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Lectures Advanced Financial Accounting
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This document summarizes all lectures of the course Advanced Financial Accounting for the academic year .
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Lecture 1 (13-04-2021) – Introduction and Setting the SceneThe International Financial Reporting Standards (IFRS) are a globally accepted set of standards for financial
reporting. These standards are developed by the International Accounting Standards Board (IASB), which
succeeded the International Accounting Standards Committee (IASC) as of 2001, while the latter was set
up in 1973. It Is an independent private organization in London and funded by contributions from both
the private and public sector. They have a very elaborate and transparent due process to safeguard
independence and high quality.
The IFRS organizational structure is shown on the right.
There is public oversight (on the process, not on the
content) by the Monitoring Board, which is comprised
of securities regulations and the European Commission.
Furthermore, there is independent oversight by the
Foundation Trustees, and there are various advisory
bodies. Finally, the Interpretations Committee
addresses upcoming urgent application issues.
The Monitoring Board appoints and monitors Trustees
in the IFRS Foundation, who then report back to the
Monitoring Board. The Trustees appoint members of
the IFRS Advisory Council, the IFRS Advisory Forum (Accounting Standards Advisory Forum), the IFRS
Interpretations Committee, and the IASB. These members then inform the Trustees. The IFRS Advisory
Council provides strategic advice to the IASB, whereas the IFRS Advisory Forum provides technical advice
to the IASB. The IASB creates the standards.
To illustrate IFRS’s success so far: 87% of the 166 countries surveyed required IFRS Standards for most
domestically accountable companies. Many of the other countries still permit their companies to use IFRS
Standards. Furthermore, when looking at the Global Fortune 500 companies, we see that an increasing
share of these companies is applying IFRS. Still, a great part applies US GAAP.
We see that the share of intangible (versus tangible) assets in the market value of the S&P 500
components has increased tremendously over time; the value relevance of intangible assets has
increased. This illustrates the movement from a production economy to a service economy. Many
accounting standards, however, do not allow the recognition of intangible assets. Thus, if an audit focuses
primarily on what is on the balance sheet, then there is only limited assurance on intangible assets.
We see that the earnings relevance has decreased over time, especially for new US listed firms (which are
more service-type companies). Potential causes of this decrease are the increasing importance of
sometimes unrecognized intangible assets (like R&D, branding, software, and people), alternative real-
time sources of financial information, and the growing importance of non-financial information.
In the future, the role of the annual report will be different compared to its role in the past. More
specifically, the audience of annual reports will be multiple stakeholders rather than solely investors, the
horizon will be long-term rather than short-term, the frequency will be real-time or continuous rather
than quarterly or annually, the focus will be on comprehensive performance rather than on financial
performance, and the format will be digital rather than on paper.
,Non-financial information is important as it tells you something about the future cash flows of the
company. Think for instance of carbon fees which internalize externalities; if you pollute the environment,
you may need to pay carbon fees in the future. Non-financial information can also insightful when it tells
you something about customer behavior and the reputational risks of the company. Sometimes, ‘non-
financial information’ is referred to as ‘pre-financial information’, to highlight the idea that, eventually,
this information will have an effect on a company’s financials.
Over the years, we have seen all sorts of requirements for non-financial information in the financial
statements or in annual reports. You could think of requirements relating to management renumeration,
corporate governance, country-by-country reporting of tax payments, sustainability information, health
and safety information, diversity information, and inequality. The annual report is considered by the
government or regulators as a convenient mailbox for disclosures by organization. The disadvantage
hereof is that there is no integration and no clear link with strategy, the value chain, or performance;
stated differently, it is not always clear what the effect of these disclosures is on the value of the company.
How does sustainability reporting relate to financial reporting?
This is illustrated by means of the boxes on the right. Generally
speaking, we can distinguish two perspectives.
• Capital market perspective; in addition to traditional
financial reporting, represented by the smallest box,
there is also information with regard to sustainability
topics that is relevant for the cash flows of a company.
This combined set of information, represented by the
smallest and the middle box, is what needs to be
reported, since this is what investors care about.
• Multi-stakeholder perspective; it is also important to
know how a firm’s operations impact the economy, environment, and people, even though it does
not necessarily have cash flow implications. This latter set of information is represented by the
largest box. Under this perspective, all three sources of information should be reported; we
should consider the impact on any potential stakeholder.
For a very long time, there were no substantial movements towards sustainability reporting. But suddenly,
in 2020 and 2021, there was an explosion of initiatives with regard to these issues. On 30 September 2020,
the Trustees of the IFRS Foundation published a Consultation Paper (CP) on sustainability reporting. The
CP is part of the Trustees’ consultation process on the IFRS Foundation’s strategy. The CP seeks feedback
on three main areas: (1) the need for sustainability reporting, (2) the role the Foundation may play in
developing sustainability standards, and (3) whether to form a Sustainability Standards Board (SSB).
Trustees agreed in March 2021 on the following strategic direction of the SSB:
• Investor focus for enterprise value (so no multi-stakeholder view).
• Sustainability scope that prioritizes the climate.
• Build on existing frameworks, in particular the Financial Stability Board’s Task Force on Climate-
Related Financial Disclosures (TCFD) as well as the alliance of leading standard-setters in
sustainability reporting focused on enterprise value.
, • Building-block approach; setting a globally consistent and comparable sustainability reporting
baseline and providing flexibility for coordination and reporting requirements that capture wider
sustainability impacts.
The expected IFRS structure is shown on the right. In
addition to the IASB, a sister organization will be set
up; the SSB. The two boards will need to work
together, under the oversight of the Trustees.
It is most likely that the sustainability disclosures will
be incorporated in the Management Discussion and
Analysis (MD&A) section of the annual report.
New role of financial reporting:
• Expand scope; impact of the environment on the financial position or performance of the entity
and an increased horizon (strategic, threats to business model). You could think of the impact of
the carbon price and the Paris Agreement on the viability of oil majors.
• Explain the relationship with the value creation model of the entity.
• Provide anchor points for investors to calibrate models built upon unstructured, unassured data
(confirmatory value).
• Interconnection between financial and non-financial reporting standard setting. You should see
the link between non-financials and their eventual effect on financials.
Role of the auditor:
• EU’s High Level Expert Group on Sustainable Finance (2018): “While there are numerous initiatives
on sustainability reporting, the ultimate ambition has to be convergence or integration of financial
and non-financial or sustainability information, which should be subject to the same assurance
rigor as audit requirements for financial information.”
• The European Commission intends to require assurance on the updated Non-Financial Reporting
Directive as well as on the sustainability taxonomy.
• Currently, the assurance on non-financial reporting provided by an auditor is mostly on a
voluntary basis. Within the EU, the idea is to get more assurance on non-financial information,
which implies that there will be a larger role for auditors.
Financial Reporting Standards are not neutral. They can have (significant) consequences:
• Economic consequences of financial reports
o Dividend
o Renumeration of management
o Reputation
• Economic consequences of financial reporting standards
o Capital allocation
o Cost of financial reporting
• ‘Political’ consequences of financial reporting standards
, o The standards drive the behavior of management; they reduce the flexibility of
management.
o Some accounting traditions view financial reporting standards as a tool to set economic
policies. Consider the following examples:
▪ During the financial crisis of 2008, there were pressures to use accounting
standards as a tool to combat the crisis.
▪ The economic fallout of the Covid-19 pandemic forced governments to interfere.
They provided relief to companies and asked others to provide relief as well in
the form of, for instance, extended payment terms and deferral or waving of rent
payments. The IASB was put under pressure to provide accounting relief. In May
2020, the IASB decided to amend IFRS 16 Leases to simplify the accounting for
rent concessions and in March 2021, they provided further relief.
The decision to move to IFRS had a very positive effect on EU capital markets, transparency and the quality
of financial information.
International reporting standards result in international comparability, but it also means a loss of control
for individual countries. The response of the IASB is to apply the most elaborate due process for setting
standards; there is public interest oversight through the Monitoring Boards, there are meetings in public,
the IASB requests for feedback on all proposed guidance, and there are post-implementation reviews of
new standards. Furthermore, there is an enhanced helpful role of the Interpretations Committee to act
fast and provide more guidance. Besides, the Accountancy Standards Advisory Forum is set up to solicit
views on proposals.
Lecture 2 (16-04-2021) – Business Combinations and Consolidation (1/3)
Business combinations are normally significant transactions that have a large impact on the current and
future performance of the entity. We can distinguish mergers of equals from acquisitions. Potential
reasons to conduct a business combination might relate to growth strategies, synergies (e.g., cost savings
on overhead costs like HR departments), consolidation of the market, diversification, acquiring
knowledge, and entering a market.
A business combination’s impact on financial performance depends on the acquisition price (including any
contingent consideration), the financing of the acquisition (shares versus cash with a loan), and the
combined earnings of the entity (including the generated synergies). In the year of an acquisition, entities
need to disclose the acquisition’s impact on revenue and income (do distinguish organic growth from
‘acquired’ growth). There are various forms of business combinations, such as an acquisition of shares in
another entity, an acquisition of a business without acquiring shares, or a combination of the two.
If you buy the business, rather than the shares, you can leave (some of) the liabilities within the original
entity. For instance, if you would have bought the shares, you also become liable for potential lawsuits
against the entity. On the other hand, buying shares is often easier and can have tax advantages.
When it comes to business combinations, the relevant IFRS standards are IFRS 3 Business Combinations
and IFRS 10 Consolidated Financial Statements. The following forms of business combinations are not
within the scope of IFRS 3:
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