Intermediate Accounting IFRS 3rd Edition PDF

Prepared by Coby Harmon University of California, Santa Barbara Westmont College 1-1  Financial Reporting CHAPTER 1 and Accounting Standards LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Describe the growing...

Prepared by Coby Harmon University of California, Santa Barbara Westmont College 1-1  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. 1-2  PREVIEW OF CHAPTER 1 Intermediate Accounting IFRS 3rd Edition Kieso Weygandt Warfield 1-3  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 1-4 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 1-5 LO 1  Global Markets Significant number of foreign companies are found on national exchanges. ILLUSTRATION 1.2 International Exchange Statistics 1-6 LO 1  Global Markets Financial Statements and Financial Reporting Essential characteristics of accounting are: 1. the identification, measurement, and communication of financial information about 2. economic entities to 3. interested parties. 1-7 LO 1  Global Markets Economic Entity Financial Statements Additional Information Financial Statement of President’s letter Information Financial Position Prospectuses Accounting? Income Statement or Reports filed with Statement of Identify governmental Comprehensive agencies and Income Measure News releases Statement of Cash and Flows Forecasts Communicate Statement of Environmental impact Changes in Equity statements Note Disclosures Etc. 1-8 LO 1  Global Markets Accounting and Capital Allocation Resources are limited. Efficient use of resources often determines whether a business thrives. ILLUSTRATION 1.3 Capital Allocation Process 1-9 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) 1-10 LO 1  Global 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. 1-11 LO 1  Objective of LEARNING OBJECTIVE 2 Explain the objective of Financial Reporting 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. 1-12 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 ► Investors and creditors are the primary user group. 1-13 LO 2  Objective of Financial Reporting Entity Perspective ► Companies viewed as separate and distinct from their owners (shareholders). Decision-Usefulness ► 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. 1-14 LO 2  Objective of Financial Reporting Question The objective of financial reporting places most emphasis on: 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. 1-15 LO 2  Objective of Financial Reporting Question General-purpose financial statements are prepared primarily for: a. internal users. b. external users. c. auditors. d. government regulators. 1-16 LO 2  LEARNING OBJECTIVE 3 Standard-Setting Identify the major policy-setting bodies and their role in the Organizations 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. 1-17 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. http://www.iosco.org/ 1-18 LO 3  Standard-Setting Organizations International Accounting Standards Board (IASB) Composed of four organizations— ► IFRS Foundation ► International Accounting Standards Board (IASB) ► IFRS Advisory Council ► IFRS Interpretations Committee 1-19 LO 3  International Accounting Standards Board ILLUSTRATION 1.4 International Standard-Setting Structure 1-20 LO 3  Standard-Setting Organizations Question IFRS stands for: a. International Federation of Reporting Services. b. Independent Financial Reporting Standards. c. International Financial Reporting Standards. d. Integrated Financial Reporting Services. 1-21 LO 3  Standard-Setting Organizations Question The major key players on the international side are the: 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. 1-22 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. Collaborative efforts with the worldwide standard-setting community. 1-23 LO 3  ILLUSTRATION 1.5 International Standard-Setting Structure 1-24 LO 3  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. 1-25 LO 3  International Accounting Standards Board Types of Pronouncements ► International Financial Reporting Standards. ► Conceptual Framework for Financial Reporting. ► International Financial Reporting Standards Interpretations. 1-26 LO 3  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). 1-27 LO 3  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. 1-28 LO 3  Financial Reporting LEARNING OBJECTIVE 4 Discuss the challenges 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. 1-29 LO 4  IFRS in a Political Environment ILLUSTRATION 1.6 User Groups that Influence the Formulation of Accounting Standards 1-30 LO 4  Financial Reporting Challenges The Expectations Gap What the public thinks accountants should do and what accountants think they can do. Significant Financial Reporting Issues ► Non-financial measurements ► Forward-looking information ► Soft assets ► Timeliness 1-31 LO 4  Financial Reporting 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 do not always provide an answer. ► Technical competence is not enough when encountering ethical decisions. 1-32 LO 4  Financial Reporting Challenges International Convergence 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. 1-33 LO 4  Financial Reporting Challenges Question 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. 1-34 LO 4  GLOBAL ACCOUNTING INSIGHTS LEARNING OBJECTIVE 5 Compare IFRS and U.S. GAAP and their standard-setting processes. Most agree that there is a need for one set of international accounting standards. Here is why: Multinational corporations Mergers and acquisitions Information technology Financial markets 1-35 LO 5  GLOBAL ACCOUNTING INSIGHTS Relevant Facts Following are the key similarities and differences between U.S. GAAP and IFRS related to the financial reporting environment. Similarities Generally accepted accounting principles (GAAP) for U.S. companies are developed by the Financial Accounting Standards Board (FASB). The FASB is a private organization. The U.S. Securities and Exchange Commission (SEC) exercises oversight over the actions of the FASB. The IASB is also a private organization. Oversight over the actions of the IASB is regulated by IOSCO. 1-36 LO 5  GLOBAL ACCOUNTING INSIGHTS 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. 1-37 LO 5  GLOBAL ACCOUNTING INSIGHTS Relevant Facts 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. 1-38 LO 5  GLOBAL ACCOUNTING INSIGHTS About The Numbers IASB has looked to the United States to determine the structure it should follow in establishing IFRS. Presented is FASB’s standard-setting structure. 1-39  GLOBAL ACCOUNTING INSIGHTS On the Horizon 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. 1-40 LO 5  Copyright Copyright © 2018 John Wiley & Sons, Inc. All rights reserved. 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