CORPORATE

FINANCIAL
REPORTING

Fall 2016

Class Participation & Attendance: 10%

Quizzes:
25%
Midterm:
30%
Group Presentation:
5%
Final Examination:
30%
Quizzes will be announced and there will be no makeup quizzes.
You are allowed to miss upto a maximum of 5 classes without any
penalty. More than 5 absences may result in an F.
You are expected to be punctual and seated before the class starts.

A zero minute policy holds and late arrival will mean

zero class participation for that session.
There is also a zero tolerance policy with regards to
unfair means

The Flipped Classroom

Source : Eberly Centre for Teaching Excellence

Carnegie Mellon University

PRESENTATIONS

Students will present to the class on reporting

requirements around one of the disclosure
areas (financial statement items) covered during
the course
Presentations are aimed at focusing attention
on the key issues for each area
They must also relate these requirements to
extracts from the audited accounts of an actual
business.

Accounting Standards

What?

Principles vs Rules

Why?

Comparability

Who?

IASC / IASB
Autonomous, Independent body

How?

Agenda

Research &
Discussion
Paper

Public
Hearing

Exposure
Draft

Standard

PREVIEW OF CHAPTER

Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield

LO 1: Describe the usefulness of a conceptual

framework.
The Conceptual Framework describes the objective of, and the concepts for,
general purpose financial reporting. It is a practical tool that:

1.assists the Board to develop IFRS Standards that are based on consistent
concepts;
2.assists preparers to develop consistent accounting policies when no IFRS
Standard applies to a particular transaction or event, or when a Standard allows
a choice of accounting policy; and

3. assists others to understand and interpret the

Standards.
The objective of the Conceptual Framework project is to improve financial
reporting by providing a more complete, clear and updated set of concepts.
LO 1

LO 2: Describe efforts to construct a conceptual

framework.
Development of a Conceptual Framework
Presently, the Conceptual Framework comprises of the following.
Chapter 1: The Objective of General Purpose Financial Reporting

Chapter 2: The Reporting Entity (not yet issued)

Chapter 3: Qualitative Characteristics of Useful Financial

Information

Chapter 4: The Framework, comprised of the following:

1.

Underlying assumptionthe going concern assumption;

2.

The elements of financial statements;

3.

Recognition of the elements of financial statements;

4.

Measurement of the elements of financial statements; and

5.

Concepts of capital and capital maintenance.

LO 2

LO 2: Describe efforts to construct a conceptual

framework.

Recognition,
measurement &
disclosure
Qualitative characteristics
& Elements of Financial
Statements

Objective
LO 2

LO 3: Understand the objective of financial reporting.

FIRST LEVEL: BASIC 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 about
providing resources to the entity.

Provided by issuing general-purpose financial statements.

Assumption is that users need reasonable knowledge of business

and financial accounting matters to understand the information.

LO 3

LO 3: Understand the objective of financial reporting.

Information about resources & claims

Assessment of future cash

flows

Useful information

LO 3

LO 2: Describe efforts to construct a conceptual

framework.

Recognition,
measurement &
disclosure
Qualitative characteristics
& Elements of Financial
Statements

Objective
LO 2

LO 4: Identify the qualitative characteristics of

accounting information.
SECOND LEVEL: FUNDAMENTAL CONCEPTS
Qualitative Characteristics of Accounting
Information
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more useful)
information from inferior (less useful) information for

decision-making purposes.

LO 4

LO 4: Identify the qualitative characteristics of

accounting information.

C
O
S
T

Decision Usefulness
Relevance
Predictive/
Confirmatory/Material

Comparability

Verifiability

Aided by consistency

consensus

Faithful
Representation
Complete/neutral/error free

Timeliness

Understandability
Classification &
Presentation

LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental QualityRelevance

To be relevant, accounting information must be capable of making

a difference in a decision.

LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental QualityRelevance

Financial information has predictive value if it has value as an input to

predictive processes used by investors to form their own expectations
about the future.
LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental QualityRelevance

Relevant information also helps users confirm or correct prior

expectations.

LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental QualityRelevance

Information is material if omitting it or misstating it could influence

decisions that users make on the basis of the reported financial
information.
LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental QualityFaithful Representation

Faithful representation means that the numbers and descriptions

match what really existed or happened.

LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental QualityFaithful Representation

Completeness means that all the information that is necessary for

faithful representation is provided.

LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental QualityFaithful Representation

Neutrality means that a company cannot select information to favor

one set of interested parties over another.

LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental QualityFaithful Representation

An information item that is free from error will be a more accurate

(faithful) representation of a financial item.

LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.
LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Verifiability occurs when independent measurers, using the same

methods, obtain similar results.
LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Timeliness means having information available to decision-makers

before it loses its capacity to influence decisions.
LO 4

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Understandability is the quality of information that lets reasonably

informed users see its significance.
LO 4

SECOND LEVEL: BASIC ELEMENTS

Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
Characteristics
(a) Qualitative characteristic being
displayed when companies in the
same industry are using the same
accounting principles.

Relevance

(b) Quality of information that confirms

users earlier expectations.

Neutrality

(c) Imperative for providing comparisons

of a company from period to period.

Timeliness

(d) Ignores the economic consequences

of a standard or rule.

Understandability

Faithful representation

Predictive value
Confirmatory value

Materiality
Verifiability
Comparability
LO 5

SECOND LEVEL: BASIC ELEMENTS

Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
Characteristics
(e) Requires a high degree of consensus
among individuals on a given
measurement.

Relevance

(f) Predictive value is an ingredient of this

fundamental quality of information.

Confirmatory value

(g) Four qualitative characteristics that

enhance both relevance and faithful
representation.

Materiality

(h) An item is not reported because its

effect on income would not change a
decision.

Understandability

Faithful representation

Predictive value
Neutrality
Timeliness
Verifiability
Comparability
LO 5

SECOND LEVEL: BASIC ELEMENTS

Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
Characteristics
(i) Neutrality is a key ingredient of this
fundamental quality of accounting
information.

Relevance

(j) Two fundamental qualities that make

accounting information useful for
decision-making purposes.

Confirmatory value

(k) Issuance of interim reports is an

example of what enhancing
ingredient?

Timeliness

Faithful representation

Predictive value
Neutrality

Materiality
Verifiability

Understandability
Comparability
LO 5

Identify which qualitative characteristic of accounting

information is best described in each item below. (Do not use
relevance or faithful representation)

i) The annual reports of Packages Ltd are audited by a firm of

independent accountants
ii) In its annual report for 2013 Packages Ltd separately disclosed results
of discontinued operations in its Income Statement
iii) Packages Ltd has used straight line depreciation ever since it began
operations
iv) Motorola and Nokia both use the FIFO cost assumption
v) Companies publish interim financial statements
vi) Assets and liabilities are grouped into current and non-current in
financial statements

Review the following transactions. Indicate

whether you consider them to be material or not

1) A company has reported a positive trend in earnings over the last 5 years. In
the current year it reduces its bad debt expense to ensure another positive
earnings year. The impact of this adjustment is not a very large amount
2) Harper Co. has a gain of $3million on the sale of plant assets and a $3.3
million loss on the sale of investments. It decides to net the gain and loss
because the net effect is considered immaterial. Their income for the current
year was $10million
3) Dunphy Ltd expenses all capital expenditure under $20,000 on the basis that
it is immaterial. They have been doing this for a number of years.

In July 2015 , Bugs Bunny plc doubled its shares by selling an

additional 50,000 shares to finance an expansion immediately
after their financial close on June 30, 2015.
The accountant feels that this information should be added as a
note to the Statement of Financial Position as at June30,2015.
The CEO objects claiming that since the sale took place in after
the year end it should be shown in next years financial
statements.

Who do you agree with and why?

LO 2: Describe efforts to construct a conceptual

framework.

Recognition,
measurement &
disclosure
Qualitative characteristics
& Elements of Financial
Statements

Objective
LO 2

The conceptual framework

SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements
Asset
Liability

A resource controlled by the entity as a

result of past events and from which
future economic benefits are expected to
flow to the entity.

Equity
Income

Expenses
LO 5

The conceptual framework

SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements
Asset
Liability
Equity

A present obligation of the entity arising

from past events, the settlement of which
is expected to result in an outflow from the
entity of resources embodying economic
benefits.

Income

Expenses
LO 5

The conceptual framework

SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements
Asset
Liability
Equity

The residual interest in the assets of the

entity after deducting all its liabilities.

Income

Expenses
LO 5

The conceptual framework

SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements
Asset
Liability
Equity
Income

Expenses

Increases in economic benefits during the

accounting period in the form of inflows or
enhancements of assets or decreases of
liabilities that result in increases in equity,
other than those relating to contributions
from equity participants.
LO 5

The conceptual framework

SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements
Asset
Liability
Equity
Income

Expenses

Decreases in economic benefits during the

accounting period in the form of outflows
or depletions of assets or incurrences of
liabilities that result in decreases in equity,
other than those relating to distributions to
equity participants.
LO 5

A farm needs to raise a loan from the bank to buy a new irrigation plant.
The owner of the farm feels that the balance sheet shows too many liabilities and
not all the assets. He tells you that the biggest asset that the farm owns does not
appear on the balance sheet the river that runs right through the centre of the
farm.
How should the river be treated in the financial statements ?

Quick Fix Ltd is a manufacturing company which has not performed well over the past three financial
years.
To improve on poor past profits, the Board approved a substantial advertising promotion during the year
ended 30 June 2014 in order to generate increased sales in the future. The advertising promotion took
place (and was paid for) during June 2014.
The accountant insists on recognising the payment as an asset at 30 June 2014. His reasoning is that
future sales will increase as the number of customers grow due to the advertising campaign.
Do you agree with the accountant?
Suggest an alternative treatment if you disagree.

A company has made the following journal entry

Dr
Insurance Expense

Cr

480 000

Insurance loss liability

480 000

This has been done on the belief that insurance is very expensive. Over the years that that they have
paid insurance, claims have roughly equated to 20% of premiums. As a result, the company decided to
self insure from the beginning of the year:
The company intends to bear all possible future losses through its own reserves. Instead of paying an
insurance company $40 000 per month, the above journal entry has been posted.
Discuss the acceptability of the above journal entry in terms of the Framework.

LO 2: Describe efforts to construct a conceptual

framework.

Recognition,
measurement &
disclosure
Qualitative characteristics
& Elements of Financial
Statements

Objective
LO 2

LO 6: Describe the basic assumptions of accounting

THIRD LEVEL: RECOGNITION, MEASUREMENT,
AND DISCLOSURE CONCEPTS
These concepts explain how companies should recognize,
measure, and report financial elements and events.
Recognition, Measurement, and Disclosure Concepts
ASSUMPTIONS
1. Economic entity
2. Going concern
3. Monetary unit
4. Periodicity

PRINCIPLES
1. Measurement

CONSTRAINTS
1. Cost

2. Revenue recognition

3. Expense recognition
4. Full disclosure

5. Accrual

ILLUSTRATION 2-7
Conceptual Framework for
Financial Reporting

LO 6

LO 6: Describe the basic assumptions of accounting

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.
LO 6

LO 6: Describe the basic assumptions of accounting

THIRD LEVEL: ASSUMPTIONS

BE2-8: 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
purpose of issuing annual reports.

Periodicity

(b) Total S.A. (FRA) does not adjust amounts in its

financial statements for the effects of inflation.

Monetary
Unit

(c) Barclays (GBR) reports current and non-current

classifications in its statement of financial
position.

Going Concern

(d) The economic activities of Tokai Rubber

Industries (JPN) and its subsidiaries are
merged for accounting and reporting purposes.

Economic
Entity
LO 6

LO 6: Describe the basic assumptions of accounting

THIRD LEVEL: RECOGNITION, MEASUREMENT,
AND DISCLOSURE CONCEPTS
These concepts explain how companies should recognize,
measure, and report financial elements and events.
Recognition, Measurement, and Disclosure Concepts
ASSUMPTIONS
1. Economic entity
2. Going concern
3. Monetary unit
4. Periodicity

PRINCIPLES
1. Measurement

CONSTRAINTS
1. Cost

2. Revenue recognition

3. Expense recognition
4. Full disclosure

5. Accrual

ILLUSTRATION 2-7
Conceptual Framework for
Financial Reporting

LO 6

LO 7: Explain the application of the basic principles of

accounting.
THIRD LEVEL: BASIC PRINCIPLES

Measurement Principles

Historical Cost is generally thought to be a faithful

representation of the amount paid for a given item.

Fair value 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.

IASB has given companies the option to use fair value as the
basis for measurement of financial assets and financial
liabilities.
LO 7

LO 7: Explain the application of the basic principles of

accounting.

THIRD LEVEL: BASIC PRINCIPLES

Measurement Principles
IASB established a fair value hierarchy that provides insight into
the priority of valuation techniques to use to determine fair value.

ILLUSTRATION 2-4

LO 7

Bric Brac made the following investments during the year

a) It purchased 1,000 shares of Paper & Paper a start up

company. It made the investment based on valuation
estimates from an internally developed model
b) It purchased 2,000 shares of Fuji Film which trades on the
Nikkei
c) It invested $25,000 in local development authority bonds.
Although these do not trade on an active market, their value
closely tracks movements in Federal Government Treasury
bonds.
Rank these investments in terms of verifiability of fair value

LO 7: Explain the application of the basic principles of

accounting.

THIRD LEVEL: BASIC PRINCIPLES

Recognition
Probable flow of future economic benefits; and
cost or value that can be measured reliably

LO 7

LO 7: Explain the application of the basic principles of

accounting.

THIRD LEVEL: BASIC PRINCIPLES

Revenue Recognition
When a company agrees to perform a service or sell a product to
a customer, it has a performance obligation.
Requires that companies recognize revenue in the accounting
period in which the performance obligation is satisfied.

LO 7

LO 7: Explain the application of the basic principles of

accounting.

THIRD LEVEL: BASIC PRINCIPLES

Expense Recognition - Outflows or using up of assets
or incurring of liabilities during a period as a result of delivering
or producing goods and/or rendering services.

ILLUSTRATION 2-6
Expense Recognition

Let the expense follow the revenues.

LO 7

LO 7: Explain the application of the basic principles of

accounting.

THIRD LEVEL: BASIC PRINCIPLES

Full Disclosure
Providing information that is of sufficient importance to
influence the judgment and decisions of an informed user.

Provided through:

Financial Statements

Notes to the Financial Statements

Supplementary information
LO 7

THIRD LEVEL: BASIC PRINCIPLES

BE2-9: Identify which basic principle of accounting is best
described in each item below.
(a) Parmalat (ITA) reports revenue in its income
statement when it delivered goods instead of when
the cash is collected.

Revenue
Recognition

(b) Google (USA) recognizes depreciation expense for

a machine over the 2-year period during which that
machine helps the company earn revenue.

Expense
Recognition

(c) KC Corp. (USA) reports information about pending

lawsuits in the notes to its financial statements.

Full
Disclosure

(d) Fuji Film (JPN) reports land on its statement of

financial position at the amount paid to acquire it,
even though the estimated fair market value is
greater.

Measurement
LO 7

LO 8: Impact of the cost constraint on financial reporting

THIRD LEVEL: COST CONSTRAINT

Cost Constraint
Companies must weigh the costs of providing the information
against the benefits that can be derived from using it.

Rule-making bodies and governmental agencies use costbenefit analysis before making final their informational
requirements.

In order to justify requiring a particular measurement or

disclosure, the benefits perceived to be derived from it
must exceed the costs perceived to be associated with it.
LO 8

Summary of
the Structure

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

LO 8