Financial Reporting and

Accounting Standards
 MODULE INTRODUCTION

The IFRS is designed as a common global language for

business affairs so that company accounts are
understandable and comparable across international
boundaries. They are a consequence of growing international
shareholding and trade. The IFRS is particularly important for
companies that have dealings in several countries. They are
progressively replacing the many different national accounting
standards.
 COURSE OUTCOME

CO #1. Understand the development of financial

reporting standards, application and effects to
the business environment.
LEARNING OBJECTIVES

1. Describe the global financial markets and

their relation to financial reporting.
2. Explain the objective of financial reporting.
3. Identify the major policy-setting bodies and
their role in the standard-setting process.
4. Discuss the challenges facing financial
reporting.
Revolution in International Financial Reporting

o Countries have their own set of financial

reporting standards or followed standards set
by larger countries such as those in Europe or
in the United States.

o Free trade and interdependence of national

economies is a reality.

o A single set of rules called International

Financial Reporting Standards (IFRS) is now
being used by over 149 countries.
Development of IFRS in the Philippines
➢ 1996, the Philippine Accounting Standards started to shift from the
Generally Accepted Accounting Principles (GAAP) of the United
States to the International Accounting Standards (IASs) and the
International Financial Reporting Standards (IFRS) adopted from
Europe.
➢ 1997, the Accounting Standards setting body in the Philippines
decided to start a program to move fully to International Accounting
Standards issued by the International Accounting Standards
Committee (IASC).
➢ 2004, the Philippine Accounting Standards Council (PASC) approved
the adoption of revised IAS called Philippine Accounting Standards
(PAS) and the International Financial Reporting Standards (IFRS)
issued by the International Accounting Standards Board (IASB) and
called it Philippine Financial Reporting Standards (PFRS).
➢ 2005, PFRS was first implemented.
Financial Reporting and Accounting Standards

Objective of Financial
Standard-Setting
Global Markets Financial Reporting
Organizations
Reporting Challenges

Financial General-purpose IOSCO Political

statements and financial IASB environment
financial reporting statements Hierarchy of IFRS
Expectations gap
Accounting and Capital providers
Significant financial
capital allocation
Entity perspective reporting issues
High-quality
Decision- Ethics
standards
usefulness
International
convergence
 Global Markets

World markets are becoming increasingly intertwined.

o International consumers:
▪ drive Japanese cars,
▪ wear Italian shoes and Scottish woolens,
▪ drink Brazilian coffees and Indian teas
o Tremendous variety and volume of both exported and
imported goods indicates the extensive involvement in
international trade for many companies, such that the
world is their market.
 Global Markets

World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms Of Sales

 Global Markets

Financial Statements and Financial Reporting

Characteristics of accounting are:
(1) the identification, measurement, and communication
of financial information about

(2) economic entities to

(3) interested parties.

 Global Markets 2.2.23
Economic Entity Financial Statements Additional Information

• Statement of President’s letter

Financial Financial Position
Prospectuses
Information • Income Statement
Reports filed with
Accounting? or Statement of
governmental
Comprehensive
agencies
• Identify Income
• Measure News releases
• Statement of Cash
• Communicate Flows Forecasts
• Statement of Environmental impact
Changes in Equity statements
• Note Disclosures Etc.
 Global Markets

Are animals and plants stakeholders?

Do they have rights?

Do flora have rights?

Global Markets
 Global Markets

Accounting and Capital Allocation

Resources are limited. Efficient use of resources often determines

whether a business thrives.

Illustration 1-3
Capital Allocation Process
 Global Markets

High Quality Standards

Globalization demands a single set of high-quality international

accounting standards. Some elements:
1. Single set of high-quality accounting standards established by a single
standard-setting body.
2. Consistency in application and interpretation.
3. Common disclosures.
4. Common high-quality auditing standards and practices.
5. Common approach to regulatory review and enforcement.
6. Education and training of market participants. (Continued)
 Global Markets

High Quality Standards

Globalization demands a single set of high-quality
international accounting standards. Some elements:
7. Common delivery systems (e.g., eXtensible Business
Reporting Language—XBRL).
8. Common approach to corporate governance and legal
frameworks around the world
 Objective of Financial Accounting

Objective: Provide financial information about the reporting

entity that is useful to
existing and potential investors,
lenders, and
other creditors
in making decisions relating to providing resources to the
entity.
 Decisions of Capital Providers

1. Buying, selling or holding equity and debt

instruments
2. Providing or settling and other forms of credit
3. Exercising rights to vote on, or otherwise, influence,
management’s actions that affect the use of the
entity’s economic resources.
 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.
 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.
 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.
 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.
 Standard-Setting Organizations

Two Major Organizations:

International Accounting Standards Board (IASB)

➢ Issues International Financial Reporting Standards

(IFRS).

➢ Standards used on most foreign exchanges.

➢ Standards used by foreign companies listing on U.S.

securities exchanges.

➢ IFRS used in over 149 jurisdictions (similar to countries)

 Standard-Setting Organizations

Two Major Organizations:

Financial Accounting Standards Board (FASB)

➢ Issues Statements of Financial Accounting

Standards (SFAS).

➢ Required for all U.S.-based companies.

 Standard-Setting Organizations

International Organization of Securities

Commissions (IOSCO)

➢ Does not set accounting standards.

➢ Dedicated to ensuring that global

markets can operate in an efficient
and effective basis.

http://www.iosco.org/
 Standard-Setting Organizations

International Accounting Standards Board (IASB)

Composed of four organizations—

➢ International Financial Reporting
Standards Foundation (IFRSF)

➢ International Accounting Standards

Board (IASB) http://www.iasb.org

➢ IFRS Advisory Council

➢ International Financial Reporting

Interpretations Committee (IFRIC)
 Standard-Setting Organizations

2.6.23
BABA1-F
BABA1-A
BABA1-G

Illustration 1-4
International Standard-Setting Structure
 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.
 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.
 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.
 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.
 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.
 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.
 BABA1-G 2.6.23
BABA1-B
Due Process

The IASB due process has the following elements:

1. Independent standard-setting board;

2. Thorough and systematic process for developing
standards;
3. Engagement with investors, regulators, business
leaders, and the global accountancy profession at every
stage of the process; and
4. Collaborative efforts with the worldwide standard-setting
community.
 Due Process

Illustration 1-4
International
Standard-Setting
Structure
 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.
 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.
 Types of Pronouncements

Issued by the IASB:

International Financial Reporting Standards.
Framework for financial reporting.
International financial reporting interpretations.
 Types of Pronouncements

Hierarchy of IFRS
Companies first look to:
1. International Financial Reporting Standards, IAS
and IFRS Interpretations;
2. Conceptual Framework; and
3. Pronouncements of other standard setting bodies
that use a similar conceptual framework
(US GAAP)
 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.
 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.
 Financial Reporting Challenges

IFRS in a Political Environment Illustration 1-6

User Groups that Influence the
Formulation of Accounting Standards
 Financial Reporting Challenges

The Expectations Gap

What the public thinks accountants should do vs. what

accountants think they can do.
 Financial Reporting Challenges

Significant Financial Reporting Issues

➢ Non-financial measurements
➢ Forward-looking information
➢ Sort assets
➢ Timeliness
 Financial Reporting Challenges
International Convergence
In 2002 the IASB and the FASB formalized their commitment to
the convergence of U.S. GAAP and international standards. The
Boards agreed to:

1. Make their existing financial reporting standards fully

converged as soon as practicable, and

2. Coordinate their future work programs to ensure that once

achieved, convergence is maintained.
 Financial Reporting Challenges

Ethics in the Environment of Financial Accounting

Companies that concentrate on “maximizing the bottom
line,” “facing the challenges of competition,” and
“stressing short-term results” place accountants in an
environment of conflict and pressure.

IFRS does not always provide an answer.

Doing the right thing is not always easy or obvious.

 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.
 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.
 Financial Reporting Challenges

Review Question
IFRS is the term used to indicate the whole body of IASB
authoritative literature.
a. True
b. False
 Financial Reporting Challenges

Review Question
IFRS is the term used to indicate the whole body of IASB
authoritative literature.
a. True
b. False
 Financial Reporting Challenges

Review Question
Any company claiming compliance with IFRS must follow
most standards and interpretations but not disclosure
requirements.
a. True
b. False
 Financial Reporting Challenges

Review Question
Any company claiming compliance with IFRS must follow
most standards and interpretations but not disclosure
requirements.
a. True
b. False
 Financial Reporting Challenges

Review Question
The primary governmental body that has influence over the
IASB is the IFRS Advisory Council.
a. True
b. False
 Financial Reporting Challenges

Review Question
The primary governmental body that has influence over the
IASB is the IFRS Advisory Council.
a. True
b. False
 Financial Reporting Challenges

Review Question
The overriding requirement of IFRS is for the financial
statements to give a fair presentation (or true and fair
view).
a. True
b. False
 Financial Reporting Challenges

Review Question
The overriding requirement of IFRS is for the financial
statements to give a fair presentation (or true and fair
view).
a. True
b. False
 Financial Reporting Challenges

Review Question
The IASB has a government mandate and therefore does not
have to follow due process in issuing an IFRS.
a. True
b. False
 Financial Reporting Challenges

Review Question
The IASB has a government mandate and therefore does not
have to follow due process in issuing an IFRS.
a. True
b. False