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Book overview. Part 1 – Environment of financial reporting Part 2 – Basic accounting techniques and the preparation of annual financial statements Part 3 – Interpretation and analysis of financial statements Part 4 – Consolidated financial statements and issues related to multinational groups

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book overview
Book overview
  • Part 1 – Environment of financial reporting
  • Part 2 – Basic accounting techniques and the preparation of annual financial statements
  • Part 3 – Interpretation and analysis of financial statements
  • Part 4 – Consolidated financial statements and issues related to multinational groups
  • Part 5 – Advanced financial statement analysis and accounting values.
contents
Contents
  • Annual financial statements
  • Uses of financial statements
  • Accounting choices
  • Accounting regulation
  • International Financial Reporting Standards
financial versus management accounting
Financial versus management accounting
  • Financial accounting (FA) -> external financial reporting
  • Management Accounting (MA) -> financial information useful in internal decision and management processes
  • Starting from the same source data + FA is frame of reference for MA
annual financial statements
Annual financial statements
  • Income statement
  • Balance sheet
  • Notes to the accounts
  • Cash flow statement
  • Statement of changes in equity
  • Audit report
uses of financial statements
Uses of financial statements
  • Objective of financial statements
  • User groups
  • Accounting traditions
    • Anglo-Saxon accounting
    • Continental Europe
    • Link with taxation
objective of financial statements
Objective of financial statements

“The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.”

IIASB, Framework for the Preparation and Presentation of Financial Statements, par.12

users of financial statements
Users of financial statements
  • Investors
  • Employees
  • Lenders
  • Suppliers
  • Customers
  • Governments
  • Public
slide9

Employees

Shareholders

Trade creditors

Government

Management

Customers

Loan providers

Public

Potential

Investors

Users of financial statements

slide10

Employees

Trade creditors

Shareholders/ Investors

Government

Management

Customers

Loan providers

Public

Potential

Investors

Users – Focus on investors

accounting traditions
Accounting traditions
  • Anglo-Saxon tradition
  • Continental European tradition
anglo saxon accounting
Anglo-Saxon accounting
  • US, UK, Australia, Canada, New Zealand, etc.
  • Financial statements as a function of a company’s financing
    • Market solution to accounting rules
  • Powerful accounting profession
continental european accounting
Continental European accounting
  • Financial statement as a product of government regulating of the economy
  • All businesses are subject to accounting rules, with extra rules for:
    • Limited liability companies
    • Listed companies
link with taxation
Link with Taxation
  • Link between measuring performance for shareholders and measuring profit for tax purposes
    • Looser in Anglo-Saxon tradition
    • Greater impact on individual accounts (less on consolidated group accounts)
  • Impact of taxation on company accounting also depends on ownership of the company, which is in turn an issue frequently linked to size
accounting choices
Accounting choices
  • Accounting is not a set of precise measurement rules which permit the exact measurement of company profit and company value
  • Measurement of profit can never be anything but an estimate
  • Accounting measurement is full of choices
    • Choices made should be stated clearly in the annual financial statements
accounting choices relevance versus reliability
Accounting choices – Relevance versus reliability
  • To be useful, accounting information should be both relevant and reliable
  • Information has the quality ofrelevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations
    • Relevant information is timely
    • Relevant information has predictive or feedback value
accounting choices relevance versus reliability cont
Accounting choices – Relevance versus reliability (cont.)
  • Information has the quality ofreliability when it is free from material error and bias and can be depended upon by users to represent faithfully what it purports (or is expected to) represent
  • Accounting choices may imply trade-offs between relevance and relaibility of information
accounting regulation
Accounting regulation
  • Accounting regulation will discipline accounting choices
  • Types of regulatory body:
    • Government
    • Stock exchange
    • Private sector body
    • Professional accountants
    • Specialist industry organizations
  • Usually separate rules for banks and insurance companies.
government as accounting regulator
Government as accounting regulator
  • Regulation of accounting designed to ensure that the markets can operate free from fraud and misrepresentation
    • Accounting laws
    • Commercial codes
    • Government regulatory agencies
  • Regulation of accounting for tax collection purposes
stock exchange as accounting regulator
Stock exchange as accounting regulator
  • Stock exchange regulates the financial information to be provided by listed companies
  • In some countries this is done by a government regulator
    • US: Securities and Exchange Commission (SEC) as accounting regulator
private sector as accounting regulator
Private sector as accounting regulator
  • Delegation of responsibility of writing detailed accounting rules to private sector bodies, financed by contributions from companies, audit industry, etc..
    • US: Financial Accounting Standards Board (FASB)
    • Global: International Accounting Standards Board (IASB)
  • Flexible and rapid rule-making, as opposed to governmental rule-making
  • Technical committees from professional accounting bodies may function as catalyst
international bodies
International bodies
  • International Accounting Standards Board (IASB)
    • Accepted as an international source of best practice
    • Issues the International Financial Reporting Standards (IFRS)
  • International Organization of Securities Commissions (IOSCO)
    • Represents the world’s stock exchange regulators
    • Strives for a single, uniform set of accounting standards worldwide
  • Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR)
    • Under the auspices of the UN Conference on Trade and Development (UNCTAD)
    • Commissions research reports into current accounting problems
  • International Federation of Accountants (IFAC)
    • International representative of the accounting profession
international financial reporting standards
International Financial Reporting Standards
  • Single set of global accounting and reporting standards, issued by the IASB
  • Increasingly used by many large and mutinational companies
  • Accepted by most security market authorities
  • Used as a basis for national accounting requirements (partially or in full) or as a benchmark for the development of national accounting rules
international accounting standards board
International Accounting Standards Board
  • A private sector body
  • Operates under the International Accounting Standards Committee Foundation (IASCF)
  • Has no responsibility to any governmental organization
  • Has no enforcement authority
  • Develops and issues both main standards (IAS / IFRS) and interpretations (SIC / IFRIC)
fig 1 1 the structure of the iasb

IASC Foundation

22 Trustees

Appoint, Oversee, Raise Funds

Board

12 full time and 2 part time

Set technical agenda. Approve standards, exposure drafts and Interpretations

Standards Advisory Council

30 or more members

International financial reporting interpretations committee

12 members

Working groups

for major agenda projects

Key:

Appoints

Reports to

Advises

Fig. 1.1 The structure of the IASB
ifrs standard setting due process
IFRS – Standard-setting due process
  • The IASB’s standard-setting procedures have to ensure that resulting IFRS are of high quality and are issued only after giving IASB’s constituencies opportunities to make their views known at several points in the standard-setting due process
  • An overview of the due process is presented in figure 1.2
fig 1 2 standard setting due process of the iasb

National Standard Setters

Others

Research

Discussion paper

Exposure

draft

Standard

Comment analysis

Comment analysis

Effective Date

9-15 months

9-15 months

6-18 months

Fig. 1.2 Standard-setting due process of the IASB
ifrs in the world
IFRS in the world
  • Recent decisions of various governments result in the requirement or permission of the use of IFRS by more than one hundred countries
  • Europe: IAS Regulation of 2002
    • Requirement of use of IFRS for consolidated financial statements of EU qouted companies as from 1 January 2005
    • Member state option to extend the application of IFRS to not-listed companies and to individual financial statements
  • Adoption of IFRS (-equivalent) as national accounting rules in a number of countries (Australia, Singapore, Hong Kong, …)
  • US: convergence process of US accounting rules and IFRS started in 2002 (“Norwalk Agreement”)