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PREVIEW OF CHAPTER

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.

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Describe the growing importance of global financial markets and

5.

Identify the objective of financial reporting.

its relation to financial reporting.

6.

Identify the major policy-setting bodies and their role in the standard-setting

2.

Identify the major financial statements and other means of financial reporting.

3.

Explain how accounting assists in the efficient use of scarce resources.

4.

Explain the need for high-quality standards.

process.

7.

Explain the meaning of IFRS.

8.

Describe the challenges facing financial reporting.


GLOBAL MARKETS


World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms of Sales

ILLUSTRATION 1-1

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LO 1


GLOBAL MARKETS

Significant number of foreign companies are found on national exchanges.
ILLUSTRATION 1-2
International Exchange Statistics

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LO 1


1

Financial Reporting and Accounting
Standards

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


1.

Describe the growing importance of global financial markets and its relation to
financial reporting.

2.

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5.

Identify the objective of financial reporting.

6.

Identify the major policy-setting bodies and their role in the standard-setting
process.

Identify the major financial statements and other means of
financial reporting.

7.

Explain the meaning of IFRS.

3.

Explain how accounting assists in the efficient use of scarce resources.


8.

Describe the challenges facing financial reporting.

4.

Explain the need for high-quality standards.


GLOBAL MARKETS

Financial Statements and Financial Reporting
Essential characteristics of accounting are:

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1.

the identification, measurement, and communication of financial information about

2.

economic entities to

3.

interested parties.

LO 2



GLOBAL MARKETS

Economic
Economic Entity
Entity

Financial
Financial

Information
Information

Accounting?
Accounting?
Identify
Identify

Financial
Financial Statements
Statements

Additional
Additional Information
Information

Statement
Statement of
of Financial
Financial Position

Position

President’s
President’s letter
letter

Income
Income Statement
Statement or
or Statement
Statement of
of

Prospectuses
Prospectuses

Comprehensive
Comprehensive Income
Income

Reports
Reports filed
filed with
with governmental
governmental

Statement
Statement of
of Cash
Cash Flows

Flows

agencies
agencies

Measure
Measure

Statement
Statement of
of Changes
Changes in
in Equity
Equity

News
News releases
releases

and
and

Note
Note Disclosures
Disclosures

Forecasts
Forecasts

and

and

Communicate
Communicate

Environmental
Environmental impact
impact statements
statements

Etc.
Etc.

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LO 2


1

Financial Reporting and Accounting
Standards

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

1.

Describe the growing importance of global financial markets and its


5.

Identify the objective of financial reporting.

relation to financial reporting.

6.

Identify the major policy-setting bodies and their role in the standard-setting

2.

Identify the major financial statements and other means of financial reporting.

3.

Explain how accounting assists in the efficient use of scarce
resources.

4.

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Explain the need for high-quality standards.

process.

7.

Explain the meaning of IFRS.


8.

Describe the challenges facing financial reporting.


GLOBAL MARKETS

Accounting and Capital Allocation

Resources
Resources are
are limited.
limited. Efficient
Efficient use
use of
of resources
resources often
often determines
determines whether
whether aa business
business thrives.
thrives.

ILLUSTRATION 1-3

Capital Allocation

Process


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LO 3


1

Financial Reporting and Accounting
Standards

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

1.

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Describe the growing importance of global financial markets and its

5.

Identify the objective of financial reporting.

relation to financial reporting.

6.

Identify the major policy-setting bodies and their role in the standard-setting

2.


Identify the major financial statements and other means of financial reporting.

3.

Explain how accounting assists in the efficient use of scarce resources.

4.

Explain the need for high-quality standards.

process.

7.

Explain the meaning of IFRS.

8.

Describe the challenges facing financial reporting.


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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LO 4


GLOBAL MARKETS


High Quality Standards
Globalization demands a single set of high-quality international accounting standards. Some elements:

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7.

Common delivery systems (e.g., eXtensible Business Reporting Language—XBRL).

8.

Common approach to corporate governance and legal frameworks around the world.

LO 4


1

Financial Reporting and Accounting
Standards

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

1.

Describe the growing importance of global financial markets and its
relation to financial reporting.

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2.

Identify the major financial statements and other means of financial reporting.

3.

Explain how accounting assists in the efficient use of scarce resources.

4.

Explain the need for high-quality standards.

5.

Identify the objective of financial reporting.

6.

Identify the major policy-setting bodies and their role in the standard-setting
process.

7.

Explain the meaning of IFRS.

8.

Describe the challenges facing financial reporting.



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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LO 5


OBJECTIVE OF FINANCIAL ACCOUNTING

General-Purpose Financial Statements

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Provide financial reporting information to a wide variety of users.

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Provide the most useful information possible at the least cost.

Equity Investors and Creditors

►

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Investors and creditors are the primary user group.

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DON’T FORGET STEWARDSHIP

In addition to providing decision-useful information about future cash flows, management also is accountable to investors
for the custody and safekeeping of the company’s economic resources and for their efficient and profitable use. For
example, the management of Nestlé has the responsibility for protecting its economic resources from unfavorable effects
of economic factors, such as price changes, and technological and social changes. Because Nestlé’s performance in
discharging its responsibilities (referred to as its stewardship responsibilities) usually affects its ability to generate net cash
inflows, financial reporting may also provide decision-useful information to assess management performance in this role.
[2]

[2] The Conceptual Framework for Financial Reporting, “Chapter 1, The Objective of General Purpose Financial Reporting” (London, U.K.: IASB, September 2010), par. OB4.

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LO 5


OBJECTIVE OF FINANCIAL ACCOUNTING

Entity Perspective

►

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

Decision-Usefulness

►

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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.

LO 5



OBJECTIVE OF FINANCIAL ACCOUNTING

Question
The objective of financial reporting places most emphasis on:

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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.

LO 5


OBJECTIVE OF FINANCIAL ACCOUNTING

Question

General-purpose financial statements are prepared primarily for:

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a.

internal users.

b.

external users.

c.

auditors.

d.

government regulators.

LO 5


1

Financial Reporting and Accounting
Standards

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


1.

Describe the growing importance of global financial markets and its
relation to financial reporting.

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2.

Identify the major financial statements and other means of financial reporting.

3.

Explain how accounting assists in the efficient use of scarce resources.

4.

Explain the need for high-quality standards.

5.

Identify the objective of financial reporting.

6.

Identify the major policy-setting bodies and their role in the
standard-setting process.

7.


Explain the meaning of IFRS.

8.

Describe the challenges facing financial reporting.


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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LO 6


STANDARD-SETTING ORGANIZATIONS

International Organization of Securities Commissions (IOSCO)

►

Does not set accounting standards.

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Dedicated to ensuring that global markets can operate in an
efficient and effective basis.

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Supports the use of IFRS as the single set of international
/>
standards in cross-border offerings and listings.

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LO 6



HOW IS IT GOING?

How much progress has been made toward the goal of one single set of global accounting standards? To answer this question, the IASB conducted a major
survey on IFRS adoption. The survey indicates that there is almost universal support (95 percent) for IFRS as the single set of global accounting standards.
This includes those jurisdictions that have yet to make a decision on adopting IFRS, such as the United States.

•

More than 80 percent of the jurisdictions report IFRS adoption for all (or in five cases, almost all) public companies.

•

Most of the remaining 11 non-adopters have made significant progress toward IFRS adoption.

•

Those jurisdictions that have adopted IFRS have made very few modifications to the standards.

•

More than 40 percent of the IFRS adopters do so automatically, without an endorsement process.

•

Where modifications have occurred, they are regarded as temporary arrangements to assist in the migration from national accounting standards to
IFRS.

(Continued)

Source: Adapted from Hans Hoogervorst, “Breaking the Boilerplate,” IFRS Foundation Conference (June 13, 2013).
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LO 6


HOW IS IT GOING?

How much progress has been made toward the goal of one single set of global accounting standards? To answer this question, the IASB conducted a major
survey on IFRS adoption. The survey indicates that there is almost universal support (95 percent) for IFRS as the single set of global accounting standards.
This includes those jurisdictions that have yet to make a decision on adopting IFRS, such as the United States.

•

A few large and important economies have not yet (fully) adopted IFRS.

•

In such countries, more progress is being made than many people are aware of. Japan already permits the use of full IFRS and has recently widened
the scope of companies that are allowed to adopt it.

•

In the United States, non-U.S. companies are allowed to use IFRS for listings on their exchanges.

•

Today, more than 450 foreign private issuers are reporting using IFRS in U.S. regulatory filings, which represents trillions of dollars in market
capitalization.


Source: Adapted from Hans Hoogervorst, “Breaking the Boilerplate,” IFRS Foundation Conference (June 13, 2013).
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LO 6