organizations:
1. 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 115 countries.
2. Financial Accounting Standards Board (FASB)
Issues Statements of Financial Accounting Standards (SFAS).
Required for all U.S.-based companies.
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.
International Accounting Standards Board (IASB)
Composed of four organizations—
International Accounting Standards Committee Foundation (IASCF)
International Accounting Standards Board (IASB)
Standards Advisory Council
International Financial Reporting Interpretations Committee (IFRIC)
INTERMEDIATE ACCOUNTING PART 3
Review Question
• IFRS stands for:
International Financial Reporting Standards.
• The major key players on the international side are the:
IASB and IOSCO.
• Which body from the U.S. side is similar to the IASB?
FASB.
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.
DUE PROCESS
1. AGENDA
Topics identified and placed on Board’s agenda.
2. RESEARCH
Research and analysis conducted and preliminary views of pros and cons issued.
3. Public hearing on proposed standard
4. EXPOSURE DRAFT
Board evaluates research and public response and issues exposure draft.
5. IASB STANDARD
Board evaluate responses and changes exposure draft, if necessary. Final standard issued.
REVIEW QUESTION
Accounting standard-setters use the following process in establishing international standards:
D. Research, discussion paper, exposure draft, standard
Types of Pronouncements
Issued by the IASB:
• International Financial Reporting Standards.
• Framework for financial reporting.
• International financial reporting interpretations.
HIERARCHY OF IFRS
Companies first look to:
1. International Financial Reporting Standards;
2. International Accounting Standards; and
3. Interpretations originated by the International Financial Reporting Interpretations
Committee (IFRIC) or the former Standing Interpretations Committee (SIC).
INTERMEDIATE ACCOUNTING PART 3
REVIEW QUESTION
IFRS is comprised of:
International Financial Reporting Standards, International Accounting Standards, and
international accounting interpretations.
Financial Reporting 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
Ethics in the Environment of Financial Accounting
1. 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.
2. IFRS does not always provide an answer.
3. Doing the right thing is not always easy or obvious.
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.
INTERMEDIATE ACCOUNTING PART 3
REVIEW QUESTION
The expectations gap is:
what the public thinks accountants should do and what accountants think they can do.
RELEVANT FACTS
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.
Organizations responsible for developing financial accounting standards (GAAP) in the
Philippines:
FRSC
The Financial Reporting Standards Council (FRSC) was established by the Professional Regulatory
Commission under the Implementing Rules and Regulations of the Philippine Accountancy of Act of
2004 to assist the Board of Accountancy in carrying out its power and function to promulgate
accounting standards in the Philippines. The FRSC's main function is to establish generally accepted
accounting principles in the Philippines.
The FRSC is the successor of the Accounting Standards Council (ASC), The ASC was created in
November 1981 by the Philippine Institute of Certified Public Accountants (PICPA) to establish
generally accepted accounting principles in the Philippines. The FRSC carries on the decision made
by the ASC to converge Philippine accounting standards with international accounting standards
issued by the International Accounting Standards Board (IASB).
PIC
Principally, to issue implementation guidance on Philippine Accounting Standards (PAS),
Philippine Financial Reporting Standards (PFRS) and related Interpretations (collectively
referred to as PFRS) adopted by the Financial Reporting Standards Council (FRSC) from
accounting pronouncements issued by the International Accounting Standards Board.
To comment on exposure drafts of proposed PFRS and other documents that may be issued
for comment by the FRSC.
To comment on exposure drafts of proposed accounting standards or proposed regulations
with accounting relevance that may be issued by government agencies, such as the
Securities and Exchange Commission, Bangko Sentral ng Pilipinas and Insurance
Commission.
The PIC shall deal with accounting issues of reasonably widespread importance and not issues of
concern only to a single entity or small group of entities. It is preferred that accounting issues are
coursed through the respective external auditors of companies or through the leadership of
professional organizations.
