Objective of reporting: provide economic decision makers with useful information about a firm's financial performance and changes in financial position.
Standard setting bodies - professional organizations.
- FASB - US GAAP
- IASB - IFRS
- Goals
- Develop standards requiring transparency, comparability, high quality in statements
- Promote use of global standards
- Account for needs of emerging mkts and small firms in standards
- Achieve convergence between countries standards
Regulatory authorities - government agencies with legal authority to enforce compliance.
- SEC in US, FSA in UK
- Filings required
- 10K (40-F in canada, 20-F for others)
- 10Q (does not have to be audited)
- DEF 14A - for proxy votes
- 8K - material events
- 144 - nonregistered issues of securities
- 3, 4, 5 - beneficial ownership of securities by officers/directors
- IOSCO - Int. Org of Securities Commissions
People disagree on best treatments for certain items. Business/interest groups are another barrier to convergence in standards.
IFRS Framework
- Understandability - reasonable effort, and basic knowledge of business/accounting
- Comparability - consistent among firms and across time
- Relevance - can influence economic decision, evaluation of past/future. Timely and detailed.
- Reliability - unbiased and error free
- Substance over form - present economic reality not just legal form
- Prudent/conservative
- Complete (within limits of cost/materiality)
Item should be recognized in financial statement if future economic benefit is probable and item's value/cost can be measure reliably
Measurement - historical, current (what you'd have to pay today), realizable (what you could sell for), present value, and fair value (what two parties in an arm's length transaction would exchange for)
Tradeoffs in reporting - reliability/timeliness, cost of info, intangible information
Going concern - company will continue to exist for foreseeable future
Required statements - BS, IS, CF, SCOE, explanatory notes
Principles for preparing - fair presentation, going concern basis, accrual basis, consistency, materiality
Principles for presenting - aggregation of similar items, no offsetting unless permitted, classified balance sheet (current/noncurrent), minimum info on each statement, comparative info for prior periods
Differences between FASB and IASB
- Purpose - FASB's framework is not at top of GAAP hierarchy like IASB's is - IASB requires mgmt to consider framework if no explicit standard exists, FASB does not
- FASB has different objectives for business and nonbusiness reporting - IASB has one
- IASB places more emphasis on going concern assumption
- FASB = relevance and reliability, IASB = FASB + comparability + understandability
- IASB lists income/expenses as related to performance, FASB uses rev/exp/gains/losses/OCI
- FASB says "asset" is a future economic benefit, IASB defines it as resource from which benefit is 'expected'
- FASB uses 'probable' to define assets/liabilities, IASB uses 'probable' to define criteria for recognition (wtf does this mean?)
- FASB does not allow value of most assets to be adjusted upward
SEC requires foreign firms that issue securities in the US to reconcile financials to US GAAP
Special standards will still apply to certain industries even after convergence
Coherent framework is transparent, comprehensive, consistent
- Barriers to this include valuation practices (measurement bases), standard setting (principles, rules, or objectives based), and measurement (proper value of elements) - e.g. is IS or BS more significant
Must be aware of systems, and new transactions and how those fit with systems. Can monitor IASB and FASB websites and CFAI. Analyst should use footnotes and disclosures.
Companies must disclose likely impact of recently issued accounting standards. Management might be evaluating whether to adopt - be aware of the risk.
End
5:15 pm
.667 hours
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