Intermediate accounting IFRS 3rd ch01

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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CHAPTER 1

Financial Reporting
and Accounting Standards

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1.

Describe the growing importance of global financial

3.

markets and its relation to financial reporting.

2.

1-2

Explain the objective of financial reporting.

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

4.

Discuss the challenges facing financial reporting.


PREVIEW OF CHAPTER 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 relation to financial reporting.

World markets are becoming increasingly intertwined.
Top 20 Global Companies In Terms of Sales

ILLUSTRATION 1.1

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LO 1

LEARNING OBJECTIVE 1

Global Markets

Describe the growing importance 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

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LO 1


Global Markets

Significant number of foreign companies are found on national exchanges.
ILLUSTRATION 1.2
International Exchange Statistics

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LO 1


Global Markets

Financial Statements and Financial Reporting
Essential characteristics of accounting are:

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1.

the identification, measurement, and communication of financial information about

2.

economic entities to

3.

interested parties.

LO 1


Global Markets

Economic
Economic Entity
Entity

Financial
Financial

Information
Information

Accounting?
Accounting?
Identify
Identify

Financial
Financial Statements
Statements

Additional
Additional Information
Information

Statement
Statement of
of Financial
Financial Position
Position

President’s
President’s letter
letter

Income
Income Statement
Statement or
or Statement

Statement of
of

Prospectuses
Prospectuses

Comprehensive
Comprehensive Income
Income

Reports
Reports filed
filed with
with governmental
governmental

Statement
Statement of
of Cash
Cash Flows
Flows

agencies
agencies

Measure
Measure

Statement
Statement of

of Changes
Changes in
in Equity
Equity

News
News releases
releases

and
and

Note
Note Disclosures
Disclosures

Forecasts
Forecasts

and
and

Communicate
Communicate

Environmental
Environmental impact
impact statements
statements

Etc.
Etc.

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LO 1


Global Markets

Accounting and Capital Allocation

Resources
Resources are
are limited.
limited. Efficient
Efficient use
use of
of resources
resources often
often determines
determines whether
whether aa business
business thrives.
thrives.

ILLUSTRATION 1.3

Capital Allocation

Process

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LO 1


Global 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)

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LO 1


Global Markets

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

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7.

Common delivery systems (e.g., eXtensible Business Reporting Language—XBRL).

8.

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

LO 1

Objective of Financial Reporting

LEARNING OBJECTIVE 2
Explain the objective of financial reporting.

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 resources to the entity.

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LO 2


Objective of Financial Reporting

General-Purpose Financial Statements

►

Provide financial reporting information to a wide variety of users.

►

Provide the most useful information possible at the least cost.

Equity Investors and Creditors

►

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Investors and creditors are the primary user group.

LO 2


Objective of Financial Reporting

Entity Perspective

►

Companies viewed as separate and distinct from their owners (shareholders).

Decision-Usefulness

►

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Investors are interested in assessing

1.

the company’s ability to generate net cash inflows and

2.

management’s ability to protect and enhance the capital providers’ investments.

LO 2


Objective of Financial Reporting

Question
The objective of financial reporting places most emphasis on:

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a.

reporting to capital providers.

b.

reporting on stewardship.

c.

providing specific guidance related to specific needs.

d.

providing information to individuals who are experts in the field.

LO 2


Objective of Financial Reporting

Question
General-purpose financial statements are prepared primarily for:

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a.

internal users.

b.

external users.

c.

auditors.

d.

government regulators.

LO 2


LEARNING OBJECTIVE 3

Standard-Setting Organizations

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

Main international standard-setting organization:

►

International Accounting Standards Board (IASB)

●

Issues International Financial Reporting Standards (IFRS).

●

Standards used on most foreign exchanges.

●

IFRS used in over 149 countries.

●

Two organizations that have a role in international standard-setting are the International
Organization of Securities Commissions (IOSCO) and the IASB.

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LO 3


Standard-Setting 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.

►

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

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LO 3


Standard-Setting Organizations

International Accounting Standards Board (IASB)
Composed of four organizations—

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►

IFRS Foundation

►

International Accounting Standards Board (IASB)

►

IFRS Advisory Council

►

IFRS Interpretations Committee

LO 3


International Accounting Standards Board

ILLUSTRATION 1.4
International Standard-Setting Structure

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LO 3


Standard-Setting Organizations

Question
IFRS stands for:

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a.

International Federation of Reporting Services.

b.

Independent Financial Reporting Standards.

c.

International Financial Reporting Standards.

d.

Integrated Financial Reporting Services.

LO 3


Standard-Setting Organizations

Question
The major key players on the international side are the:

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a.

IASB and IFRS Advisory Council.

b.

IOSCO and the U.S. SEC.

c.

London Stock Exchange and International Securities Exchange.

d.

IASB and IOSCO.

LO 3


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.

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Collaborative efforts with the worldwide standard-setting community.

LO 3

ILLUSTRATION 1.5
International Standard-Setting Structure
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LO 3


International Accounting Standards Board

Question
Accounting standard-setters use the following process in establishing international standards:

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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.

LO 3