kieso, weygandt “et *. wr Intermediate ACCOUNTING IFRS EDITION Prepared by ‘Coby Harmon University of California, Santa Barbara Westmont College. 1 WILEYFinancial Reporting CHAPTER 1 and Accounting Standards LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Describe the growing 3. Identify the major policy- importance of global financial setting bodies and their role markets and its relation to in the standard-setting financial reporting. process. 2. Explain the objective of financial 4. Discuss the challenges reporting. facing financial reporting.PREVIEW OF CHAPTER 1 FINANCIAL REPORT! GEUTEL |G STANDARDS ——__ I I 1 Global Markets Objective of Financial | | Standard-Setting Financial Reporting « Financial statements and | | Reporting Organizations Challenges financial reporting + General-purpose + International + IFRS ina political + Accounting and capital financial statements Organization of Securities | | environment allocation + Equity investors and Commissions (10SCO) + The expectations gap + High-quality standards creditors + International Accounting |. significant financial + Entity perspective Standards Board (IASB) reporting issues + Decision-usefulness + Hierarchy of IFRS + Ethies in the envionment of financial accounting, + International convergence + Conclusion. Intermediate Accounting IFRS 3rd Edition 7 Kieso * Weygandt » WarfieldGlobal Markets LEARNING OBJECTIVE 1 Describe the growing importance of global financial markets and its relation to financial reporting, World markets are becoming increasingly intertwined. Top 20 Global Companies In Terms of Sales Revenues Revenues Rank Company Country (Smilin) Rank Company Country (Smilions) 1 Walmare us. 482,130 1 BerkshireHathaway US. 210,821 state Gr China 329,601 12 McKesson us. 392,487 3 China National Petroleum China 299,271 13 SamsungElectronies South Korea 177,440 4 Sinopec Group China 204304 14 Glencore Switzerland 170497 5 Royal Dutch Shell Netherlands 272,156 15 Industrial & Commercial 6 ExxonMobil us. 246.204 Bank of China china ietaa7 T Volkswagen Germany 236,600 16 Daimler Germany 165,800 8 Toyota Motor Japan 236,592 17 UnitedHealth Group US. 157,107 9 Apple us. 233,715 18 CVSHealth us. 153,290 10 oP Britain 225,982 19 EXORGroup tay 152,591 20 General Motors us. 152,356 aorta coma ILLUSTRATION 1.1 14 LotGlobal Markets LEARNING OBJECTIVE 1 Describe the growing importance of global financial markets and its relation to financial reporting, World markets are becoming increasingly intertwined. Top 20 Global Companies In Terms of Sales Revenues Revenues Rank Company Country (Smilin) Rank Company Country (Smilions) 1 Walmare us. 482,130 1 BerkshireHathaway US. 210,821 state Gr China 329,601 12 McKesson us. 392,487 3 China National Petroleum China 299,271 13 SamsungElectronies South Korea 177,440 4 Sinopec Group China 204304 14 Glencore Switzerland 170497 5 Royal Dutch Shell Netherlands 272,156 15 Industrial & Commercial 6 ExxonMobil us. 246.204 Bank of China china ietaa7 T Volkswagen Germany 236,600 16 Daimler Germany 165,800 8 Toyota Motor Japan 236,592 17 UnitedHealth Group US. 157,107 9 Apple us. 233,715 18 CVSHealth us. 153,290 10 oP Britain 225,982 19 EXORGroup tay 152,591 20 General Motors us. 152,356 aorta coma ILLUSTRATION 1.1 15 LotGlobal Markets Significant number of foreign companies are found on national exchanges. ILLUSTRATION 1.2 International Exchange Statistics xchange Market Capitalization Total Domestic Foreign Foreign (Location) (§ millions) Ustings Listings Listings. _—% NYSE (US) 19,009,042 232,834 488 210 Nasdaq (US, 7,549,892 2ert 2,488 382 233 Japan Exchange Group 4,967,989 3525 asi7 8 02 London Stock Exchange Group 3,612,520 2622 2,31 491 187 Euronext 3,425,104 44057 938 ug a3 Deutsche Borse (Germany) 14,682,370 599 538 61 302 SIX Swiss Exchange 41,458,721 266 220 36 135 Korea Exchange 41,344,266 2008 1,992 as 08 Nasdaq Nordic Exchanges 1,282,556 848 813 35 41 Australian Securities Exchange 1276494 2068 1,947 aaa 59 Johannesburg Stock Exchange 14,036,306 377 306 n 188 Taiwan Stock Exchange Corp. 843,133 son 226 15 83 BMBF Bovespa (Brazil) 152,694 352 ui u 31 BME Spanish Exchanges 701,756 35533526 27 08 Singapore Exchange 668,022 67 484 283 369 Source: Focus: The Monthly Newsletter of Regulated Exchanges (September 2016) LotGlobal Markets Financial Statements and Financial Reporting Essential characteristics of accounting are: 1. the identification, measurement, and communication of financial information about 2. economic entities to 3. interested parties. 17 LotGlobal Markets Economic Entity ] Financial Statements ] Additional Information ] Financial Statementof President's letter Information Financial Position Prospectuses Accounting? L eee a Income Statement Reports filed with Identify Comprehensive governmental and Income agencies Measure Statement of Cash News releases and Flows Forecasts Communicate Statement of Environmental Changes in Equity impact statements Note Disclosures Etc. 18 LotGlobal Markets Accounting and Capital Allocation Resources are limited. Efficient use of resources often determines whether a business thrives. Financial Reporting Users Capital Allocation (present and potential) The financial information The process of ‘a company provides to determining how and at help users with capital what cost money is allocation decisions about allocated among, the company. competing interests, ILLUSTRATION 1.3 Capital Allocation Process 19 Lot4-10 Global Markets High Quality Standards Globalization demands a single set of high-quality international accounting standards. Some elements: 1. aap oN Single set of high-quality accounting standards established by a single standard-setting body. Consistency in application and interpretation. Common disclosures. Common high-quality auditing standards and practices. Common approach to regulatory review and enforcement. Education and training of market participants. (Continued) Lot1 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. LotObjective of “LEARNING OBJECTIVE 2 Explain the objective of Financial financial reporting. Reporting Objective: 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. 412 Lo2Objective of Financial Reporting General-Purpose Financial Statements » Provide financial reporting information to a wide variety of users. >» Provide the most useful information possible at the least cost. Equity Investors and Creditors > Investors and creditors are the primary user group. 1-13 Lo2Objective of Financial Reporting Entity Perspective » Companies viewed as separate and distinct from their owners (shareholders). Decision-Usefulness » Investors are interested in assessing 1, the company’s ability to generate net cash inflows and 2. management's ability to protect and enhance the capital providers’ investments. 1-14 Lo2Objective of Financial Reporting 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. 1-15 Lo2Objective of Financial Reporting Question General-purpose financial statements are prepared primarily for: a. internal users. => b. external users. c. auditors. d. government regulators. 1-16 Lo2LEARNING OBJECTIVE 3 =! i Identify th licy-sett Standard-Setting Seen Organizations standard-setting process Main international standard-setting organization: > International Accounting Standards Board (IASB) « Issues International Financial Reporting Standards (IFRS). « Standards used on most foreign exchanges. e IFRS used in over 149 countries. e Two organizations that have a role in international standard-setting are the International Organization of Securities Commissions (IOSCO) and the IASB. 117 Lo3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. > Supports the use of IFRS as the single set of international standards in cross-border offerings and listings. http://www.iosco.org/ OIC W500 INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS. 1-18 03119 Standard-Setting Organizations International Accounting Standards Board WR Bbea of four organizations— > > > IFRS Foundation International Accounting Standards Board (IASB) IFRS Advisory Council IFRS Interpretations Committee Lo3International Accounting Standards Board Appoints} Monitors Monitoring iinisiees [> coor Reports to a en ene Re 8 brass, Reviews Ske SSE tenes, Informs co 5 GET Aopoits Finances IFRS Advisory Couneit surotesc ieee Rs ere (ocrmacnenten) [~~ Mies ho —— ‘commie TRS: (High-quality, enforceable, and global) Source: Adspted fom Em & Young, intmational GAAP 213, ILLUSTRATION 1.4 International Standard-Setting Structure 1-20 Lo3Standard-Setting Organizations 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. 4-21 Lo3Standard-Setting Organizations Question The major key players on the international side are the: a. IASB and IFRS Advisory Council. b. IOSCO and the U.S. SEC. c. London Stock Exchange and International Securities Exchange. mp d. IASB and IOSCO. 4-22 Lo3International Accounting Standards Board 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. 423 Lo3Topice Preliminary Views <6 — ‘Topics identified and placed ‘onthe Board's agenda, Research and analysis conducted and Preliminary views of pros and cons issued. iy mare comments This willbe your final \chance: Exposure Draft Board evaluates research and ppublic response and issues, ‘exposure draft. Public hearing on proposed standard. Board evaluates responses and changes exposure draft, if necessary. Final standard issued. ILLUSTRATION 1.5 tag Mlemational Standard Seting Sructire Lo3International Accounting Standards Board 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. Lo3International Accounting Standards Board Types of Pronouncements > International Financial Reporting Standards. > Conceptual Framework for Financial Reporting. > International Financial Reporting Standards Interpretations. 1-26 Lo3Standard-Setting Organizations Hierarchy of IFRS Companies first look to: 1. International Financial Reporting Standards; International Financial Reporting Standards, International Accounting Standards (issued by the predecessor to the IASB), and IFRS interpretations originated by the IFRS Interpretations Committee (and its predecessor, the IAS Interpretations Committee); 2. The Conceptual Framework for Financial Reporting; and 3. Pronouncements of other standard-setting bodies that use a similar conceptual framework (e.g., U.S. GAAP). 4-27 Lo3Standard-Setting Organizations 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 Standards Interpretations. c. International Accounting Standards and International Accounting Standards Interpretations. d. FASB financial reporting standards and International Accounting Standards. 4-28 Lo3Financial Reporting LEARNING OBJECTIVE 4 Discuss the challenges Challenges Es IFRS in a Political Environment >» Considering the economic consequences of many accounting rules, special interest groups are expected to vocalize their reactions to proposed rules. > The Board should not do is issue standards that are primarily politically motivated. >» While paying attention to its constituencies, the Board should base IFRS on sound research and a conceptual framework that has its foundation in economic reality. 4-23 Lo4IFRS in a Political Environment — IASB | ILLUSTRATION 1.6 User Groups that Influence the Formulation of Accounting Standards 1-30 Lo4131 Financial Reporting Challenges The Expectations Gap What the public thinks accountants should do and what accountants think they can do. Significant Financial Reporting Issues Non-financial measurements v Forward-looking information v Soft assets Timeliness v Lo4Financial Reporting Challenges Ethics in the Environment of Financial Agceunting. 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 do not always provide an answer. » Technical competence is not enough when encountering ethical decisions. 4-32 Lo4133 Financial Reporting Challenges International Convergence Examples of how convergence is occurring: 1. China's goal is to eliminate differences between its standards and IFRS. Japan now permits the use of IFRS for domestic companies. The IASB and the FASB have spent the last 12 years working to converge their standards. Malaysia helped amend the accounting for agricultural assets. Italy provided advice and counsel on the accounting for business combinations under common control. Lo4Financial Reporting Challenges 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. 1-34 Lo4D ' GLOBAL ACCOUNTING INSIGHTS LEARNING OBJECTIVE 5 Compare IFRS and U.S. GAAP and their standard-setting processes. Most agree that there is a need for one set of international accounting standards. Here is why: 1-35 Multinational corporations Mergers and acquisitions Information technology Financial markets LosD ‘ GLOBAL ACCOUNTING INSIGHTS Relevant Facts Following are the key similarities and differences between U.S. GAAP and IFRS related to the financial reporting environment. Similarities + Generally accepted accounting principles (GAAP) for U.S. companies are developed by the Financial Accounting Standards Board (FASB). The FASB is a private organization. The U.S. Securities and Exchange Commission (SEC) exercises oversight over the actions of the FASB. The IASB is also a private organization. Oversight over the actions of the IASB is regulated by lOSCO, 1-36 LosD * GLOBAL ACCOUNTING INSIGHTS Relevant Facts Similarities + Both the IASB and the FASB have essentially the same governance structure, that is, a Foundation that provides oversight, a Board, an Advisory Council, and an Interpretations Committee. In addition, a general body that involves the public interest is part of the governance structure. + The FASB relies on the U.S. SEC for regulation and enforcement of its standards. The IASB relies primarily on IOSCO for regulation and enforcement of its standards. Both the IASB and the FASB are working together to find common ground wherever possible. 137 LosD * GLOBAL ACCOUNTING INSIGHTS Relevant Facts Differences + U.S. GAAP is more detailed or rules-based. IFRS tends to simpler and more flexible in the accounting and disclosure requirements. The difference in approach has resulted in a debate about the merits of principles-based versus rules-based standards. + Differences between U.S. GAAP and IFRS should not be surprising because standard-setters have developed standards in response to different user needs. In some countries, the primary users of financial statements are private investors. In others, the primary users are tax authorities or central government planners. In the United States, investors and creditors have driven accounting-standard formulation. 1-38 LosA SS GLOBAL ACCOUNTING INSIGHTS About The Numbers IASB has looked to the United States to determine the structure it should follow in establishing IFRS. Presented is FASB’s standard-setting structure. Financial Accounting Foundation Financial Accounting Standards Board Finanelal Accounting Standards re) (ease) sory Council aSAC) Purpose: Purpose: Purpose: Tosselect members ofthe FASB ard [7] To establish and improve standards “To consult on major policy ives, its Advisory Courel, fund their of financial accounting and reporting {schnical issues, project privties, activities, and exereise generat forthe guidance and education of the and selection and organization of oversight public, including issuers, auditors, fd uses of finanial information, T 4 Staff ond Task Forces 139D ‘ GLOBAL ACCOUNTING INSIGHTS On the Horizon Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported. In fact, beginning in 2010, the IASB (and the FASB on its joint projects with the IASB) started its policy of phasing in adoption of new major standards over several years. The major reason for this policy is to provide companies time to translate and implement international standards into practice. 1-40 Los144 Copyright Copyright © 2018 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.