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Samenvatting - Intermediate Financial Accounting
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Course in the Accounting minor. IFA Summary
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Summary IFALecture 1 – Financial Reporting in Capital Markets and IFRS development
Accounting = the way a business communicated its financial performance. Communication of information
for decision-making
Inside the company Outside the company
Managers Investors, lenders, customers
Managerial accounting Financial accounting (focus!!!)
Not regulated at all Regulated
Financial statements as a primary means of a firm’s communication
Managerial accounting = a collection and processing of financial (and non-financial) information to meet
the decision-making needs of parties internal to the organization
Financial accounting = a collection and processing of financial information to meet the decision-making
needs of parties external to the organization
Role of reporting. Economic (theory) reasoning = firms need economic
resources (capital providers). Absence of reporting = Wild Wild West
adverse selection. For efficient
functioning capital providers write
contracts to prevent agency conflicts and
moral hazard behavior.
The objective of financial reporting = 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 recourses to the entity.
Annual report = general non-standard summary of company activities. It included financial statements,
but many other things (e.g., CEO letter, operation improvements, new technological developments). It is
distributed through media, firm websites, etc.
vs.
Financial statements (F/S) = regulated by GAAP (Generally Accepted Accounting Principles). Must be
deposited into national registers (e.g., KvK in the Netherlands). A lot of developed countries prepare F/S
according to their national GAAP (e.g., Dutch GAAP, UK GAAP)
Financial reporting standards
Differences contributing to variation in GAAP regimes
- Ownership concentration
o Dispersed ownership greater need for investor protection stronger need for F/S
- Financing mix
o Debt financing from banks banks have higher bargaining power less reliance on
general purpose F/S
o Debt financing from banks banks prefer conservative accounting F/S balances are
more conservative
- Globalization
o Costs of GAAP diversity increased
o Poor accounting quality low transparency and comparability makes F/S analysis
difficult restricts international capital flows
o When accounting quality is poor capital providers require a risk premium increase
in cost of capital
o Cross-listed firms must produce multiple sets of financial statements increase in
reporting costs
need for an international set of accounting standards!!!
Set of rules for accounting standards
, - High-quality
- Understandable
- Enforceable
- Globally accepted
- Comparable
To ensure that relevant and faithful information is disclosed IFRS = International Financial Reporting
Standards
History of IFRS
IASC = International Accounting Standard IASB = International Accounting Standard Board
Committee
1973-2001 2001-present
IAS 1 to 41 IFRS 1 tot 17 (September 2020)
International Accounting Standards International Financial Reporting Standards
SIC = Standard Interpretations Committee IFRIC = International Reporting Interpretations Committee
1997-2002 2002-present
IASB pronouncements
1. International Financial Reporting Standards (IFRS)
2. Conceptual Framework for Financial Reporting
3. International Financial Reporting Standards Interpretations
Lecture 2 – IFRS conceptual framework
How were accounting standards written? Founded on generalization from existing accounting practice
followed by practitioners. Criticisms:
- Determined by finance directors and auditors benchmarks tainted
- Rate of change leaves little time for effective and coherent practice to evolve
- Acceptability of income determined under historical cost model is questionable
Need for agreed accounting theory Conceptual Framework (CF) = a coherent frame of refence used by
standard setters (e.g., FASB, IASB, ASB). Purpose:
- Clarify conceptual underpinnings of standards
- Help the development and review of accounting standards
- Ensure a consistent basis in setting standards, and uniformity in reporting
- Act as a reference source of basic accounting theory for solving emerging practical problems of
financial reporting
- Reduce need for fundamental debate each time a standard is issued
- Achieve other objectives: legality, cost-benefit, industry features, evolution
Conceptual Framework good or bad?
Pro’s Con’s
Defense against political interference Defined in terms of current practices
Source of authority ‘Social construct’ used to legitimize the accounting profession
Common language Too general and vague to have direct impact
History of IFRS Conceptual Framework
1989 IASC issued the first CF
2004-2010 Joint IASB & FASB work leads to minor revisions to the CF in 2010
2012 IASB-only project starts
2015 IASB issues the exposure draft for a revised CF
2018 IASB issues the revised CF for Financial Reporting
Effective immediately for IASB
Effective from 1 January 2020 for preparers
, What does the IFRS Conceptual Framework look like?
Introduction and foundation. Conceptual Framework (8 chapters).
IFRS 1-8 (17 in the new edition). IAS 1-41. Interpretations: IFRIC 1-
23, SIC 1-33.
CF is not an International Standard
CF does not override any IAS/IFRS
Chapter 1 – The objective of financial reporting
‘’To 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’’.
Chapter 2 – qualitative characteristics of financial information
‘’The qualitative characteristics of useful financial information
discussed in this chapter identify the types of information that are
likely to be most useful to the existing and potential investors,
lenders and other creditors for making decisions about the
reporting entity on the basis of information in its financial report.
If financial information is to be useful, it must be relevant and
faithfully represent what is purports to represent. The usefulness of financial information is enhanced if
it is comparable, verifiable, timely and understandable.’’
The qualitative characteristics (QC)
- Fundamental QC = relevance and faithful representation
o Relevance = information capable of making a difference in a decision. Predictive value,
confirmatory value, or both. Concepts of materiality = should I report an ‘unusual gain’
separately in my P&L? Materiality always referred in relative terms (to sales, to
income…) and is defined subjectively (rule of thumb: 5% of net income)
o Faithful representation = information that faithfully represents the substance of the
phenomena complete, neutral and free from error. It does not imply measurement
certainty as many accounting numbers are based on estimates, which may be highly
uncertain
- Enhancing QC = comparability, verifiability, timeliness and understandability. When the
fundamental QC is present, other information qualities enhance the usefulness of accounting
information
o Comparability = comparable within firm and across firms (over time)
o Verifiability = when knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement that a particular depiction is a faithful
representation
o Timeliness = when information is available in time for decision-making
o Understandability = when information is classified, characterized, and presented clearly
and concisely
Chapter 3 – Financial statements and the reporting entity
The financial statements (F/S) should include:
- Statement of financial position (assets, liabilities and equity) SOFP, BS
- Statement of financial performance (income and expenses) P&L, IS
- Other statements and notes
o Unrealized revenues/expenses/gains/losses (excluded from P&L) other
comprehensive income
o Statement of cash flows (CF statement)
o Contribution/distributions to equity holders (equity statement, statement of changes in
equity)
o Methods, assumption, judgement, and changes to them (notes)
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