Development of Accounting Principles and Professional Practice
Development of Accounting Principles and Professional Practice
Development of Accounting Principles and Professional Practice
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Financial Reporting and Accounting Standards
Objective of Financial
Standard-Setting
Global Markets Financial Reporting
Organizations
Reporting Challenges
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Global Markets
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Global Markets
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Global Markets
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Global Markets
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Objective of Financial Accounting
lenders, and
other creditors
in making decisions in their capacity as capital providers.
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Objective of Financial Accounting
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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
1. ability to generate net cash inflows and
2. management’s ability to protect and enhance the
capital providers’ investments.
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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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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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Standard-Setting Organizations
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Standard-Setting Organizations
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Standard-Setting Organizations
http://www.iosco.org/
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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
Illustration 1-5
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
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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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Financial Reporting Challenges
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Financial Reporting Challenges
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Financial Reporting Challenges
International Convergence
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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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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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Conceptual Framework For Financial Reporting
Third Level:
Second Level: Recognition,
Conceptual First Level: Basic
Fundamental Measurement, and
Framework Objective
Concepts Disclosure
Concepts
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Conceptual Framework
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Conceptual Framework
Three levels:
First Level = Basic objective(the why acc)
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ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
Third
3. Monetary unit 3. Expense recognition
level
4. Periodicity 4. Full disclosure
5. Accrual
QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities Second level
2. Enhancing 3. Equity
qualities 4. Income
5. Expenses
Illustration 1-7
Framework for Financial
Reporting OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential First level
equity investors,
lenders, and other
creditors in their
capacity as capital
Slide Providers.
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First Level: Basic Objective
OBJECTIVE
“To 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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Second Level: Fundamental Concepts
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Second Level: Fundamental Concepts
Illustration 1-8 Hierarchy of Accounting Qualities
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Second Level: Fundamental Concepts
Fundamental Quality - Relevance
Relevance is one of the two fundamental qualities that make
accounting information useful for decision-making. To be
relevant, accounting information must be capable of making
a difference in a decision.
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Cont’d
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Second Level: Fundamental Concepts
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Cont’d
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Second Level: Fundamental Concepts
Enhancing Qualities
Distinguish more-useful information from less-useful
information.
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Cont’d
Comparability: Information that is measured and reported
in a similar manner for different companies is considered
comparable.
Consistency: is present when a company applies the
same accounting treatment to similar events, from period to
period.
Verifiability: means that different knowledgeable and
independent observers could reach consensus, although
not necessarily complete agreement, that a particular
depiction is a faithful representation.
Timeliness: means having information available to
decision-makers before it loses its capacity to influence
decisions.
Understandability: is the quality of information that lets
reasonably informed users see its significance.
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ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
Third
3. Monetary unit
4. Periodicity
Basic Elements
3. Expense recognition
4. Full disclosure
level
5. Accrual
QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities Second level
2. Enhancing 3. Equity
qualities 4. Income
5. Expenses
Illustration 1-9
Framework for Financial
Reporting OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential First level
equity investors,
lenders, and other
creditors in their
capacity as capital
Slide Providers.
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LO 4
Second Level: Basic Elements
Elements of Financial Statements
Asset: A present economic resource controlled by the entity as
a result of past events. (An economic resource is a right that has
the potential to produce economic benefits).
Liability: A present obligation of the entity to transfer an
economic resource as a result of past events.
Equity: The residual interest in the assets of the entity after
deducting all its liabilities. The elements of income and expenses
are defined as follows.
Income: Increases in assets, or decreases in liabilities, that
result in increases in equity, other than those relating to
contributions from holders of equity claims.
Expenses: Decreases in assets, or increases in liabilities, that
result in decreases in equity, other than those relating to
Slide distributions to holders of equity claims.
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Second Level: Basic Elements
Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(a) Qualitative characteristic being Relevance
employed when companies in the Faithful representation
same industry are using the same
Predictive value
accounting principles.
Confirmatory value
(b) Quality of information that confirms Neutrality
users’ earlier expectations.
Completeness
(c) Imperative for providing comparisons Timeliness
of a company from period to period.
Verifiability
(d) Ignores the economic consequences Understandability
of a standard or rule. Comparability
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Second Level: Basic Elements
Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(e) Requires a high degree of consensus Relevance
among individuals on a given Faithful representation
measurement.
Predictive value
(f) Predictive value is an ingredient of Confirmatory value
which fundamental quality of Neutrality
information.
Completeness
(g) Qualitative characteristics that Timeliness
enhance both relevance and faithful
Verifiability
representation.
Understandability
Comparability
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Second Level: Basic Elements
Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(h) Neutrality and completeness are Relevance
ingredients of which fundamental Faithful representation
quality of accounting information.
Predictive value
(i) Two fundamental qualities that make Confirmatory value
accounting information useful for Neutrality
decision-making purposes.
Completeness
(j) Issuance of interim reports is an Timeliness
example of what enhancing
Verifiability
ingredient?
Understandability
Comparability
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Third Level: Recognition, Measurement, and
Disclosure Concepts
Illustration 1-10
Framework for
Financial Reporting
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Third Level: Assumptions
Basic Assumptions
Economic Entity – company keeps its activity separate from
its owners and other business unit.
Going Concern - company to last long enough to fulfill
objectives and commitments.
Monetary Unit - money is the common denominator.
Periodicity - company can divide its economic activities into
time periods.
Accrual Basis of Accounting – transactions are recorded in
the periods in which the events occur.
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Third Level: Assumptions
Exercise: Identify which basic assumption of accounting is
best described in each item below.
(a) The economic activities of FedEx Corporation
(USA) are divided into 12-month periods for the Periodicity
purpose of issuing annual reports.
(b) Total S.A. (FRA) does not adjust amounts in its Monetary
financial statements for the effects of inflation. Unit
(c) Barclays (GBR) reports current and non-current
classifications in its statement of financial Going Concern
position.
(d) The economic activities of Tokai Rubber
Industries (JPN) and its subsidiaries are merged Economic
for accounting and reporting purposes. Entity
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Third Level: Principles
Principles
Measurement
Cost is generally thought to be a faithful representation of the
amount paid for a given item.
Fair value is “is defined as “the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.” Fair value is therefore a market-based measure.”
Value in use is the present value of the cash flows, or other
economic benefits that a company expects to derive from the
use of an asset and from its ultimate disposal.
IASB has taken the step of giving companies the option to use fair
Slide value as the basis for measurement of financial assets and
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Third Level: Principles
Revenue Recognition – companies recognize revenue in the
accounting period in which the performance obligation is satisfied.
Illustration 1-11 Timing of Revenue Recognition
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Third Level: Principles
Provided through:
Financial Statements
Notes to the Financial Statements
Supplementary information
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Third Level: Principles
Exercise: Identify which basic principle of accounting is
best described in each item below.
Revenue
(a) Parmalat (ITA) reports revenue in its income
statement when it is earned instead of when the
Recognitio
cash is collected. n
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Third Level: Constraints
Constraints
Cost – the cost of providing the information must be weighed
against the benefits that can be derived from using it.
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Third Level: Constraints
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Summary
of the
Structure
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End of chapter one on IFA I
THANK YOU!!!!
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