Financial Reporting Frameworks

• Financial reporting frameworks and standard-setting bodies are crucial for ensuring transparency and reliability in financial information.

Objectives of Financial Reporting

• A general-purpose financial statement delivers the most useful financial information to a board at the least possible cost.
• Primary users include equity investors (shareholders) and creditors (lenders).
• These users rely on financial statements to evaluate a company's ability to generate net cash.
• The entity perspective views a company as separate and independent from its owners and creditors.
• The entity perspective ensures a balanced and comprehensive view of a company's financial position and considers the company's assets to belong to the company itself.
• The proprietory perspective focuses solely on the needs of shareholders and is not considered appropriate for financial reporting.
• Decision usefulness involves helping investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends or interest.
• Financial reporting should facilitate efficient capital allocation by enabling investors to make comparisons across borders and ensuring adequate comparability.
• Elements to achieve these goals include a single set of high-quality accounting standards established by a single standard setting body.
• Other elements to achieve financial reporting goals are consistency in application and interpretation, common disclosure, high-quality auditing standards, regulatory review and enforcement, market participant education and training, common delivery systems like XBRL, and common approaches to corporate governance and legal frameworks.

Branches of Accounting

• Financial accounting involves recording business transactions and preparing periodic reports on financial position and results of operations.
• Financial accounting puts importance on existing accounting standards.
• Management accounting partners in management's decision-making, planning, and performance management systems.
• Management accounting provides expertise in financial reporting.
• It assists management in formulating and implementing organizational strategies.
• Cost accounting involves collecting, allocating, and controlling the costs of producing goods and services.
• Auditing is an independent examination that ensures the fairness and reliability of reports submitted by management to users outside the business.
• Government accounting identifies the sources and uses of government funds.
• Tax accounting involves preparing tax returns and considering the tax consequences of proposed business transactions.
• Accounting education employs researchers, professors, or reviewers and is dedicated to developing the accounting profession.

Standard Setting Organizations

• The International Accounting Standards Board (IASB) is the main international standard-setting organization.
• IASB is based in London and issues International Financial Reporting Standards (IFRS).
• IFRS is used by most foreign exchanges.
• The International Organization of Securities Commissions (IOSCO) ensures the global market operates efficiently and effectively.
• IOSCO does not set accounting standards but cooperates to promote high standards of regulation to maintain just, efficient, and sound markets.
• IOSCO exchanges information on their expertise to promote the development of domestic markets, unites efforts to establish standards, and provides mutual assistance to promote integrity in international securities transactions.

International Standard Setting Structure

• The IFRS Foundation has 22 trustees who oversee the IASB, IFRS Advisory Council, and IFRS Interpretation Committee.
• It appoints members, reviews effectiveness, and helps in fundraising efforts.
• The International Accounting Standards Board (IASB) has 16 members.
• The IASB develop a single set of high-quality, enforceable, and global international financial reporting standards for general-purpose financial statements.
• The IFRS Advisory Council has 30 or more members.
• The IFRS Advisory Council provides advice and counsel to the IASB on major policies and technical issues.
• The IFRS Interpretation Committee consists of 22 members.
• Members assist the IASB through timely identification, discussion, and resolution of financial reporting issues within the frameworks of IFRS.
• A monitoring board is part of the governance structure, establishing a link between the accounting standard setter and public authorities, and providing political legitimacy.

Due Process of IASB

• The IASB is thorough, open, and transparent which is important in establishing financial accounting standards.
• The characteristics of the IASB include:
  • membership of 16 well-paid representatives from different countries who serve five-year renewable terms,
  • autonomy from any professional organization while being appointed and answerable only to the IFRS Foundation,
  • full-time independence where members must sever all ties with their former employers, and members who are selected for their expertise.
  • Regarding voting, 9 of 16 votes are needed to issue a new IFRS.
• Elements of the IASB include an independent standard-setting board overseen by a geographically and professionally diverse body of trustees, a thorough and systematic process for developing standards, engagement with investors, regulators, business leaders, and the global accountancy profession, and collaborative efforts within the worldwide standard-setting community.
• Steps to implement new standards:
• Topics are identified and placed on the Board’s agenda.
• Research and analysis are conducted, and preliminary views are issued.
• Public hearings are held on the proposed standard.
• The Board evaluates research and public responses, then issues an exposure draft.
• The Board evaluates the response and changes the exposure draft if necessary, then the final standard is issued.

Financial Reporting Challenges

• Financial reporting is essential for providing transparent and reliable financial information to stakeholders, but there are challenges.
• The expectations gap is the difference between what the public believes accountants and auditors should do and what they can do within accounting/auditing standards.
• Public perception often assumes auditors should detect all fraud, but this is not always possible.
• Accountants ensure accuracy and compliance but do not guarantee fraud detection.
• Traditional financial statements focus on monetary transactions, while modern businesses rely on non-financial factors.
• A challenge exists because there is no universally accepted way to measure and report non-financial metrics in financial statements.
• Investors and stakeholders often need future projections, but it is difficult to provide reliable forward-looking data without speculation.
• Brand reputation, patents, trademarks, and human capital are crucial for many companies, but it is challenging to assign accurate values to these intangible assets resulting in reporting inconsistencies.
• Financial reports are released months after the actual financial events, limiting their usefulness for decision-making.
• Achieving a balance between accuracy and timeliness is difficult.
• Faster reporting may increase errors or omissions.

Ethical Issues in Accounting

• Ethical issues arise when accountants face conflicts between professional standards and pressures from management, clients, or personal interests.
• Ethical dilemmas stem from time pressure, job pressure, client pressure, personal pressure, and peer pressure.
• Time pressure, like tight deadlines, may lead to increased errors.
• Job, client, and personal pressure, and pressure from colleagues or superiors may encourage unethical conduct.
• A lack of comprehensive ethical guidelines and vague ethical rules may cause accountants to struggle.
• Common ethical dilemmas include earnings management by adjusting financial reports to meet targets, revenue recognition issues like recognizing revenue too early, expense manipulation through hiding or misclassifying expenses, conflicts of interest that benefit oneself, and bribery/corruption involving gifts in exchange for altering financial reports.

Addressing Financial Reporting and Ethical Issues

• Companies and regulatory bodies mitigate these challenges by implementing stricter accounting standards like IFRS which are continuously refined.
• These challenges are also mitigated through corporate governance and ethics training and whistleblower protection.
• Stronger oversight by boards and independent auditors is key.
• Training educates accountants on ethical decision-making.
• Whistleblower protection encourages employees to report unethical behavior without fear of retaliation.