A coherent financial reporting framework is one that fits together logically. Such a framework should be transparent, comprehensive, and consistent.
Transparency-full disclosure and fair presenration reveal the underlying economics of the company to the financial statement user.
Comprehensiveness-all types of transactions that have financial implications should be part of the framework, including new types of transactions that emerge.
Consistency-similar transactions should be accounted for in similar ways acr.oss companies, geographic areas, and time periods.
Barriers to creating a conerenc financiJ.1 reporring framework include issues related to valuation, standard setting, and me:.lsuremenc.
\;~z!lidtion-The differel1t measuremenc bases for v:.llu:.lriol1 involve a trade-off becween relev:.lnce :.ll1d reliabilir:-'. Bases Ch~lC require little judgment, such as historical cosr, cend to be more reliable, bur nu:-' be less relevanr chan :.l b:.lsis like t;lir value that requires more judgment.
Standard setting-Three approaches ro st:1ndard serring are~1 "principles-based"
approach that relies on :.l broad framework. :1 "rules-based" :lpproach th:.lt gives specific guidance abollt how ro cl:1ssify rr:H1sacrions. and ~ln "objectives oriented"
approach thac blends the other rwo ~lpproaches.lFRS is largelv:.l principles-based :.lppro:.lch. U.S. GAAP has rradiciolLlilv been mOI'e rules-based. bur FASB is moving toward an objectives oriented ;l~)proach.
jlãI",zwrement-Anorher rrade-off in fin:lI1ci:d rq)()('ring i.\ berween properlv valuing the elements ar one poinr in rime (:lS on cne hal:1nce sheer) :lnd properlv v:duing the changes between poinrs in rime (:lS 'on che income sr:trcmcnc), :\n "asser/liabiliry"
approach, which standard s('[cers luve largeh' used, focuses on balance shc<.:'t valuation. A "revenlle/expelbc'" ,1~)~)[oachwlluld rc:nd en place I11llre signifIcal1ce 011
rne income statement.
SnJdy Session ~
Cross-Reference toCFA Institute Assig-ned Readin~#31 - Financial Rcporlin~Standards
LOS .1I.h: Discuss the importance of monitoring developments in financial reporting standards and evaluate company disclosures of significant accounting policies.
As Financial reponing standards contillllCWy\'tll\'t~. anal~'stsneed (() nwnitor how these developments will affeCt the financial SLltcmenrS the~' lise. An analyst should be aware of new products and innov;nions in the financial markets that generate new types of transactions. These might not fall nearl~'into the existing financial reporting standards.
The analyst can lise the financial reporring fr~lmeworkas a guide for evaluating what effect new products or transactions might haH on financial statements.
To keep upto date on the evolving standards. an anaj~'st can monitor professional journals and other sources such as the lA5B (\\,nv.iasb.orgl and FASB (www.fasb.org) Web sites. CFA Institute produces position papers on financial reporting issues through the CFA Centre for Financial Market Integrit~ã(www.cfainstitute.org/cfacentrel.
Companies that prepare financial statements under IFRS or U.S. GAAP must disclose their accounting policies and estimates in the footnotes and in Management's
Discussion and Analysis. An analyst should use these disclosures to evaluate what policies are discussed, whether they cover all the relevant data in the financial statements, wnich policies required management to make estimates, and whether the disclosures and estimates have changed since the prior period.
Another disclosure that is required for public companies is the likely impact of implementing recently issued accounting standards. Management can discuss the impact of adopting a new standard, conclude that the standard does not apply or will not affect the financial statements materia]]~',or state that they are still evaluating the effects of the new standards. Analysts should be aware of the uncertainty this last statement implies.
Page 40 (D200H Sch wese!
Srudy Session 7 Cross-Reference [0CFA Insrj[Urc Assigned Reading #31 - Financial Reporting Standards
1. Reporting srandards are designed ro ensure rhar diFferenr firms' sratements are comparable ro one anorher and ro narrow rhe range of reasonable esrimares on which financial sraremenrs are based.
2. Srandard-serting bodies are private-secror organizarions rhat establish financial reporting standards. Regularory authorities are governmenr agencies thar enforce compliance with financial reporting standards.
3. The two primary standard-setting bodies are the International Accounting Standards Board (IASB) and: in the U.S., the Financial Accounting Standards Board (FASB).
4. The IASB has four goals:
• Develop global accounting standards requiring transparency, comparability, and high quality in financial statemenrs.
• Promore rhe use of global accounting srandards.
• Account for rhe needs of emerging markers and small firms when implementing global accounting standards.
• Converge various national accounting principles wirh global accounting standards.
5. Regularory authorities include the Securiries and Exchange Commission (SEC) in the U.S. and the Financial Services Authority (FSA) in the United Kingdom.
Many national regulatory authorities belong ro the Internarional Organization of Securities Commissions (IOSCO).
6. Three objectives of financial market regulation according ro IOSCO are ro:
• Protect investors.
• Ensure the fairness, efficiencv, and transparency of markets.
• Reduce systemic risk.
/. Barriers ro developing one universally accepred ser of financial reporting standards include disagreemenrs among srandard-serring bodies and regulatory authorities from different counuies and political pressure from groups affected by changes in reporring standards.
8. The IFRS "Framework for the Prepararion and Presenration of Financial Srarements" documenr begins with the objeerive of financial statemenrs. derlnes the quali(Jtive characteristics thev should have, specifies the required reporting elements, and notes the constLlints and .lssumptions involved in preparing financial statements.
9. The qualitative characteristics of financial statements include understandability, relevance, reliabilitv, and compar~lbilit\ã.
10. Elements of tlnancial statemenrs are :ISSets. liabilities. and owners' equity (for measuring financial position) ~lIld income ~lndexpenses (for measuring performance) .
11. Constrainrs on rlnancial scltemenr prep'Jration include cost. the need to balance reliability with timeliness. ~lDd rhe dir'r'iculrv nfcaprurin~non-quanrifiable information in financial sLtrel1leIH~.
12. The rwo primary a~~umprionsrhar underlie rhe prepaLtrion of fin:lncial statements are rhe :lccrual basis ~lnd rhe ~oingLllncern :l~~umption.
13. Required financial sr:llemenr~are rhe bahncl' sheer. income sratemenr. La~h
now SCltel1lenr, sLtremelH nf' clunges in ()",ner; equir\'. :lnd expl:lnatllrV notes.
Slud\' Session 7
Cross-Refcrcnce to CFA Institutc.Assigned Reading #.11 - Financial ReporrillF; Standards
14. Principles forprepal'illgfinancial st3tements stated in LAS No.1 are:
Fair presentation.
• Going ctlnccl'Iybasis.
• Accrual basis.
• Consistency ben\'(:'cn periods.
• Matcrialitv.
] 5. Principles forPI'NCllti/lgfinancial statements stated in lAS No.1 are:
• Aggregation.
• No offsetting.
• Classified balance sheet.
• Minimum required information.
• Comparative information.
16. The IASB and FASB frameworks differ in the purpose of the framework, objectives for business and non-business reponing, empha.sis on the going concern assumption, qualitative characteristics, and financial statement elements.
17. A reconciliation statement shows a company's financial results under an
alternati\'e reponing system. The SEC requires foreign firms that issue securities in the U.S. to reconcile their financial statements to U.S. GAAP.
18. A coherent financial reponing framework should exhibit transparency,
comprehensiveness, and consistency. Barriers to creating a coherent framework include issues of valuation, standard setting, and measurement.
19. An analyst should be aware of evolving financial reporting standards and new products and innovations tha t genera te new types of transactions.
20. Under IFRS and U.S. GAAP, companies must disclose their accounting policies and estimates in the footnotes and MD&A. Public companies are also required
to disclose the likely impact of recently issued accounting standards on their financial statements.
Page 42 (r~200HSchwncr
StudySession7
Cross-Referenc~ to CfA Institute Assigned Reading #31 - financial Reporting Standards
1. Standard-sening bodies are responsi ble for:
A. establishing financial reporting standards only.
B. establishing and enforcing standards for flnancial reponing.
C. enforcing compliance with financial reporting standards only.
D. determining the information that must be disclosed by securities issuers.
2. Which of the following organizations is least likely involved with enforcing compliance with financial reporting standards?
A. Financial Services Authority (FSA).
B. Securities and Exchange Commission (SEC).
C. International Accounting Standards Board (IASB).
D. International Organization of Securities Commissions (IOSCO).
3. Dawn Czerniak is writing an article about international financial reporting standards. In her article she states, "Despite strong support from business, groups for a universally accepted set of financial reporting standards,
disagreements among the standard-setting bodies and regulatOry authorities of various counrries remain a barrier to developing one." Czerniak's statemenr is:
A. correct.
B. incorrect, because business groups have not supported a uniform set of financial reporting standards.
C. incorrect, because disagreemenrs among national standard-setting bodies and regulatOry agencies have not been a barrier to developing a universal set of standards.
D. incorrect, because business groups have not supported a uniform set of financial reporting standards, but disagreements among nati"nal standard- setting bodies and regulatOry agencies have not been a barrierto
developing one.
4. Which of the following characteristics least likely contributes to the reliability of financial sta temenrs?
.-\. Prudence.
B. Neutrality.
C. Timeliness.
D. Completeness.
5. Which of the followi ngmo.,t 11CClIl'rlte{JIIists a required reporci ng elemen t that is used to melsure a companv'stin~l11cialposition. and one th~1tis used to measure a company's performance?
Position Performance A. Assets Liabiliries B. Income Expenses C. Expenses ASsets D. Liabiliries Income
~llIlh' ~cs.~i<l11 -
Cross-Rd'crencc tll CFA Institutc Assigncd Reading #31 - Financial Reporting Standards
Page 44
6.
7.
8.
International Accounting Standard (lAS) No. I least like!.)'requires which of the following?
J\. Neither assns and liabilities. nor income and expenses. may be offset unless required or permitted b~ãa financial reporting standard.
R. Audited financial statements and disclosures. along with updated inf"ormation about the f-lrm and its management, must be filed annual]~'.
C. Required flnancial statements include a balance sheet, income statement.
cash flow statement, statement of owners' equity. and explanatory notes.
D. Fair presentation of financial statements means faithfully representing the firm's events and transactions according to the financial reporting
standards.
Compared to the International Financial Reporting Standards (lFRS)
framework, does the Financial Accounting Standards Board (FASB) framework for U.S. GAAP place more emphasis on:
Comparability and The going concern understandabili tv) assumption?
A. Yes Yes
B. Yes No
C. No Yes
D. t'-:G No
\Xlhich is Least Like!.)1one of the conclusions abollt the impact of a change in financial reponing standards that might appear in management's discussion and analysis?
A. The new standard does not apply to the company.
B. Management is currently evaluating the impact of the new standard.
C. Management has chosen not to implement the new standard.
D. The new standard will not have a material impact on the company's financial statements.
Study S~"il)n"7 Cross-Reference to CFA Institute Assigned Reading #31 - Financial Reporting Standards
1. A Standard-setting bodies are private sectot otganizations that establish financial reporting standards. Enforcement and determination of the information that must be disclosed by securities issuers are responsibilities and goals or regulatory authorities.
2. C The lASB is a standard-setting body. The SEC (in the United States) and the FSA (in the United Kingdom) are regulatory authorities, andlaSCa is an organization composed of national regulatory authorities.
3. B Political pressure from busine~sgroups and other interest groups who are affected by financial reporting standards has been a barrier to developing a universally accepted set of financial reporting standards. Disagreements among national standard-setting bodies and regulatory agencies have also been a barrier.
4. C Timeliness contributes to the relevance of financial statements, but there is often a trade-off between timeliness and reliability.
5. D Balance sheet reporting elements (assets, liabilities, and owners' equity) measure a company's financial position. Income statement reporting elements (income, expenses) measure its financial performance.
6. B It is the Securities and Exchange Commission's requirement that publicly traded companies file Form lOcK annually. The required financial statements are specified in lAS No.1. Fair presentation is one of the lAS No.1 principles for preparing financial statements. The ban against offsening is one of the lAS No.1 principles for presenting financial statements.
7. D Comparability, understandability, reliability and relevance are qualitative
characteristics of financial statements in the IFRS framework, but only reliability and relevance are primary qualitative characteristics in the FASB framework. The IFRS framework places more emphasis on the going concern assumption.
8. C Management can discuss the impact of adopting the new standard, conclude that it does not apply or will have no material impact. or state that they are still evaluating the potential impact.
The following is:1 re\'iew of Ihe Fillancial SI:ltenWnl An:dv,is principles desiglwd HI address the learning Oulcome stalemelllS set forthh)'eFA lnSlillItC"'. This lopic' is ,dso.(ão\'crn! in: