Term
| Objective of Financial Statements |
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Definition
| provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit |
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Term
| Importance of Financial Reporting standards |
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Definition
-allows for information to be as useful as possible for many different types of users
-helps analysts to understand how, and when judgments and subjective estimates affect the financial statements
-helps to make comparisons between companies |
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Term
| Financial Reporting Standard-setting Bodies |
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Definition
private sector organizations of accountants and auditors that DEVELOP financial reporting rules, regulations and accounting standards
-US Financial Accounting Standards Board (FASB) --> (standard they create) US GAAP
-International Accounting Standards Board (IASB) --> IFRS |
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Term
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Definition
have legal authority to enforce financial reporting requirements, and can overrule private sector standard setting bodies
-SEC US)
-Financial Services Authority (UK) |
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Term
| Roles of Financial Reporting Standard-setting Bodies |
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Definition
-develop and promote the use and adoption of a single set of high quality financial standards
-ensure the standards result in transparent, comparable and decisions-useful information
-account for needs of a range of sizes and types of entities in diverse economic settings
-promote the convergence of national accounting standards and IFRS |
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Term
| Desirable Attributes of Standard Setting Bodies |
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Definition
-responsibilities of all parties involved in the standard-setting process should be clearly defined
-parties should observe high professional and ethical standards, including stands of confidentiality
-organization should have adequate authority, resources, and competencies
-clear and consistent processes to guide the organization and formation standards
-well-articulated framework with a clearly-stated objective to guide the board
-board should seek and consider input from all stakeholders
-board should not succumb to pressure from external forces
-final decisions should be in public interest and should lead to a set of high-quality standards that will be recognized and adopted by regulatory authorities |
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Term
| Roles of Regulatory Authorities |
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Definition
| -legal authority to enforce the financial reporting requirements set forth by the standard-setting bodies and to exert control over entities that participate in capital markets within their jurisdiction |
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Term
| Role of International Organization of Securities Commissions |
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Definition
not a regulatory authority, but its members regulate a large portion of the world's financial capital markets
-Protect Investors
-Ensure fairness, efficiency, transparency
-reduce systematic risk |
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Term
| Status of Global Convergence of accounting standards |
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Definition
| -convergence is underway but not yet done! |
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Term
| Ongoing barriers to developing one universally accepted set of financial reporting standards |
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Definition
1) Standard setting bodies and regulators have different opinions regarding appropriate accounting treatments due to differences in institutional, regulatory, business and cultural environments
2) Powerful lobbyists and business groups exert pressure against adoption of unfavorable standards |
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Term
| IASB conceptual framework |
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Definition
-used to develop reporting standards
-assist standard-setters in developing and reviewing standards, assists preparers of financial stmts in applying standards, helps auditors in forming an opinion on financial stmts and aids users in interpreting financial stmt information |
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Term
| Conceptual Framework's Objective of Financial Stmts |
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Definition
| -provide financial information that is useful in making decisions about providing resources to the entity to existing and potential providers of resources to the entity |
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Term
| Qualitative Characteristics of Financial Statements |
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Definition
Fundamental characteristics
1) Relevance
2) Faithful Representation
Supplementary Qualitative characteristics
1) comparability
2) verifiability
3) timeliness
4) understandability |
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Term
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Definition
-info in financial stmts should be useful in making forecasts (predictive value) and useful to evaluate past decisions or forecasts (confirmatory value)
-materiality: info should by timely and sufficiently detailed w no material omissions or misstatements of info that could make a difference to users' decisions
**remember, confirmatory value, predictive value and materiality |
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Term
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Definition
requires that info presented is:
-complete:
all info necessary to understand phenomenon is included
-neutral
(info presented is free from any bias)
-free from error
(no errors of commission or omission in the description of the economic phenomenon; appropriate process to arrive at reported info is adhered to w/o error) |
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Term
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Definition
-presentation of financial stmts should be consistent over time and across firms to facilitate comparisons
-should be able to do trend analysis and cross sectional analysis |
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Term
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Definition
| Different knowledgeable and independent observers should be able to verify that the information presented faithfully represents the economic phenomena that it is supposed to represent |
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Term
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Definition
| info should be available to users in a timely manner |
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Term
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Definition
| users with basic business and accounting knowledge should be able to easily understand the info presented |
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Term
| Constraints and Assumptions in preparing financial statements |
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Definition
-may be TRADE-OFF btwn certain desirable characteristics
-there is COST of providing useful financial info. benefits from info should exceed costs of providing it
-INTANGIBLE ASSETS cannot be quantified and reflected in financial stmts |
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Term
| Required Reporting Elements of Financial statements |
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Definition
elements related to measurement of financial position:
-assets
(resources owned and controlled by a co from which it expects to realize future benefits)
-liabilities
(obligations of a co. that are expected to result in future outflow of resources)
-equity
(residual claim of owners on assets of the company after subtracting all liabilities)
elements related to measurement of financial performance
-income:
(increases in economic benefits in the form of inflows or enhancement of assets or reductions in liabilities that result in increases in equity). includes revenues and gains. rev refers to income generate through ordinary activities of the business. gains may result from ordinary activities or other activities
-expenses
decreases in economic benefits in the form of outflows or depletion of assets or increases in liabilities that result in reductions in equity. include losses |
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Term
| Assumptions of Financial Stmt Analysis |
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Definition
-Accrual Basis accounting
-Going concern: assumption that the company will continue operating for the foreseeable future. if this is not the case, fair representation would require all assets to be written down to their liquidation values |
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Term
| Recognition of Financial Stmt Elements |
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Definition
-element should be recognized on financial stems if the future benefit from the item is PROBABLE and it its value/cost can be ESTIMATED WITH RELIABILITY
-monetary value of item recognized on financial stmts depends on measurement base used |
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Term
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Definition
| Historical Cost, Amortised cost, current cost, realizable (settlement value), PV, Fair value |
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Term
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Definition
asset: amount that it was originally purchased for
Liabilities: amount of proceeds that were received initially in exchange for the obligation |
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Term
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Definition
| historical cost adjusted for amortization, depreciation, or depletion and/or impairment |
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Term
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Definition
Asset: amount that the asset can be purchased for today
Liabilities: total undercounted amount of cash that would be required to settle the obligation today |
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Term
| Realizable (settlement) value |
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Definition
assets: amount that the asset can be sold for in an ordinary disposal today
Liability: undercounted amount of cash expected to be paid to settle the liability in the normal course of business |
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Term
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Definition
assets: discounted value of future net CFs expected from the asset
Liabilities: present discounted value of future net cash outflows that are expected to be required to settle the liability |
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Term
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Definition
| amount that the asset can be exchanged for, or a liability can be settled for, in an arms length transaction. may be based on market value or present value |
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Term
| General Requirements for financial stmts under IFRS |
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Definition
Required Financial Stmts
-BS, stmtm of comprehensive income, stmt of changes in equity, stmt of CF, significant accounting policies and explanatory notes, sometimes stmtm of financial position from earliest comparative period |
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Term
| General Features of Financial Stmts |
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Definition
-fair presentation
-going concern basis
-accrual basis
-no offsetting
-frequency of reporting (must be prepared at least annually)
-comparative information: comparative amounts should be presented for prior periods
-consistency: (items should be presented and classified in the same manner every period)
-materiality |
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Term
| Structure and Content Requirements |
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Definition
-Classified Statement of Financial Position (distinguish between non current and current assets)
-Minimum information on the face of financial statements
-Min info in the notes (or on face of FS)
-Comparative info: comparative amounts should be presented for prior periods |
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Term
| Key Concepts of Financial Reporting Standards under IFRS and U.S. GAAP reporting systems |
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Definition
-FASB, in addition to the financial performance elements recognized under the Framework (rev and exp) also identifies gains, losses and comprehensive income
-FASB: assets are future economic benefits rather than resources from which economic benefits are expected to flow under
-under FASB, the world probable is not discussed in its revenue recognition criteria while under IASB it is required that it is probably that future economic benefit flow to/from the entity
-FASB does not allow upward revaluation of assets except for certain categories of financial instruments that must be reported at fair value |
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Term
| Characteristics of a coherent Financial Reporting Framework |
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Definition
Transparency
-reflect the underlying economics of the business. full disclosure and fair representation
Comprehensiveness
-one that is based on universal principles that provide guidance for recording all kinds of financial transactions
Consistency
-Financial Transactions of a similar nature should be measured and reported in a similar manner, irrespective of industry type, geography and time period |
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Term
| Barriers to Creating a Single Coherent Framework |
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Definition
valuation
-different ways to value assets and liabilities
-different frameworks might disagree on appropriate valuation method for different kinds of assets and liabilities
measure
Standard Setting Approach
-reporting standard can be based on:
--> pricniples based approach (broad financial reporting framework with limited guidance on how to report specific transactions. required the use of subjective judgement in FR)
--> rules-based: provides strict rules for classifying elements and transactions
--> Objective oriented: combination of a principles-based and rules-based approach. includes a framework of principles and appropriate levels of implementation guidance
Measurement
-reporting of financial statement elements can be based on asset/liability approach (where elements are properly valued at a point in time)or revenue/expense approach (changes in the elements are properly valued over a period of time)
- use of these approaches will result in more reliable info on one stmt and less on the other
standard setting |
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Term
| importance of monitoring developments in financial reporting standards |
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Definition
| -changes in regulations and financial reporting standard affect reported financial performance. investment decision-making can be improved by keeping track of enacted and proposed changes |
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Term
| implications for financial analysis of differing financial reporting systems |
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Definition
| -reconciliation disclosures are not required so analysts should be aware of areas where accounting standards have not yet converged |
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Term
| Company disclosures of significant accounting policies |
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Definition
-good source of info regarding effects of financial reporting standards on a company's performance
-both IFRS and US GAAP are required to disclose accounting policies and estimates in the footnotes, also discuss accounting policies and estimates that require sig, material judgement in MD&A
-Quantified Disclosures: when companies are able to quantify the expected impact of standards that have changed but are not yet effective as of the reporting date are extremely useful |
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