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 CHAPTER 1
FINANCIAL REPORTING AND
ACCOUNTING STANDARDS

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and
Warfield
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 Learning Objectives

•Identify the major financial statements and other means of financial

reporting.
•Explain how accounting assists in the efficient use of scarce
resources.
•Explain the need for high-quality standards.
•Identify the objective of financial reporting.
•Identify the major policy-setting bodies and their role in the standard-
setting process.
•Explain the meaning of IFRS.
•Describe the challenges facing financial reporting.

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 Financial Reporting and Accounting Standards

Objective of Financial
Standard-Setting
Global Markets Financial Reporting
Organizations
Reporting Challenges

•Financial •General-purpose •IOSCO •Political

statements and financial statements environment
•IASB
financial reporting
•Capital providers •Expectations gap
•Hierarchy of IFRS
•Accounting and
•Entity perspective •Significant
capital allocation
financial reporting
•Decision-
•High-quality issues
usefulness
standards
•Ethics
•International
convergence

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 Global Markets

World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms Of Sales

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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

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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LO 1 Identify the major financial statements and other means of financial reporting.
 Global Markets

Economic Entity Financial Statements Additional Information

Financial Statement of President’s letter

Information Financial Position Prospectuses
Accounting? Income Statement Reports filed with
Identify or Statement of governmental
Comprehensive agencies
and Income
Measure News releases
Statement of Cash
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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LO 2 Explain how accounting assists in the efficient use of scare resources.
 Global Markets

High Quality Standards

Globalization demands a single set of high-quality
international accounting standards. Some elements:
•Single set of high-quality accounting standards established by
a single standard-setting body.
•Consistency in application and interpretation.
•Common disclosures.
•Common high-quality auditing standards and practices.
•Common approach to regulatory review and enforcement.
•Education and training of market participants.
(Continued)
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LO 3 Explain the need for high-quality standards.
 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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LO 3 Explain the need for high-quality standards.
Slide
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LO 3 Explain the need for high-quality standards.
 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 in their capacity as capital providers.

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LO 4 Identify the objectives of financial reporting.
 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.

Capital Providers (Investors)

Investors are the primary user group.

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LO 4 Identify the objectives of financial reporting.
 Objective of Financial Accounting

Entity Perspective
Companies viewed as separate and distinct from their owners.

Decision-Usefulness
Investors are interested in assessing the company’s
•ability to generate net cash inflows and
•management’s ability to protect and enhance the
capital providers’ investments.

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LO 4 Identify the objectives of financial reporting.
 Objective of Financial Accounting

Review Question
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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LO 4 Identify the objectives of financial reporting.
 Objective of Financial Accounting

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

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LO 4 Identify the objectives of financial reporting.
 Standard-Setting Organizations

Two Major Organizations:

•International Accounting Standards Board (IASB)

•Issues International Financial Reporting Standards

(IFRS).

•Standards used on most foreign exchanges.

•Standards used by foreign companies listing on U.S.

securities exchanges.

•IFRS used in over 115 countries.

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 Standard-Setting Organizations

Two Major Organizations:

•Financial Accounting Standards Board (FASB)

•Issues Statements of Financial Accounting

Standards (SFAS).

•Required for all U.S.-based companies.

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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/

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 Standard-Setting Organizations

International Accounting Standards Board (IASB)

Composed of four organizations—

•International Accounting Standards
Committee Foundation (IASCF)
•International Accounting Standards
Board (IASB) http://www.iasb.org

•Standards Advisory Council

•International Financial Reporting
Interpretations Committee (IFRIC)

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 Standard-Setting Organizations

Illustration 1-4
International Standard-Setting Structure

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 Standard-Setting Organizations

Review Question
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

Review Question
The major key players on the international side are the:
a.IASB and FASB.
b.SEC and FASB.
c.IOSCO and the SEC.
d.IASB and IOSCO.

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 Standard-Setting Organizations

Review Question
Which body from the U.S. side is similar to the IASB?
a.SEC.
b.FASB.
c.FASC.
d.FAF.

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 Due Process

The IASB due process has the following elements:

•Independent standard-setting board;
•Thorough and systematic process for developing
standards;
•Engagement with investors, regulators, business leaders,
and the global accountancy profession at every stage of the
process; and
•Collaborative efforts with the worldwide standard-setting
community.

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 Due Process

Illustration 1-4
International
Standard-Setting
Structure

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 Due Process

Review Question
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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 Types of Pronouncements

Issued by the IASB:

•International Financial Reporting Standards.
•Framework for financial reporting.
•International financial reporting interpretations.

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 Types of Pronouncements

Hierarchy of IFRS

Companies first look to:

•International Financial Reporting Standards;

•International Accounting Standards; and

•Interpretations originated by the International Financial

Reporting Interpretations Committee (IFRIC) or the former
Standing Interpretations Committee (SIC).

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LO 6 Explain the meaning of IFRS.
 Types of Pronouncements

Review Question
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 interpretations.
c.International Accounting Standards and international
accounting interpretations.
d.FASB financial reporting standards and International
Accounting Standards.
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LO 6 Explain the meaning of IFRS.
 Financial Reporting Challenges

IFRS in a Political Environment Illustration 1-6

User Groups that Influence the
Formulation of Accounting Standards

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LO 7 Describe the challenges facing financial
 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
•Sort assets
•Timeliness

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LO 7 Describe the challenges facing financial
 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 does not always provide an answer.

•Doing the right thing is not always easy or obvious.

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LO 7 Describe the challenges facing financial
 Financial Reporting Challenges

International Convergence

In 2002 the IASB and the FASB formalized their commitment

to the convergence of U.S. GAAP and international
standards. The Boards agreed to:

•Make their existing financial reporting standards fully

converged as soon as practicable, and

•Coordinate their future work programs to ensure that

once achieved, convergence is maintained.

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LO 7 Describe the challenges facing financial
 Financial Reporting Challenges

Review Question
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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LO 7 Describe the challenges facing financial
 •The fact that there are differences between IFRS and U.S. GAAP
should not be surprising because standard-setters have developed
standards in response to different user needs.
•IFRS tends to be simpler and more flexible in its accounting and
disclosure requirements.
•The U.S. SEC recently eliminated the need for foreign companies
that trade shares in U.S. markets to reconcile their accounting with U.S.
GAAP.

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 Appendix 1A THE U.S. STANDARD-SETTING ENVIRONMENT

Organizations responsible for developing financial

accounting standards (GAAP) in the United States:

•Securities and Exchange

http://www.sec.gov/
Commission (SEC).

•Financial Accounting
Standards Board (FASB).
http://www.fasb.org/

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 Securities and Exchange Commission

•Established by federal government

•Accounting and reporting for public companies

Securities Act Securities Act

of 1933 of 1934

•Encouraged private standard-setting body

•SEC requires public companies to adhere to GAAP
•SEC Oversight
•Enforcement Authority

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 Financial Accounting Standards Board
Wheat Committee’s recommendations resulted in the creation of a the
Financial Accounting Standards Board (FASB) in 1973.

Financial •Selects members of the FASB

Accounting •Funds their activities
Foundation •Exercises general oversight.

Financial •Mission to establish and improve

Accounting standards of financial accounting and
Standards Board reporting.

Financial Accounting
Standards Advisory •Consult on major policy issues.
Council

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 Financial Accounting Standards Board

Missions is to establish and improve standards of financial

accounting and reporting. Differences between FASB and
APB include:

•Smaller Membership
•Full-time, Remunerated Membership
•Greater Autonomy
•Increased Independence
•Broader Representation

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 Financial Accounting Standards Board

Due Process
FASB relies on two basic premises:
1.Responsive to entire economic community
2.Operate in full view of the public

Step 1 = Topic placed on agenda

Step 2 = Research conducted and Discussion
Memorandum issued.
Step 3 = Public hearing
Step 4 = Board evaluates research, public response
and issues Exposure Draft
Step 5 = Board evaluates responses and issues final
Statement of Financial AccountingLO
Standard
8 Identify the major policy-setting bodies
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 Financial Accounting Standards Board

Types of Pronouncements

•Standards, Interpretations, and Staff Positions.

•Financial Accounting Concepts
•Emerging Issues Task Force Statements

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 Financial Accounting Standards Board

U.S. Generally Accepted Accounting Principles

Principles that have substantial authoritative support.

Major sources of GAAP:

•FASB Standards, Interpretations, and Staff Positions
•APB Opinions
•AICPA Accounting Research Bulletins

When the Board approves a new standard, staff position, etc., the results are
included in the Codification through an Accounting Standards Update.

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 Financial Accounting Standards Board

Illustration 1A-2

The
Codification
Framework

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 International Accounting Convergence

Improvements in Accounting Standards

IASB and FASB have set up an extensive work plan to achieve
one set of international standards.
Illustration 1A-3
IFRS Adoption Timeline

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 International Accounting Convergence

SEC Work Plan

•Sufficient development and application of IFRS.

•Independent standard-setting for the benefit of investors.

•Investor understanding and education.

•Regulatory environment.

•Impact on large and small financial statement preparers.

•Human capital readiness.

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 Copyright

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