Financial Accounting
Vrije Universiteit Amsterdam 2022
Summary of the lectures, assignments & book chapters
Week 1
Lecture 1.2: The regulatory Framework of Financial Reporting
Why is there an emphasis on regulations, why are there rules for accounting?
à Because we cannot trust everybody! So, we need to prevent:
• Covering up mismanagement
• Fraud and deception
• Lack of transparency
• Abuse of power
Accounting standards / accounting standard setters are clearly important! Why?
• Politicians do not care that much about technical issues of accounting.
• Legislative processes are slow.
International standard setter
1973-2000: International Accounting Standards (IAS).
• Issued by International Accounting Standards Committee (IASC).
• Private-sector body with parttime members.
• In most countries, IAS have status of recommendations or best practices.
2001: International Financial Reporting Standards (IFRS).
• Issued by International Accounting Standards Board (IASB).
• Private-sector body with full-time, independent members.
• Since 2001, use IFRS by listed companies has become mandatory in most countries.
International harmonization of ‘national GAAP’ = Generally accepted accounting principles.
International Accounting Standards Board (IASB)
1. Independent standard-setting and related activities, by
IFRS foundation (IASB and IFRS interpretations committee).
2. Governance and oversight, by
IFRS foundation trustees.
3. Public accountability, by
IFRS foundation monitoring board.
Application of IFRS in Europe
Consolidated financial statements Separate Financial statements
Companies with exchange- Mandatory Member-state option to permit or
listed securities require
Non-listed companies Member-state option to permit or Member-state option to permit or
require require
Interactive video 1: “Condorsement” approach by the US towards IFRS
Question 1: What two words do condorsement combine?
1. Convergence
2. Endorsement
Question 2: What is the FASB’s role in convergence and endorsement?
à Align US GAAP with IFRS and include IFRS standards to US GAAP.
Question 3: What are the 4 good things S&P thinks of condorsement approach?
1. It will eventually lead to international standard in the US.
2. During transition, FASB will be actively involved in implementing IFRS standards.
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, 3. After transition, FASB can still involve by giving advice (do research etc.).
4. SEC will be involved in the governance and monitoring role and retain ultimate authority to establish
accounting standards in the US.
Question 4: What are the 2 “not so good” parts about the condorsement approach?
1. The endorsement phase, FASB can reject or modify IFRS rules, creating US flavor.
2. FASB could be slow (lag in implementation of new standards).
Interactive video 2: IFRS standard setting steps
Question 1: After selecting topics from the research program, what is the purpose of IFRS to publish
discussion paper?
à Set out their ideas and seek feedback on which project to proceed with.
Question 2: What is the exposure draft for?
à Preliminary idea of standard to encourage feedback from the public.
Question 3: Which of the following is true?
• The accounting standard is implemented immediately after issued. Incorrect
• You, as a student from VU, can participate in the writing of the “discussion paper”. Incorrect
• Everyone can comment on the “exposure draft”. Correct
Assignments week 1
For each country, in turn, assume that your group is the government of that country. discuss whether you
would require all companies listed in the exchanges in your country to prepare their financial statement
according to IFRS or follow your own national accounting standard. Decide by majority vote, if
necessary.
General reasons for mandatory IFRS use:
• Makes it easier for companies from your country to raise finance internationally.
• Makes it easier for companies from other countries to list on your exchanges.
• All our major trading partners use IFRS.
• IFRS is generally seen as of high quality: using national standards may make it look as if financial
reporting in your country is of lower quality.
• IFRS is a complete set of standards, we don’t have the resources in our country to develop
standards of similar quality.
Reasons against mandatory IFRS use:
• The quality of IFRS is not perfect, we can set better standards in our country.
• IFRS are high quality standards, but as a global standard it cannot be optimally adjusted to our
national circumstances.
• IFRS are of high quality, and we might want to develop something that looks very much like it, but
we want to retain sovereignty over our own rules, so we don’t adopt IFRS in a formal sense, we
converge our national standards with IFRS.
• IFRS is too complex, especially for smaller listed companies; our country doesn’t have sufficient
qualified people to make sure that IFRS is properly applied.
What are the main reasons why the discussion, and perhaps the decision, is not simply the same
from country to country?
The discussion based on these arguments may well play out differently in different countries. Small
countries with few resources may choose IFRS because they lack the capacity to develop their own
standards, and because they want to signal to foreign investors that financial statements are of high quality.
However, the complexity of IFRS is certainly a problem in some countries, and if your companies are
mainly financed locally, requiring them to adopt full IFRS may be just too much of an administrative burden.
The sovereignty argument is likely to weigh more heavily for large countries. Due to Brexit, the UK might
revise their IFRS policy. However, the UK has a capital market that is very internationally oriented. China
does not have such a long history (with national standards, like US and UK), and the standards it has
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, developed rely quite heavily on IFRS. Sovereignty is an issue there, as well as the idea that there are
specific national characteristics that are not properly taken care of in IFRS.
Week 2
Lecture 2.1: Financial accounting basics & the conceptual framework
Basic accounting equation:
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑒𝑞𝑢𝑖𝑡𝑦 + 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
From which follows:
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 + (∆𝑜𝑡ℎ𝑒𝑟 𝑎𝑠𝑠𝑒𝑡𝑠 − ∆𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠) − 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑏𝑦 𝑜𝑤𝑛𝑒𝑟𝑠
+ 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑡𝑜 𝑜𝑤𝑛𝑒𝑟𝑠
𝑤𝑖𝑡ℎ accruals = ∆𝑜𝑡ℎ𝑒𝑟 𝑎𝑠𝑠𝑒𝑡𝑠 − ∆𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Traditional accounting principles/conventions
• Realization principle
Recognize revenue only when earned.
• Matching principle
Match revenue with associated expense in the period.
• Going concern principle
Assume that the company will continue to operate.
• Cost principle
Assets are recorded at cost rather than current value.
• Prudence principle (conservatism)
Revenue recognition when certain, loss recognition when probable.
The objective of financial reporting: to provide financial information that is useful to users in making
decisions relating to providing resources to the entity.
Users’ decisions involve decisions about:
• Buying, selling, or holding equity or debt instruments.
• Providing or settling loans and other forms of credit.
• Voting, or otherwise influencing management’s actions.
To make these decisions, users assess:
• Prospects for future net cash inflows to the entity.
• Management’s stewardship of the entity’s economic resources.
To make both of these assessments, users need information about both:
• The entity’s economic resources, claims against the entity & changes in those resources & claims.
• How efficiently and effectively management has discharged its responsibilities to use the entity’s
economic resources.
Qualitative characteristics of decision-useful information
Fundamental qualitative characteristics
Relevance Faithful representation
• Information is relevant if it is capable of • Information must faithfully represent the
making a difference to the decisions made substance of what it purports to represent.
by users. • A faithful representation is, to the maximum
• Financial information is capable of making a extent possible, complete, neutral, and free
difference in decisions if it has predictive from error.
value or confirmatory value. • A faithful representation is affected by level
of measurement uncertainty.
Enhancing qualitative characteristics
1 Comparability 2 Verifiability 3 Timeliness 4 Understandability
• These four qualitative characteristics enhance the usefulness of information
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