FINANCIAL ACCOUNTING

LECTURE 1: OVERVIEW

FMT – HANU – DINH LE MAI

INTERMEDIATE ACCOUNTING
IFRS 2 ED Chapter 1, 2, 3

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PREVIEW OF CHAPTER 1

Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
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1 Financial Reporting and

Accounting Standards

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the growing importance of 5. Identify the objective of financial reporting.

global financial markets and its relation 6. Identify the major policy-setting bodies and
to financial reporting. their role in the standard-setting process.
2. Identify the major financial statements and 7. Explain the meaning of IFRS.
other means of financial reporting.
8. Describe the challenges facing financial
3. Explain how accounting assists in the efficient reporting.
use of scarce resources.
4. Explain the need for high-quality standards.

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 GLOBAL MARKETS

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 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
and agencies
Income
Measure News releases
Statement of Cash
and Flows Forecasts
Communicate Statement of Environmental impact
Changes in Equity 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 (e.g., eXtensible Business
Reporting Language—XBRL).
8. Common approach to corporate governance and legal
frameworks around the world.

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OBJECTIVE OF FINANCIAL ACCOUNTING

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.

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OBJECTIVE OF FINANCIAL ACCOUNTING

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.

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 OBJECTIVE OF FINANCIAL ACCOUNTING

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.

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STANDARD-SETTING ORGANIZATIONS

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 115 countries.

● 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)
► Does not set accounting standards.

► Dedicated to ensuring that global

markets can operate in an efficient
and effective basis.
http://www.iosco.org/
► Supports the use of IFRS as the
single set of international
standards in cross-border offerings
and listings.
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 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

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International Accounting Standards Board

ILLUSTRATION 1-4
International Standard-Setting Structure

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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 accountancy profession at every stage of
the process; and
4. Collaborative efforts with the worldwide standard-setting
community.
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 International Accounting Standards Board

ILLUSTRATION 1-5
International
Standard-Setting
Structure

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LO 6

International Accounting Standards Board

Types of Pronouncements
► International Financial Reporting Standards.

► Conceptual Framework for Financial Reporting.

► 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 (e.g., U.S. GAAP).
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 FINANCIAL REPORTING CHALLENGES

The Expectations Gap

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

Significant Financial Reporting Issues

► Non-financial measurements

► Forward-looking information

► Soft assets

► Timeliness

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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.

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GLOBAL ACCOUNTING INSIGHTS

INTERNATIONAL FINANCIAL REPORTING

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

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 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.

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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.
• 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 grounds
for convergence. A good example is the recent issuance of a new standard
on revenue recognition that both organizations support. Also, the Boards
are working together on other substantial projects such as the
measurement and classification of financial instruments.
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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.

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 PREVIEW OF CHAPTER 2

Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
2-28

Conceptual Framework
2 for Financial Reporting

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the usefulness of a conceptual 5. Define the basic elements of financial

framework. statements.

2. Describe efforts to construct a conceptual 6. Describe the basic assumptions of

framework. accounting.

3. Understand the objective of financial 7. Explain the application of the basic principles
reporting. of accounting.

4. Identify the qualitative characteristics of 8. Describe the impact that the cost constraint
accounting information. has on reporting accounting information.

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CONCEPTUAL FRAMEWORK

Conceptual Framework establishes the concepts that

underlie financial reporting.

Need for a Conceptual Framework

► Rule-making should build on and relate to an established
body of concepts.

► Enables IASB to issue more useful and consistent

pronouncements over time.

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 CONCEPTUAL FRAMEWORK

Development of a Conceptual Framework

Presently, the Conceptual Framework is comprises of the following.
• Chapter 1: The Objective of General Purpose Financial Reporting
• Chapter 2: The Reporting Entity (not yet issued)
• Chapter 3: Qualitative Characteristics of Useful Financial
Information
• Chapter 4: The Framework, comprised of the following:
1. Underlying assumption—the going concern assumption;
2. The elements of financial statements;
3. Recognition of the elements of financial statements;
4. Measurement of the elements of financial statements; and
5. Concepts of capital and capital maintenance.
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CONCEPTUAL FRAMEWORK

Overview of the Conceptual Framework

Three levels:
 First Level = Objectives of Financial Reporting

 Second Level = Qualitative Characteristics and

Elements of Financial Statements

 Third Level = Recognition, Measurement, and

Disclosure Concepts.

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ASSUMPTIONS PRINCIPLES CONSTRAINTS

1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
Third level
3. Monetary unit 3. Expense recognition The "how"—
4. Periodicity 4. Full disclosure implementation
5. Accrual

QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities Second level
2. Enhancing 3. Equity Bridge between
qualities 4. Income
levels 1 and 3
5. Expenses
ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential First level
equity investors, The "why"—purpose
lenders, and other of accounting
creditors in their
capacity as capital
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 FIRST LEVEL: BASIC OBJECTIVE

OBJECTIVE
“To 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.

 Provided by issuing general-purpose financial statements.

 Assumption is that users need reasonable knowledge of business
and financial accounting matters to understand the information.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Qualitative Characteristics of Accounting

Information
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more useful)
information from inferior (less useful) information for
decision-making purposes.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

ILLUSTRATION 2-2
Hierarchy of Accounting
Qualities

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 Relevance

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

To be relevant, accounting information must be capable of making

a difference in a decision.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Financial information has predictive value if it has value as an input to

predictive processes used by investors to form their own expectations
about the future.
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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior

expectations.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Information is material if omitting it or misstating it could influence

decisions that users make on the basis of the reported financial
information.
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Faithful Representation

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and descriptions

match what really existed or happened.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary for

faithful representation is provided.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to favor

one set of interested parties over another.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

An information item that is free from error will be a more accurate

(faithful) representation of a financial item.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Verifiability occurs when independent measurers, using the same

methods, obtain similar results.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Timeliness means having information available to decision-makers

before it loses its capacity to influence decisions.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Understandability is the quality of information that lets reasonably

informed users see its significance.

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Basic Elements

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

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 SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements

A resource controlled by the entity as a

Asset
result of past events and from which
future economic benefits are expected to
Liability flow to the entity.

Equity

Income

Expenses
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SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements

Asset
A present obligation of the entity arising
from past events, the settlement of which
Liability
is expected to result in an outflow from the
entity of resources embodying economic
Equity benefits.

Income

Expenses
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SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements

Asset

Liability

The residual interest in the assets of the

Equity
entity after deducting all its liabilities.

Income

Expenses
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 SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements

Asset

Liability

Equity Increases in economic benefits during the

accounting period in the form of inflows or
enhancements of assets or decreases of
Income
liabilities that result in increases in equity,
other than those relating to contributions
Expenses from equity participants.
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SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements

Asset

Liability

Equity Decreases in economic benefits during the

accounting period in the form of outflows
Income or depletions of assets or incurrences of
liabilities that result in decreases in equity,
other than those relating to distributions to
Expenses
equity participants.
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THIRD LEVEL: RECOGNITION, MEASUREMENT,

AND DISCLOSURE CONCEPTS

These concepts explain how companies should recognize,

measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure
5. Accrual

ILLUSTRATION 2-7
Conceptual Framework for
Financial Reporting

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 THIRD LEVEL: ASSUMPTIONS

Basic Assumptions
Economic Entity – company keeps its activity separate from its
owners and other business unit.

Going Concern - company to last long enough to fulfill

objectives and commitments.

Monetary Unit - money is the common denominator.

Periodicity - company can divide its economic activities into

time periods.

Accrual Basis of Accounting – transactions are recorded in the

periods in which the events occur.
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THIRD LEVEL: BASIC PRINCIPLES

Measurement Principles
 Historical Cost is generally thought to be a faithful
representation of the amount paid for a given item.

 Fair value is defined as “the price that would be received to

sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.”

 IASB has given companies the option to use fair value as the
basis for measurement of financial assets and financial
liabilities.
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THIRD LEVEL: BASIC PRINCIPLES

Revenue Recognition
When a company agrees to perform a service or sell a product to
a customer, it has a performance obligation.

Requires that companies recognize revenue in the accounting

period in which the performance obligation is satisfied.

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 THIRD LEVEL: BASIC PRINCIPLES

Expense Recognition - Outflows or “using up” of assets

or incurring of liabilities during a period as a result of delivering
or producing goods and/or rendering services.
ILLUSTRATION 2-6
Expense Recognition

“Let the expense follow the revenues.”

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THIRD LEVEL: BASIC PRINCIPLES

Full Disclosure
Providing information that is of sufficient importance to
influence the judgment and decisions of an informed user.

Provided through:
 Financial Statements

 Notes to the Financial Statements

 Supplementary information

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THIRD LEVEL: COST CONSTRAINT

Cost Constraint
Companies must weigh the costs of providing the information
against the benefits that can be derived from using it.

 Rule-making bodies and governmental agencies use cost-

benefit analysis before making final their informational
requirements.

 In order to justify requiring a particular measurement or

disclosure, the benefits perceived to be derived from it
must exceed the costs perceived to be associated with it.

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Summary of
the Structure

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

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GLOBAL ACCOUNTING INSIGHTS

THE CONCEPTUAL FRAMEWORK

The IASB and the FASB have been working together to develop a common
conceptual framework. This framework is based on the existing conceptual
frameworks underlying U.S. GAAP and IFRS. The objective of this joint project
is to develop a conceptual framework consisting of standards that are
principles-based and internally consistent, thereby leading to the most useful
financial reporting.

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GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to the Conceptual Framework for Financial Reporting.
Similarities
• In 2010, the IASB and FASB completed the first phase of a jointly created
conceptual framework. In this first phase, they agreed on the objective of
financial reporting and a common set of desired qualitative characteristics.
These were presented in the Chapter 2 discussion. Note that prior to this
converged phase, the Conceptual Framework gave more emphasis to the
objective of providing information on management’s performance
(stewardship).

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Similarities
• The existing conceptual frameworks underlying U.S. GAAP and IFRS are
very similar. That is, they are organized in a similar manner (objective,
elements, qualitative characteristics, etc.). There is no real need to change
many aspects of the existing frameworks other than to converge different
ways of discussing essentially the same concepts.
• The converged framework should be a single document, unlike the two
conceptual frameworks that presently exist. It is unlikely that the basic
structure related to the concepts will change.

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GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Similarities
• Both the IASB and FASB have similar measurement principles, based on
historical cost and fair value. In 2011, the Boards issued a converged
standard on fair value measurement so that the definition of fair value,
measurement techniques, and disclosures are the same between U.S.
GAAP and IFRS when fair value is used in financial statements.

Differences
• Although both U.S. GAAP and IFRS are increasing the use of fair value to
report assets, at this point IFRS has adopted it more broadly. As examples,
under IFRS, companies can apply fair value to property, plant, and
equipment; natural resources; and, in some cases, intangible assets.
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GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• U.S. GAAP has a concept statement to guide estimation of fair values when
market-related data is not available (Statement of Financial Accounting
Concepts No. 7, “Using Cash Flow Information and Present Value in
Accounting”). The IASB has not issued a similar concept statement; it has
issued a fair value standard (IFRS 13) that is converged with U.S. GAAP.
• The monetary unit assumption is part of each framework. However, the unit
of measure will vary depending on the currency used in the country in which
the company is incorporated (e.g., Chinese yuan, Japanese yen, and British
pound).

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• The economic entity assumption is also part of each framework although
some cultural differences result in differences in its application. For
example, in Japan many companies have formed alliances that are so
strong that they act similar to related corporate divisions although they are
not actually part of the same company.

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