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9 Cards in this Set
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Describe the objective of financial statements and the importance of financial reporting standards in security analysis and valuation |
Objective is to provide economic decision makes with useful information about a firm's financial performance and changes in financial position Reporting standards are designed to ensure that different firms are comparable to one another and to narrow the range of reasonable estimates on which financial statements are based. this aids users of financial statements who rely on them for information about a company's activities, profitability and creditworthiness |
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Describe roles and desirable attributes of financial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards , and describe the role of the International Organization of Securities Commisssions |
Standard setting bodies are private sector organizations that establish financial reporting standards. The two primary standard setting bodies are the International Accounting Standards Board (IASB) and in the US, the Financial Accounting Standards Board (FASB) Regulatory authorities are government agencies that enforce compliance with financial reporting standards. Regulatory authorities include the Securities and Exchange Commission (SEC) in the US and the Financial Service Authority (FSA) in the United Kingdom. Many national regulatory authorities belong to the International Organization of Securities Commissions (IOSCO) |
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Describe the status of global convergence of accounting standards and ongoing barriers to developing one universally accepted set of financial reporting standards |
Efforts to achieve convergence of local accounting standards with the IFRS are underway in most major countries that have not adopted IFRS Barriers to developing one universally accepted set of financial reporting standards include differences if opinion among standard setting bodies and regulatory authorities from different countries and political pressure within countries from groups affected by changes in reporting standards |
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Describe the International Accounting Standards Board's conceptual framework, including the objective and qualitative characteristics of financial statements, required reporting elements , and constraints and assumptions in preparing financial statements |
The IFRS "conceptual framework for financial reporting" defines the fundamental and enhancing qualitative characteristics of financial statements, specifies the required reporting elements, and notes the constraints and assumptions involved in preparing financial statements Fundamental characteristics of financial statements are relevance and faithful representation. The enhancing characteristics include comparability, verifiability, timeliness and understandability Elements of financial statements are assets, liabilities, and owners equity (for measuring financial position) and income and expenses ( for measuring performance) Constraints on the financial statement preparation include cost versus benefit and the difficulty of capturing non quantifiable information in the financial statements Two primary assumptions in preparing financial statements are the accrual basis and the going concern assumption |
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Describe general requirements for financial statements under International Financial Reporting Standards(IFRS) |
Required financial statements include balance sheet, comprehensive income statement, cash flow statement, statement of change in owners equity and explanatory notes General features of financial statements according to IAS No. 1 are: -Fair representation -Going concern -Accrual accounting -Consistency -Materiality -Aggregation -No offsetting -Reporting frequency -Comparative information Other presentation requirements include a classified balance sheet and specific minimum information that must be reported in the notes and on the face of the financial statements |
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Compare key concepts of financial reporting standards under IFRS an US generally accepted accounting principles(US GAAP) reporting systems |
The IASB and FASB frameworks are similar but are moving towards convergence. Some of the remaining differences are: -IASB lists income and expenses as performance elements, while FASB lists revenues,expenses,gains, losses and comprehensive income. -There are minor differences in the definition of assets. Also, the FASB uses the word probable when defining assets and liabilities -The FASB does not allow the upward revaluation of most assets Firms that list their shares in the US but does not use US GAAP or IFRS are required to reconcile their financial statements with US GAAP. For IFRS firms listing their shares in the US, reconciliation is no longer required |
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Identify characteristics of a coherent financial reporting framework and the barriers to creating such a framework |
A coherent financial reporting framework should exhibit transparency, comprehensiveness, and consistency Barriers to creating a coherent framework include issues of valuation, standard setting, and measurement |
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Describe implications for financial analysis of differing financial reporting systems and the importance of monitoring developments in financial reporting standards |
An analyst should be aware of evolving financial reporting standards and new products and innovations that generate new types of transactions |
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Analyze company disclosures of significant accounting policies |
Under IFRS and US GAAP, companies must disclose their accounting policies and estimates in the footnotes and the MD&A. Public companies are also required to disclose the likely impact of recently issued accounting standards on their financial statements |
