BMAN31792 Financial Market Microstructure
Semester 1
T1 Context of International Accounting
T2 Accounting Diversity and the Pursuit of Global Convergence
T3 The New International Financial Architecture and the Growing Significance of
International Accounting/Auditing Standard
T4 Key Trends in the Pursuit of Global Convergence
T5 Conceptual Frameworks for Financial Reporting
T6 Fair Value Accounting: Concepts of Measurement and Valuation
T7 Fair Value Accounting: Critical Issues and Challenges in International Standard Setting
T8 The Value Relevance and Significance of International Financial Accounting
T9 Accounting for Financial Instrument: Classification and Measurement
Semester 2
T1 Accounting for Revenue Recognition
T2 Consolidated Accounting
T3 Accounting for Associate Companies and Joint Ventures
T4 Foreign Currency in a Group Context
T5 Lease
T6 Public-Private Partnerships (PPPs)
T7 Segmental Reporting
T8 Accounting for Sustainability and Human Right
T9 New Audit Reporting
T10 Contemplating Professional and Regulatory Futures
Semester 1 T4 Key Trends in the Pursuit of Global Convergence
Scope of Regulation
- Regulatory form: State, Self-Regulation, Mixed (most common rise of public oversight)
- Law making activities, Admission to profession, Enforcement
New Transnational Mode of Governance
1. Global Standard e.g. IASB, IAASB(audit)
2. Transnational organisation for coordinating enforcement & compliance: E Sec Mkt Authority
3. Global Ranking systems and assessment practice: WB & IMF assess
4. Global donor relations: WB loans
5. Global professional education and credentialing systems: ACCA
Monitoring
- Who to monitor with what system?
- Proactive surveillance or reactive investigation?
- What will be the legal action in case of non-compliance?
- What will be the qualification of regulators and inspectors (expert or non-expert)?
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,Semester 1 L1 Context of International Accounting
International Accounting Scope
1. Accounting issues uniquely confronted by companies involved in inter business/ foreign inv
2. Include audit, corporate governance, regulation (adoption, compliance, enforcement)
3. Good quality corporate information for private decision making/public accountability
4. In the past, IA focus on learn from difference of acct; Nowadays, IA to eliminate difference
Factors Driving Growth of International Accounting
1. Growth of Global Economy
- Trade agreement e.g. WTO, Transatlantic Trade & Investment Partnership (TTIP)
- Globalisation, export and import of merchandise and commercial services
2. Growth of Foreign Direct Investment
- Produce locally instead of exporting (e.g. JLR build plants in China instead of exporting)
- UN World Investment Report: Most changes in national law favour FDI -> encouragement
3. Growth of International Capital Market
- Rise in multinational corporations (Largest 100, Global Fortune 500 significant ^ MNCs)
- Growing cross listing activity (Alibaba, Chinese company lists in US stock market)
4. Growth of International Institutions in financial, regulatory, governmental, societal
- Multiplicity of national & international standards & stakeholders
Problem of National Accounting
1. Many models of accounting
- British, American, Continental European, Latin American, Post-Communist etc
2. Diversity in accounting, auditing, governance regimes
- Problems for MNCs (e.g. Daimler Benz profit in German GAAP but loss 3x in US GAAP)
- German GAAP conservative, hide profit in reserve; US GAAP informative, transparent
3. International Investors
- Costly to interpret data, increased investment risk
Harmonisation
1. IASB is working with FASB in US for convergence project
2. To increase compatibility of practice by bounding allowable degrees of variation
- Limit permitted alternatives or offering preferred choices
3. To gain mutual recognition between countries
4. Contrast btw de jure regulation (standard setting) and de facto compliance (actual practice)
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,View of International Accounting
Common International Standards
1. Enhance investor’s understanding & confidence -> growth of capital market
2. Investor’s capital will flow to safer opportunities
3. Reduce learning & application cost for accountants, auditors, regulators, companies
4. Reduce cost of capital as analysts and investors understand better -> info asymmetry drop
Comparative Accounting
1. No one country has monopoly of knowledge, wisdom, new ideas in accounting field
2. Exchanging information & opinion will benefit the world as a whole
Leadership
1. Large nations/economies that attract capital: UK, US
2. Non-profit standard setters: IASB FASB
3. Big 4/NGO/MNC/Financial Market/Users/Government
Standard Setter’s View
1. High quality standards in FR, auditing, ethics & education serve public interest
PI: Benefit the society as a whole whether or not a self is benefit
2. Underpin investors’ trust in financial information
3. President of International Federation of Accounts believe multiplicity of acct. sta. harm PI
4. Convergence is vital to economic growth & market stability
Academic View
1. Single set of accounting risks restricting different form of capitalism that can develop
- optimised for stock makers doesn’t necessarily optimise other forms of capitalism
2. Single set of accounting risks preventing alternative and superior ways of doing business
3. Optimal accounting standards depends on political and economic systems
Reflection on Corporate Reporting
Historical
1. Fundamental objective: communicate economic measurement of & information about
resources and performance of the reporting entity, which are useful to those having
reasonable rights to such information
2. Relevant, understandable, reliable, complete, objective, timely, comparable
Contemporary
1. Complex & long corporate reports due to more rules and regulations, challenging for audit
2. Should only provide meaningful & relevant information, with the assistance of auditors
3. Regulators should support companies to publish information outside annual report
4. Use of internet to direct less relevant and wider financial information
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,Semester 1 L2 Accounting Diversity and the Pursuit of Global Convergence
Causes of Accounting Diversity
1. Legal System
a. Common Law (Anglo-Saxon/British-America/Micro-based)
- Case Law, court gradual develops law from decision to decision
- No significant influence of tax rules & taxation in accounting practice (individual focus)
- Accounting standards are commonly accepted standard by private standard setting body
- Fair presentation of FR to address the information needs of outsider investors in stock mkt
b. Code Law (Continental/Legalistic/Macro-uniform)
- Comprehensive law regarding accounting code set by government, less by acct profession
- Significant link between accounting and taxation (state focus)
- Aim at creditor protection, more conservative (e.g. Daimler Benz listing in US GAAP)
- Less transparent and disclosure, more concentrated ownership by family, commercial bank
2. Finance Structure
- Common law countries: stronger external finance from equity makers – Disperse ownership
- Common law countries focus on revealing inside info to outside
- Code law countries treat debt as an important source of external finance
- CLC focus on private communication with BoD with customers, labor, suppliers, lenders, SH
3. Users & Organisational Reporting Demand
- Shareholders investment, Creditor protection, Serving society, Preserving Environment
- Government: Centrally planned economy, assessing tax
- Principle-based or Rule-based standards (Scandal e.g. Enron, Worldcom)
Accounting System Classification
1. To identify underlying structures
2. To assess potential for harmonisation
3. To guide development
4. Deductive (testing theory): Identify environment factors -> Link to accounting -> Judge
5. Inductive (generate): Analysis accounting practice > identify pattern > Judge base on env fact
Empirical Evidence on Culture & Accounting Systems
1. (Lack)Different accounting in (different)similar (culture)business environment (SG/ML) Cana
2. Culture influence accounting indirectly through legal system etc.
Gary: Culture Preferences Influences Accounting System Development
1. Professionalism (Judgement & Self-regulation) v Statutory control (Legal regulation)
2. Uniformity (Across & overtime consistency) v Flexibility (Consider specific circumstances)
3. Conservatism (Cautious) v Optimism (Risk-taking)
4. Secrecy (Restricted disclosure) v Transparency (Publicly accountable)
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,Causes of Convergence
1. Rise in MNCs causes more problems
2. Rise in overseas investment, cross border listing, international M&A, free flow of capital
3. MNCs actively support: reduce acct preparera. cost, efficient analysis, more credible info
Problem: if convergence is so important, why not yet done? Why world grew without it?
Different Perspective on Accounting Convergence
1. International Comparability
- Give international investors & users more confident in acct no. as they know what it is
- Increasing trust will reduce information asymmetry, thus reduce CoC and increase NPV
2. Cost and Quality
- Reduce cost of preparation
- Enhance quality for countries previously below international norm (or will hinder?)
3. Incentive
- Users may have enough access to determine underlying corporate value
- Preparers may have little incentive to make more public information
- Forcing companies with no incentive do not improve quality of accounting disclosures
4. Oppose to Accounting Convergence (IFRS)
- Standardisation is simply westernisation (i.e. Anglo-American)
- Difference between national goals and difference in needs of capital markets
- Different accounting standards bring competition
IASB & EU: EU Adoption of IFRS since 2005
1. European Financial Reporting Advisory Group Endorsement Process base on criteria
- No contrary to EU accounting directive & true and fair principle
- Conductive to European public good
- Understandable, Relevant, Reliable, Comparable
2. Standard Advice Review Group reviews EFRAG’s advice
3. Accounting Regulatory Committee vote -> European Parliament
IASB & US: Relationship with US
1. Convergence research project: Attempt to converge all difference in US GAAP & IFRS
2. Short term converge: IASB members in FASB office to exchange information and cooperate
3. All new projects assessed for convergence potential
4. US Grown from 2001 – 2008, but declined interest in IFRS since 2009 after new SEC chair
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,Semester 1 T5 Conceptual Framework for Financial Reporting
Conceptual Framework Definition
A coherent system of interrelated objectives and fundamentals that is expected to lead to
consistent standards and that prescribes the nature, function, and limits of financial accounting
and reporting
Need of Conceptual Framework
Functional View: A framework for accounting standard setting
1. Provide a framework for setting accounting standards (e.g. University to set exam reg.)
2. A basis for resolving accounting disputes (e.g. IFRSIC i.e. interpretation committee)
3. Fundamental principles which ten do not have to be repeated in acct stands (e.g. quali char)
Alternative View
1. To enhance uniformity and facilitate accounting choice
2. Help make up users
- Actual users are inconsistent, conflicting, don’t know their decision processes (which type?)
- CF defines FS users as a rational economic decision maker
- CF put attention on investors & creditors to eliminate difference between readers -> focus
- CF determines information in FS that reader should know
3. Construct institutional thinking and resolve accounting problems
Previous Conceptual Framework
FASB: Statement of Financial Accounting Concept
- Objective, Qualitative characteristics, Elements of FR, Accounting info, FS
- Recognition & measurement
- Use of cashflow information & present value
ASB: Statement of Purpose
- Objective, Qualitative characteristics, element of FR, Accounting info, FS
- Recognition & measurement
- Presentation & Accounting for other interest
IASC/IASB Conceptual Framework
1989
- To provide financial information allows economic decision making & stewardship assessment
- Users: Present and potential investors, creditors, government, other stakeholders, public
- Qualitative Characteristics
a. Understandability
b. Relevance: Predictive (feedback of past), Confirmatory value, materiality (O/M influence)
c. Reliability: Free from material error, faithfully represent, neutral, prudence, Sub over form
d. Comparability: with other entities / same entity for another date
- Measurement: Historic cost, Current Cost, NRV (R-S), PV (Expected to receive/pay)
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,Joint Project between IASB & FASB
- 2004: To create a sound foundation for future accounting standards that are principal-based,
internally consistent and internationally converged
- 2010: Completed objective and qualitative characteristics convergence
- 2012: IASB restarted CF after its suspension in 2010 to give other projects priority ->15 draft
2015: Draft Conceptual Framework for Consultation
- To improve FR by a more complete, clear and updated concept to help IASB set standards
- Immediate effect: no effect expect entity using CF to choose accounting policy
- Future effect: Guide new and revised standards
- More on public interest: Acct info isn’t the sole determinant of distributions of div & bonus
1. Objective of Financial Reporting
- Provide FI useful to existing & potential investors, lenders, other creditors in making
decisions about providing resources to the reporting entity.
- They depend on future net cash inflow to entity and assessment of mng’s stewardship
- FR have large amount of estimates and judgement
2. Qualitative Characteristic
- Fundamental: Relevance, Faithful Representation (complete, neutral, free from error)
- Enhancing: Comparability, verifiability (assumption, methods for estimation),
timeliness (in time to influence decision), understandability (clear & precise, expect know.)
- Cost must be justified by the benefit of reporting
3. Financial Statements and the Reporting Entity
- FS prepared from the perspective of the entity as a whole (i.e. consolidation) on going conc.
4. Element of Financial Statements
- A: Present econ resources controlled as a result of past event. Potentially bring econ benefit
- L: Present obligation to transfer economic resources as a result of past event
- E: Residual interest in net assets
- Income: ↑A/↓L result in ↑E Expenses: ↓A/↑L result in ↓E (Asset-liability approach)
5. Recognition & Derecognition
- Recognition: Inclusion of item in financial statement
- Disclosure: Not included in financial statement, but disclosed in accounting note
6. Measurement
- Historical Cost
- Current Cost: Fair value, Value in use for asset/Fulfilment value for liabilities)
7. Presentation and Disclosure
8. Concepts of Capital and Capital Maintenance (no work planned on this in CF)
Key Changes in Accounting Thought
1. From rules to principles: Giving direction, allowing entity specific information-> compare^
2. Focus from I/S to SoFT: Increase in value of net asset gives rise to income
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, Fair Value World View Alternative World View
1. In theory, not in practice 1. In practice not in theory
- Straight forward & simple, market value - Entity/Industry-specificity, judgement
- Assume perfect & complete market - Assume imperfect & incomplete mkt (reality)
2. Usefulness for economic decision in CM* 2. Stewardship rank =ly as decision usefulness
3. User: Current, potential investor & creditor 3. User: Present shareholders
4. Relevance is primary characteristic in FS 4. Reliability is &QC, info asymmetry in reality
5. Prudence violate faithful repre. (neutral) 5. Prudence enhance reliability
6. Entry value is inappropriate measure 6. EV is relevant measure of input to predict
Fair value measures exist price -> Future CF future CF and for stewardship purpose
7. Comprehensive income is important as is 7. Performance statement and earnings
consistent with NA change in B/S measures, more important than B/S smtime
Removal and Reinstatement of Prudence
Prudence
- Degree of caution in exercise judgment needed in estimates under uncertainty, such that
asset and income are not overstated, liabilities and expenses are not understated
- Ensures performance and capital are not overstated
- Underpin confidence of shareholders & lenders in SoFP strength and capital stewardship
- Without prudence, will rely more on mark-to-market valuation, not appropriate, complex
Neutrality
- Reported info is free from bias so as not to influence a decision or outcome
- Not to overstate e.g. income in profit really help FR users – investor/lenders make decision?
- IASB empirical evi.: Understated asset frequently led to overstated income in later period
- IASB: Prudence does not allow creation of reserve/excessive provision, deliberate
understating asset/income or overstating liability/expense, thus a neutral financial info
Semester 1 L6 Fair Value: Measurement and Valuation
Fair Value in IFRS
1. Intangible asset – optional, e.g. FV of NCI (full goodwill method) or proportional method
2. Financial instruments – required, using business model
3. PPE, impairment – Optional, e.g. in revaluation or devaluation
IFRS 13 Fair Value Measurement
- Price that would be received to sell an asset or pay to transfer a liability in an orderly
transaction between market participants at the measurement date
- Valuation Techniques
1. Market Approach: Use price in market transaction of identical or comparable A/L
2. Cost Approach: Current replacement cost
3. Income Approach: Discount future amounts to current, reflecting mkt expectation
- Price input at 3 level: (1) quoted price for identical items (2) similar items (3) unobservable M
- Disclose: Valuation techniques & input used to measure, for L(3) effect on P&L
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