1 Financial Reporting and

Accounting Standards

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the growing importance of 5. Identify the objective of financial reporting.

global financial markets and its relation
to financial reporting.
2. Identify the major financial statements and
other means of financial reporting.
3. Explain how accounting assists in the efficient
use of scarce resources.
6. Identify the major policy-setting bodies and
their role in the standard-setting process.
7. Explain the meaning of IFRS.
8. Describe the challenges facing financial
reporting.

4. Explain the need for high-quality

standards.

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 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)

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 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.

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 1 Financial Reporting and
Accounting Standards

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the growing importance of 5. Identify the objective of financial

global financial markets and its relation
to financial reporting.
2. Identify the major financial statements and
other means of financial reporting.
3. Explain how accounting assists in the efficient
use of scarce resources.
4. Explain the need for high-quality standards.
reporting.
6. Identify the major policy-setting bodies and
their role in the standard-setting process.
7. Explain the meaning of IFRS.
8. Describe the challenges facing financial
reporting.

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 OBJECTIVE OF FINANCIAL ACCOUNTING

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.

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 OBJECTIVE OF FINANCIAL ACCOUNTING

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.

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 DON’T FORGET STEWARDSHIP

In addition to providing decision-useful information about future cash

flows, management also is accountable to investors for the custody
and safekeeping of the company’s economic resources and for their
efficient and profitable use. For example, the management of Nestlé
has the responsibility for protecting its economic resources from
unfavorable effects of economic factors, such as price changes, and
technological and social changes. Because Nestlé’s performance in
discharging its responsibilities (referred to as its stewardship
responsibilities) usually affects its ability to generate net cash inflows,
financial reporting may also provide decision-useful information to
assess management performance in this role. [2]

[2] The Conceptual Framework for Financial Reporting, “Chapter 1, The Objective of General Purpose Financial
Reporting” (London, U.K.: IASB, September 2010), par. OB4.

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 OBJECTIVE OF FINANCIAL ACCOUNTING

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.

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 OBJECTIVE OF FINANCIAL ACCOUNTING

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.

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 OBJECTIVE OF FINANCIAL ACCOUNTING

Question
General-purpose financial statements are prepared primarily
for:
a. internal users.
b. external users.
c. auditors.
d. government regulators.

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