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2015, Study Session # 7, Reading # 24

FINANCIAL REPORTING STANDARDS


FCF = Future Cash Flows
FASB = Financial Accounting
Standard Board
IASB = International
Accounting Standard
Board

24.b

24.a
 F.S provides information about financial performance & in financial position.
 Reporting standards ensure the usefulness of information to a wide range of users.

FS =
A&L =
G/L =
BS =
IS =

Financial Statements
Assets & Liabilities
Gain & Loss
Balance Sheet
Income Statement

 Standards-setting bodies professional organizations of accountants & auditors that establish financial reporting standards.
 Regulatory authorities Govt agencies to enforce compliance with financial reporting standards.

Standard-Setting Bodies

Financial Accounting Standards Board (FASB).

International Accounting Standards Board (IASB).

Generally Accepted Accounting Principles (GAAP)

International Financial Reporting Standards (IFRS).

 IASB has four stated goals.


 Develop transparent & comparable accounting standards and high quality F.S.
 Promote global accounting standards.
 Achieve convergence b/w national & global accounting standards.
 Consider emerging markets & small firms when implementing standards.
 Examples of regulatory authorities are Securities & Exchange Commission (SEC) & Financial Services Authority (FSA).

Securities & Exchange Commission Filings

Form S-1

Form 10-K

Form 10-Q

Registration
statement
prior to sale of
new securities

Annual filing
with
information
about
management,
Companys
business &
disclosures.
Not a
substitute for
annual report.

Quarterly
unaudited
filings & a
MD&A about
certain events.

Form DEF-14A

Related to
proxy
statement for
shareholders.

Form 8-K

To disclose
material
events
corporate

Form 144

Filing to notify
SEC notice of
the proposed
sale of
restricted
securities or
securities held
by an issuer
affiliate on
reliance of
Rule 144.

24.c
 One barrier to convergence is different standard setting bodies & regulatory authorities.
 Political pressure that regulatory bodies face from business groups is another barrier.

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Form 3, 4, &5

Filing about
beneficial
ownership

2015, Study Session # 7, Reading # 24

24.d

Qualitative Characteristics

Understandability

Comparability

Users with basic knowledge of


business should be able to readily
understand the information in F.S.

Verifiability

F.S presentation should be


consistent among firms &
across time periods

Timeliness

Similar conclusions could be


drawn from independent
observers using same method.

Information is available to users


prior to making a decision.

Required Reporting Elements


 An item should be recognized in F.S if future benefit is probable & can be measured reliably.

Measurement Bases

Historical cost

Amount originally paid


for asset

Current cost

Amount to be paid
today for same asset

Realizable value

Amount for which firm


could sell the asset

Present value

Discounted value of
assets expected FCF

Fair value

Exchange asset or settle


liability in arms -length
transaction.

Constraints & Assumption


Constraints
 One constraint on F.S preparation is to balance b/w verifiability & timeliness.
 Benefit of information should be greater than cost.
 Intangible & non-quantifiable information cannot be captured directly in F.S.

Assumption
 Accrual basis reflecting transactions at time of occurrence, not necessarily when
cash is paid.
Going concern assumption company will continue to exist for a foreseeable future.

24.e

Required financial statements


 Balance sheet.
 Statement of comprehensive
Income.
 Cash flow statement.
 Statement of in owners
equity.
 Explanatory notes.

IAS # 1

Principles for preparing F.S

Principles for presenting F.S

 Fair presentation
 Going concern; accrual basis;
materiality and aggregation
 No offsetting
 Frequency of reporting
 Comparative information and
consistency of presentation.

 Aggregation of similar items.


 Classified B.S & minimum
information on face of F.S.
 Comparative information for
prior periods.

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2015, Study Session # 7, Reading # 24

24.f

Comparison of framework

FASB

IASB

 Not at top of GAAP hierarchy.


 Different objective for business & non business F.S.
reporting.
 Place less emphasis on going concern assumption.
 Relevance & reliability are primary characteristics.
 Revenue, expense, G&L & comprehensive income as
elements of performance.
 Define asset as future economic benefit.
 Probable is used to define A&L.
 Does not allow upward movement of assets.

24.g

Consider framework if no explicit standard exist.


One objective for both.
Place more emphasis on going concern assumption.
Also lists comparability & understandability as primary
characteristics.
 Income & expenses are elements of performance.
 Assets are resources from which future economic
benefit is expected.
 Requires probability criterion to be met and has a
separate recognition criterion of relevance.





Coherent Financial Reporting Framework

Transparent

Comprehensive

Full disclosure & fair


presentation.

Should include all types of


transactions having financial
implications.

Consistent
Similar transactions should
be accounted for in similar
ways.

Barriers to Coherent Financial Reporting

Valuation

Standard Setting

Trade-off b/w relevance &


reliability.

 Principle-based relies on
broad framework (IFRS).
 Rule-based specific
guidance (U.S.GAAP).
 Objective-oriented Blend
of two.

Measurement
Trade-off b/w properly
valuing B/S & I.S.

24.h
 Analyst should be aware of new products & innovations in financial market.
 Companies disclose policies & estimates in footnotes.
 Management can discuss impact of adopting a new standard.

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