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Evolution of Financial Reporting (main objective is to capture (how the…
Evolution of Financial Reporting
main objective is to capture
how public accounts have been prepared
auditing
use of financial statements
how the reports are complied for external use
what are the constraints
study of evolving financial regulation is to solve the issue that no two countries have the same reporting rules
supplementary objectives
how information is captured
how information is stored
internal use within international group
Purpose of financial statements
firms using info to negotiate
raise additional finance
sell products
quality needs to be good to achieve this
market will price in doubts if quality is doubtful
i.e. ask for a higher price to compensate for uncertainty
provider wants the info to be high quality to reassure users
Stewardship
simplest form of financial reporting
unregulated
traditional (old school)
wealthy individuals appoint others to manage their money
agents send a stewardship report which details what they did with the money
verbal financial reports (mentioned in the bible)
multinationals continue to use stewardship to establish track records which incite investors
Managing the National Economy
earliest European regs aimed at small businesses because they were not measuring the success of their business
as result, they went into liquidation, often taking others down with them
first national accounting rule created by France in 1673
objectives
all businesses to prepare a balance sheet
snap shot using current market values to assess health of the business
results
difference in YoY net values determined profitability of company
illustrates the principle force for regs
governments concern with an economy which is healthy
governmental interference is normally to protect markets and investors/ customers e.g. financial market regulations
purpose - identify weak businesses before they took down other businesses
increases in bankruptcy can lead to a loss in confidence resulting in a downturn in economic activity
Information for Investors
next major change to financial reporting was the result of the Industrial Revolution (19th century)
foundations for most of the accounting we know now
start of investor pooling - providing capital, sharing risks for large high risk projects
evolved Stewardship
larger gap between the manager and investor
financial reporting needed to be developed to meet needs of communicating info between the two
aka
capital market function
providing info to about a company's economic performance to financial markets
auditing became a gradual requirement and legal requirement in the 20th century
1,2,3 are response to economic evolution
4 and 5 are other factors
Borrowed finery
borrowing legislation from other countries
two families
US/ UK
aka
Anglo Saxon reporting
Continental Europe
aka
commercial code accounting
Imperialism
transferring regulations across borders
reasons
trade relations
colonial tradition
cons of not creating own rules from economic activity of the country
using rules from one economy may not be best suited to another economy
Taxation
accounting provides basis to on which tax is measured
link between accounting and tax varies by country
more pronounced in owner managed businesses rather than multinationals