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Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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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 roles
markets and its relationship to in the standard-setting
financial reporting. process.
2. Explain the objective of financial 4. Discuss the challenges
reporting. facing financial reporting.

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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
relationship to financial reporting.

World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms of Sales

ILLUSTRATION 1.1

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LEARNING OBJECTIVE 1
Global Markets Describe the growing importance
of global financial markets and its
relationship to financial reporting.

World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms of Sales

ILLUSTRATION 1.1

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Global Markets

Significant number of foreign companies are found on

national exchanges. ILLUSTRATION 1.2
International Exchange Statistics

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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.

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Global Markets

Economic Entities Financial Statements Additional Information

Financial Statement of President's letter

Information Financial Position
Prospectuses
Accounting? Income Statement
or Statement of Reports filed with
Identify Comprehensive governmental
and Income agencies
Measure Statement of Cash News releases

and Flows Forecasts

Communicate Statement of Environmental
Changes in Equity impact statements
Note Disclosures Etc.

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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

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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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Global Markets

High Quality Standards

Globalization demands a single set of high-quality
international accounting standards. Some elements:
7. Common delivery systems (eg, eXtensible Business
Reporting Language—XBRL).
8. Common approach to corporate governance and legal
frameworks around the world.

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LEARNING OBJECTIVE 2
Objective of Explain the objective of
Financial financial reporting.

Reporting
Objective: Provide financial information about the reporting
entity that is useful to
ÿ present and potential equity investors,
ÿ lenders, and

ÿ other creditors

in making decisions about resources provided to the entity.

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Objectives of Financial Reporting

General-Purpose Financial Statements

ÿ Provide financial reporting information to a wide variety
of users.
ÿ Provide the most useful information possible at the
least cost.

Equity Investors and Creditors

ÿ Investors and creditors are the primary user group.

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Objectives of Financial Reporting

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

Decision-Usefulness
ÿ 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.

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Objectives of Financial Reporting

Questions
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.

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Objectives of Financial Reporting

Questions
General-purpose financial statements are prepared primarily
for:
a. internal users.
b. external users.
c. auditors.
d. government regulators.

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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:

ÿ 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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Standard-Setting Organizations

International Organization of Securities

Commissions (IOSCO)
ÿ Does not set accounting standards.

ÿ Dedicated to ensuring that global markets can operate

on an efficient and effective basis.

ÿ Supports the use of IFRS as a single set of

international standards in cross-border offerings and
listings.

http://www.iosco.org/

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Standard-Setting Organizations

International Accounting Standards Board

(IASB)
Composed of four organizations—
ÿ IFRS Foundation

ÿ International Accounting Standards Board (IASB)

ÿ IFRS Advisory Council

ÿ IFRS Interpretations Committee

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International Accounting Standards Board

ILLUSTRATION 1.4
International Standard-Setting Structure

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Standard-Setting Organizations

Questions
IFRS stands for:

a. International Federation of Reporting Services.

b. Independent Financial Reporting Standards.
c. International Financial Reporting Standards.
d. Integrated Financial Reporting Services.

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Standard-Setting Organizations

Questions
The major key players on the international side are the:
a. IASB and IFRS Advisory Council.
b. IOSCO and the US SEC.

c. London Stock Exchange and International

Securities Exchange.
d. IASB and IOSCO.

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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 accounting profession at every stage of
the process; and

4. Collaborative efforts with the worldwide standard-setting

community.
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ILLUSTRATION 1.5
International Standard -Setting Structure
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International Accounting Standards Board

Questions
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.

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International Accounting Standards Board

Types of Pronouncements
ÿ International Financial Reporting Standards.
ÿ Conceptual Framework for Financial Reporting.
ÿ International Financial Reporting Standards Interpretations.

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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 (eg, US GAAP).

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Standard-Setting Organizations

Questions
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.
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Financial Reporting LEARNING OBJECTIVE 4

Discuss the challenges
Challenges facing financial reporting.

IFRS in a Political Environment

ÿ Considering the economic consequences of many
accounting rules, special interest groups are expected to
vocalize their reactions to proposed rules.
ÿ The Board should not do is issue standards that are

primarily politically motivated.

ÿ While paying attention to its constituencies, the Board
IFRS should base on sound research and a conceptual
framework that has its foundation in economic reality.

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IFRS in a Political Environment

ILLUSTRATION 1.6
User Groups that Influence the Formulation of Accounting Standards
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Financial Reporting Challenges

The Expectations Gap

What the public thinks accountants should do and what
accountants think they can do.

Significant Financial Reporting Issues

ÿ Non-financial measurements

ÿ Forward-looking information
ÿ Soft assets

ÿ Timeliness

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Financial Reporting Challenges

Ethics in the Environment of Financial

Accounting
Companiesÿthat 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.

ÿ IFRS does not always provide an answer.

ÿ Technical competence is not enough when encountering

ethical decisions.

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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.

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Financial Reporting Challenges

Questions
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.

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GLOBAL ACCOUNTING INSIGHTS

LEARNING OBJECTIVE 5
Compare IFRS and US GAAP and their standard-setting processes.

Most agree that there is a need for a set of international accounting standards.
Here is why:
• Multinational corporations
• Mergers and acquisitions
• Information technology
• Financial markets

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GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Following are the key similarities and differences between US GAAP and IFRS
related to the financial reporting environment.
Similarities

• Generally accepted accounting principles (GAAP) for US companies are

developed by the Financial Accounting Standards Board (FASB). The FASB
is a private organization. The US 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.

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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 US 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.

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GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences

• US GAAP is more detailed or rules-based. IFRS tends to be 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 US 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.

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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.

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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.

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Copyright

Copyright © 2018 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Requests for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these programs
or from the use of the information contained herein.

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