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01. ch01_Kieso_IFRS4_PPT.pptx

1. Intermediate Accounting I F R S Edition Kieso, Weygandt, Warfield Fourth Edition Chapter 1 Financial Reporting and Accounting Standards Prepared by Coby Harmon University of California, Santa Barbara Westmont College This slide deck contains animations. Please disable animations if they cause issues with your device. Copyright ©2020 John Wiley & Sons, Inc.

2. Learning Objectives After studying this chapter, you should be able to: L O 1 Describe the global financial markets and their relation to financial reporting. L O 2 Explain the objective of financial reporting. L O 3 Identify the major policy-setting bodies and their role in the standard-setting process. L O 4 Discuss the challenges facing financial reporting.

3. PREVIEW OF CHAPTER 1

4. Learning Objective 1 Describe the global financial markets and their relation to financial reporting. L O 1

5. Global Markets World markets are becoming increasingly intertwined. Top 20 Global Companies In Terms of Sales ILLUSTATION 1.1 L O 1

6. Global Markets International Exchange Statistics Significant number of foreign companies are found on national exchanges. ILLUSTATION 1.2 L O 1

7. Global Markets Financial Statements and Financial Reporting Essential characteristics of accounting are: the identification , measurement , and communication of financial information about economic entities to interested parties. L O 1

8. Global Markets Capital Allocation Process ILLUSTATION 1.3 L O 1

9. Global Markets High-Quality Standards (1 of 2) Globalization demands a single set of high-quality international accounting standards. Some elements: Single set of high-quality accounting standards established by a single standard-setting body. Consistency in application and interpretation. Common disclosures. Common high-quality auditing standards and practices. Common approach to regulatory review and enforcement. Education and training of market participants. L O 1

10. Global Markets High-Quality Standards (2 of 2) Globalization demands a single set of high-quality international accounting standards. Some elements: Common delivery systems (e.g., eXtensible Business Reporting Language—X B R L). Common approach to corporate governance and legal frameworks around the world. L O 1

11. Learning Objective 2 Explain the objective of financial reporting. L O 2

12. 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. L O 2

13. Objective of Financial Reporting Elements of the Objective 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. L O 2

14. Objective of Financial Reporting Additional Elements of the Objective Entity Perspective Companies viewed as separate and distinct from their owners (shareholders). Decision-Usefulness Investors are interested in assessing the company’s ability to generate net cash inflows and management’s ability to protect and enhance the capital providers’ investments. L O 2

15. Objective of Financial Reporting Review Question The objective of financial reporting places most emphasis on: reporting to capital providers. reporting on stewardship. providing specific guidance related to specific needs. providing information to individuals who are experts in the field. L O 2

16. Objective of Financial Reporting Review Question Answer The objective of financial reporting places most emphasis on: Answer: reporting to capital providers. reporting on stewardship. providing specific guidance related to specific needs. providing information to individuals who are experts in the field. L O 2

17. Objective of Financial Reporting Another Review Question General-purpose financial statements are prepared primarily for: internal users. external users. auditors. government regulators. L O 2

18. Objective of Financial Reporting Another Review Question Answer General-purpose financial statements are prepared primarily for: internal users. Answer: external users. auditors. government regulators. L O 2

19. Learning Objective 3 Identify the major policy-setting bodies and their role in the standard-setting process. L O 3

20. Standard-Setting Organizations International Accounting Standards Board (I A S B) Main international standard-setting organization: Issues International Financial Reporting Standards (I F R S) . Standards used on most foreign exchanges. I F R S used in over 149 countries. Two organizations that have a role in international standard-setting are the International Organization of Securities Commissions (I O S C O) and the I A S B. L O 3

21. Standard-Setting Organizations International Organization of Securities Commissions (I O S C O) Does not set accounting standards. Dedicated to ensuring that global markets can operate in an efficient and effective basis. Supports the use of I F R S as the single set of international standards in cross-border offerings and listings. http://www.iosco.org/ L O 3

22. International Accounting Standards Board Composed of four organizations— I F R S Foundation International Accounting Standards Board (I A S B) I F R S Advisory Council I F R S Interpretations Committee L O 3

23. International Accounting Standards Board International Standard-Setting Structure ILLUSTATION 1.4 L O 3

24. IFRS Review Question I F R S stands for: International Federation of Reporting Services. Independent Financial Reporting Standards. International Financial Reporting Standards. Integrated Financial Reporting Services. L O 3

25. IFRS Review Question Answer I F R S stands for: International Federation of Reporting Services. Independent Financial Reporting Standards. Answer: International Financial Reporting Standards. Integrated Financial Reporting Services. L O 3

26. Standard-Setting Organizations Review Question The major key players on the international side are the: I A S B and I F R S Advisory Council. I O S C O and the U.S. S E C. London Stock Exchange and International Securities Exchange. I A S B and I O S C O. L O 3

27. Standard-Setting Organizations Review Question Answer The major key players on the international side are the: I A S B and I F R S Advisory Council. I O S C O and the U.S. S E C. London Stock Exchange and International Securities Exchange. Answer: I A S B and I O S C O. L O 3

28. International Accounting Standards Board Due Process The I A S B due process has the following elements: Independent standard-setting board; Thorough and systematic process for developing standards; Engagement with investors, regulators, business leaders, and the global accountancy profession at every stage of the process; and Collaborative efforts with the worldwide standard-setting community. L O 3

29. International Accounting Standards Board IASB Due Process ILLUSTATION 1.5 L O 3

30. International Accounting Standards Board Review Question Accounting standard-setters use the following process in establishing international standards: Research, exposure draft, public hearing, standard. Public hearing, research, exposure draft, standard. Research, preliminary views, public hearing, standard. Research, public hearing, exposure draft, standard. L O 3

31. International Accounting Standards Board Review Question Answer Accounting standard-setters use the following process in establishing international standards: Research, exposure draft, public hearing, standard. Public hearing, research, exposure draft, standard. Research, preliminary views, public hearing, standard. Answer: Research, public hearing, exposure draft, standard. L O 3

32. International Accounting Standards Board Types of Pronouncements International Financial Reporting Standards. Conceptual Framework for Financial Reporting. International Financial Reporting Standards Interpretations. L O 3

33. Hierarchy of IFRS Companies first look to: International Financial Reporting Standards; International Financial Reporting Standards, International Accounting Standards (issued by the predecessor to the I A S B), and I F R S interpretations originated by the I F R S Interpretations Committee (and its predecessor, the I A S Interpretations Committee); The Conceptual Framework for Financial Reporting; and Pronouncements of other standard-setting bodies that use a similar conceptual framework (e.g., U.S. G A A P). L O 3

34. Hierarchy of IFRS Review Question I F R S is comprised of: International Financial Reporting Standards and F A S B financial reporting standards. International Financial Reporting Standards, International Accounting Standards, and International Accounting Standards Interpretations. International Accounting Standards and International Accounting Standards Interpretations. F A S B financial reporting standards and International Accounting Standards. L O 3

35. Hierarchy of IFRS Review Question Answer I F R S is comprised of: International Financial Reporting Standards and F A S B financial reporting standards. Answer: International Financial Reporting Standards, International Accounting Standards, and International Accounting Standards Interpretations. International Accounting Standards and International Accounting Standards Interpretations. F A S B financial reporting standards and International Accounting Standards. L O 3

36. Learning Objective 4 Discuss the challenges facing financial reporting. L O 4

37. I F R S 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 issue standards that are primarily politically motivated. While paying attention to its constituencies, the Board should base I F R S on sound research and a conceptual framework that has its foundation in economic reality. L O 4

38. I F R S in a Political Environment User Groups that Influence the Formulation of Accounting Standards ILLUSTATION 1.6 L O 4

39. Financial Reporting Challenges (1 of 3) 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 L O 4

40. Financial Reporting Challenges (2 of 3) 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. I F R S do not always provide an answer. Technical competence is not enough when encountering ethical decisions. L O 4

41. Financial Reporting Challenges (3 of 3) International Convergence Examples of how convergence is occurring: China’s goal is to eliminate differences between its standards and I F R S. Japan now permits the use of I F R S for domestic companies. The I A S B and the F A S B have spent the last 12 years working to converge their standards. Malaysia helped amend the accounting for agricultural assets. Italy provided advice and counsel on the accounting for business combinations under common control. L O 4

42. Financial Reporting Challenges Review Question The expectations gap is: what financial information management provides and what users want. what the public thinks accountants should do and what accountants think they can do. what the governmental agencies want from standard-setting and what the standard-setters provide. what the users of financial statements want from the government and what is provided. L O 4

43. Financial Reporting Challenges Review Question Answer The expectations gap is: what financial information management provides and what users want. Answer: what the public thinks accountants should do and what accountants think they can do. what the governmental agencies want from standard-setting and what the standard-setters provide. what the users of financial statements want from the government and what is provided. L O 4

44. Learning Objective 5 Compare I F R S and U.S. G A A P and their standard-setting processes. L O 5

45. Global Accounting Insights 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 L O 5

46. Global Accounting Insights Similarities Following are the key similarities between U.S. G A A P and I F R S related to the financial reporting environment. Generally accepted accounting principles (G A A P) for U.S. companies are developed by the Financial Accounting Standards Board (F A S B). The F A S B is a private organization. The U.S. Securities and Exchange Commission (S E C) exercises oversight over the actions of the F A S B. The I A S B is also a private organization. Oversight over the actions of the I A S B is regulated by I O S C O. L O 5

47. Global Accounting Insights More Similarities Both the I A S B and the F A S B 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 F A S B relies on the U.S. S E C for regulation and enforcement of its standards. The I A S B relies primarily on I O S C O for regulation and enforcement of its standards. Both the I A S B and the F A S B are working together to find common ground wherever possible. L O 5

48. Global Accounting Insights Differences U.S. G A A P is more detailed or rules-based. I F R S 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. G A A P and I F R S 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. L O 5

49. F A S B’s Standard-Setting Structure L O 5

50. G A A P Review Question G A A P (for U.S. companies) stands for: Government accepted accounting practices. Generally accepted auditing policies. Generally accepted accounting principles. Government approved accounting principles. L O 4

51. G A A P Review Question Answer G A A P (for U.S. companies) stands for: Government accepted accounting practices. Generally accepted auditing policies. Answer: Generally accepted accounting principles. Government approved accounting principles. L O 4

52. Oversight of Accounting Standard-Setting Review Question Oversight of accounting standard-setting is as follows: I A S B oversees F A S B. I O S C O oversees both the I A S B and F A S B. S E C oversees both the I A S B and F A S B. S E C oversees F A S B; I O S C O oversees I A S B. L O 4

53. Oversight of Accounting Standard-setting Review Question Answer Oversight of accounting standard-setting is as follows: I A S B oversees F A S B. I O S C O oversees both the I A S B and F A S B. S E C oversees both the I A S B and F A S B. Answer: S E C oversees F A S B; I O S C O oversees I A S B. L O 4

54. On the Horizon Both the I A S B and the F A S B 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 I A S B (and the F A S B on its joint projects with the I A S B) 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. L O 5

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