Cfa 2009: Fsa Chapt 31 Ss 7

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Two primary standard-setting bodies

Back 1

1. FASB - financial accounting standards board
2. IASB - international accounting standards board

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FASB sets forth ?

Back 2

sets forth GAAP - generally accepted accounting principles

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IASB establishes ?

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establishes IASB - International Financial Reporting Standards or IFRS

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IASB four stated goals

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1. to develop, in the public interest, a single set of high quality , understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the worlds captial markets and other users make economic decisions
2. to promote the use and rigorous application of those standards
3. in fulfilling the objectives associated 1 and 2 to take account of, as appropriate, the special needs of small and medium sized entities and emerging economies
4. to bring about convergence of nationa accounting starndards and internationa accounting standards IAS and international financial reporting standards IFRS to high quality solutions

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SEC - securities and exchange commision and
FSA - financial services authority in UK

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are established by the governments

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Most national authorities belong to the ?

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IOSCO - international organization of securities commisions

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IOSCO - international org. of securities comm. three objectives of financial market regulation

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1. protecting investors
2. ensuring that markets are fair, efficient, and transparent
3. reducing systematic risk

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SEC required filings

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Form S-1 or Securities offerings registration statement
Forms 10-k, 20-k, and 40-f
Annual report
Proxy statement/form def-14a
Forms 10-Q and 6-k
form 8-k
form 144
forms 3, 4, and 5
form 11-k

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SEC Filings:
Securities offerings registration statement

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registration statement filed prior to the sale of new securities to the public:
1. disclosures about the securities being offered for sale
2. the relationship of these new securities to the issuers oter capital securities
3. information typically provided in the annnual filings
4. recent audited f/s
5. risk factors involved in the business

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SEC Filings:
Forms 10-K, 20-F, and 40-F

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required annual filing, includes info about the business and its management, audited f/s and disclosures, legal matters involving firm
Equivalents in US market are 40-F for Canadian firms, and 20-F for forgein firms

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SEC Filings:
Form 10-Q

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requried to file quarterly, updated f/s, does not have to audited, unlike 10-K, includes accounting and legal disclusures, Non- US firms file 6-K semiannually

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SEC Filings:
Form DEF-14A/Proxy Statement

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when a firm prepares a proxy statement prior to a vote, it also files Form DEF-14A

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SEC Filings:
Form 8-K

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file this form to disclose material events including asset acquisitions and disposals, changes in management, or corporate governance,

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SEC Filings:
Form 144

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files this form when issuing securities to qualified buyers without registering the securities with the SEC

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SEC Filings:
Forms 3, 4, and 5

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analysts use these forms to discover purchases and sales of company securities by corporate insiders

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Barriers to developing one universally accepted set of FSA

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1. differnet standard setting bodies disagree on best treatement of items and issues
2. barriers result from politics, business groups, and those that will be affected by changes in reporting standards

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Describe the IFRS Framework

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details the objectives of financial statements, defines qualitative characteristics necessary to meet objectives, specifies required reporting elements, also notes certain constraints and assumptions in f/s preparation

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The objective of the IFRS Framework

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to provide information about the financial position, performance, and changes in financial position of an entity; this inforamtion should be useful to a wide range of users for the purposse of making economic decisions

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The qualitative characteristics of f/s within the IFRS Framework

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1. understandability - who should be able to understand it, should be readily understandable by users with a basic understanding of business, economics, and accounting
2. relevance - will the information help users make economic decisions? must help to evaluate past, present, and future events, to confirm or correct past evaluations, is timely, detailed enough to help asses risks and opportunities
3. Reliablity - free from material error and bias; a) faithful representation, b) substance over form, c)neutrality, d) prudence, e) completeness
4. Comparability - presented in a consistent manner over time and between entities

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The required reporting elements of the IFRS Framework

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Financial Positions:
1. Assets
2. Liabilities
3. Equity
Performance
1. Income
2. Expenses
3. Capital Maintenance Adjustments

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What are the constraints and assumptions of F/S

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Qualitative assumptions of f/s can be at cross purposes,
the need to balance reliability with being error free and timeliness,
cost is another constraint, the benefit should outweigh the cost,
another constraint is intangible and non-quantifiable information cannot be fully captured on a f/s
Assumptions:
1. Accrual basis
2. Going concern

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General requirements for F/S under IAS No. 1

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1. Balance Statement
2. Income Statement
3. Statement of changes in equity
4. Cash Flow statement
5. Accounting policies and notes

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Fundamental Principles underlying the prep of F/S
under IAS No. 1

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1. fair presentation
2. going concern
3. accrual basis
4. consistency
5. materiality

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Presentation requirements
under IAS No. 1

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1. Aggregation
2. No offsetting
3. Classified balance sheet
4. Minimum information on the face of the f/s
5. Minimum information in the notes
6. Comparative information

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Compare and contrast key concepts of FRS under IFRS and GAAP:
Purpose of the Framework

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1. Both frameworks are meant to help develop and revise standards,
2. FASB framework, unlike IASB framework is not at the top of the GAAP hierarchy,
3. IASB requires management to consider the framework if no explicit standard exists on an issue, FASB does not

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Compare and contrast key concepts of FRS under IFRS and GAAP:

Objectives of financial statements

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1. FASB freamework presents different objectives for business and non business fsr, the IASB has one objective for both

Front 27

Compare and contrast key concepts of FRS under IFRS and GAAP:
Assumptions

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IASB framework places more emphasis on the going concern assumption

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Compare and contrast key concepts of FRS under IFRS and GAAP:
Qualitative characteristics

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1. FASB, relevance and reliability are the primary characteristics,
2. IASB, lists comparability and understandibilty as primary

Front 29

Compare and contrast key concepts of FRS under IFRS and GAAP:
financial statement elements

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1, IASB lists income and expenses as the elements related to performance, while, FASB uses revenues, expenses, gains, losses, and comprehensive income
2. FASB defines an asset as future economic benefit, IASB defines asset as resource from which a future economic benefit is expected
3. the word "probable" is used by FASB to define assets and liabilities and by the IASB to define the criteria for recognition
4. FASB does not allow the values of most assets to be adjusted upward

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Compare and contrast key concepts of FRS under IFRS and GAAP:
implications for financial analysis of differing FRSs

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analysts will need to interpret f/s under different standards, companies will need to provide reconcialation statements, SEC requires foreign firms info necessary to reconcile

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Characteristics of a coherent financial reporting framework

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1. transparency - full disclosure, fair presentation of underlying economics of a company to the f/s user
2. Comprehensiveness - all types of transactions that have financial implications should be part of the framework
3. Consistency - similar transactions should be accounted for in similar ways across companies, geo, and time periods

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Barriers to creating coherent financial reporting networks

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1. Valuation - different measurement bases for valuation involve a trade-off between relevance and reliability
2. Standard setting - three approaches; a) principles based - IFRS approach, relies on broad framework, b) rules based, GAAP approach, but FASB is moving more towards principle based, gives specific guidance about how to classify transactions, c) objectives based, blends the other two approaches
3. Measurement - proper valuing the elemts at one point in time (balance sheet), and proper valuing between points in time (income statemet), asset/liability approach, used mostly by standard setters, uses balance sheet valuation, and revenue/expense approach tend to place more significance on the income statement

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Importance of monitoring developments in FRS

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analysts need to monitor how these developments will affect the f/s they use, be aware of new products and innovations in the financial markets that generate new types of transactions, use the financial reporting framework as a guide for evaluation of new products, or transactios that may impact the f/s

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Evaluate company disclosures of significant accounting policies

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analysts should use disclosures to evaluate what policies are discussed, whether they cover all the relevant data in the f/s, which policies required management to make estimates, and whether the disclosures and estimates have changed since te prior period, should understand the likely impact of a company implementing recently issued accounting standards