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Reading 20: Financial Reporting Standards (FRS) (SEC Forms (S1: New issue…
Reading 20: Financial Reporting Standards (FRS)
Objectives
Ensure that difference firms' statements are comparable.
Narrow the range of reasonable estimate on which financial statements are based
FRS-setting authorities
Standard-setting bodies
Private organization that establish financial reporting standards
International Accounting Standard Board (IASB) in other countries
Financial Accounting Standard Board (FASB) in USA
Regulatory authorities
Government agencies that enforce FRS compliance
International Organization of Securities Commissions (IOSCO)
International coordination of securities and futures regulation, but not mandatory regulation
Over 100 member countries
Benchmark principles for regulators
Objective
Protecting investors
ensuring market is fair, transparent, efficient
reducing systemic risk
Security and Exchange Commission (SEC) in USA
Financial Service Authority (FSA) in UK
Global conversion of accounting standards
Status
: Countries that have not adopted IFRS are converging local law and IFRS Standard.
Barriers
Difference in opinion among standard-setting bodies and regulatory authorities
Political pressure within countries from interest groups.
ISAB Conceptual Framework
Objectives
Define fundamental and enhancing qualitative characteristics of financial statement.
Specify the required reporting elements
Note constraints and assumption involved in preparing financial statements
Financial Statement Characteristics
Fundamental
Relevance
Information can influence decisions/ valuation
Information should have predictive value and/or confirmatory value
Materiality is an aspect of relevance
Faithful representation
Information presentation is complete, neutral (no bias), and error-free
Supporting
Comparability
Consistency of accounting treatment
Verifiability
Be audited
Timeliness
be fast
Understandability
Reasonable user can understand
Constraints on Financial Report Preparation
Cost vs. benefit
Excludes nonquantifiablle information in Financial Statement.
Relevance vs verifiabliity
As time goes by, the verifiability aspect increases, but the relevance aspect decreases
General requirements for FS under IFRS
Required financial statements
Balance sheet
Asset
Resources controlled by the entity resulting from past transactions
Probable that future economic benefits flow to enterprise
Liability
Obligation resulting from past events
Settlement results in probable resource outflow
Equity
Shareholder's residual interest
Income statement
Income
Increases in economic benefits that results in higher equity
Enhancement of assets
Decrease of liabilities
Revenue and gains
Expense
Decreases in economic benefits that result in lower equity
Outflow/ depletion of assets
Increases in liabilities
Expenses and losses
Cash flow statement
Statement of changes in equity
Explanatory note
Others:
Classified balance sheet
Specific minimum information that must be reported in note and on FS
Statement of comprehensive income
: Net profit + change in other comprehensive income
General features of FS
Fundamental Principles
Going concern
: company will continue to do business in foreseeable future
Accrual Accounting
: Record revenue when transaction is complete and sure to receive payment. Not record if the customer only pay but have not received goods yet
Consistency
: Apply the accounting method consistently overtime as long as it reflects the economic substance
Materiality
: Transaction is significantly affect decision/ valuation of FS users
Fair presentation
: reflect the true economic substance of the transaction
Presentation Requirements
No offsetting
: Cannot offset assets against liabilities unless there is a legal basis
Aggregation when appropriate
: Write the total number only when it is possible
Classified balance sheet
: look at due date of assets and liabilities
Minimum information on face
: The minimum amount of information that must be on the FS
Minimum disclosure
The minimum amount of disclosure required
Comparative information
Must include information from prior period (frequency: at least annually)
An Item should be
recognized
in financial statement if:
1) a future economic benefit from the item is
probable
2) item's value or cost can be reliably measured
IASB (IFRS) vs. FASB(GAAP) differences
IFRS lists
income
and
expense
as
performance elements
GAAP lists
revenues, expenses, gains and losses in comprehensive incomes.
Minor differences in asset definition.
GAAP does not allow upward revaluation of most assets
Analyst must adjust for differences when comparing companies (necessary information for adjustment may not be available)
IFRS does not allow LIFO
GAAP does not allow reversals of inventory write-down
Coherent Financial Reporting Framework
Characteristics
Transparency
Comprehensiveness
Consistency
Barriers
Issues of valuation
Issues of Standard setting
Issues of Measurement
Company disclosures
Must disclose accounting policies and estimate in footnotes and MD&A
Disclose likely impact of recently issued accounting standards on the FS
SEC Forms
S1
: New issue of securities for public sale
10K
: Annual report
10Q
: Quarterly Reports
DEF 14A
: Proxy Statements
8K
: Material events
Form 144
: Issuance of unregistered stock
Form 3,4,5
: Share transactions with corporate insiders
Monitoring Development
Reporting standards evolve rapidly
Analyst focus on impact toward financial reports
Monitor new products/ transactions
Monitor Standard setter/ regulator actions
IASB (IFRS)
FASB (GAAP)
CFA Centre for Financial Market Integrity