Summary Advanced Financial Accounting
Lecture 1 (week 1)
Financial versus management accounting;
- financial accounting (FA) → external financial reporting
- management accounting (MA) → information useful in internal decision and
managent processes
Key concepts;
- Financial statements are an important source of information to the capital markets
and business analysts → Financial reporting helps resolve information problems,
supported by its core features and institutional environment.
- Analyzing financial statements addresses variety of questions of interest to external
stakeholders and company insiders.
- If done well, financial statement analysis follows a clear structure.
The international accounting standards board (IASB) and international financial reporting
standards (IFRS); The main issues for international accounting standards ⇒
- Should (financial) accounting be the same everywhere? No according to the lecturer
- Should it be exactly the same? Is some diversity acceptable or useful?
- Who should have the power to set international standards?
- How should the standard setter determine what the ‘right’ standards are?
The IASB and IFRS as they are today are answers to these questions, but few people think
we already have the definitive answers.
International accounting standard board;
- A private sector body
- Operates under the IFRS
Foundation (IFRSF)
- Has no responsibility to any
governmental organization
- Has no enforcement authority
- Develops and issues both main
standards (IAS / IFRS) and
interpretations (SIC / IFRIC)
IASC/IASB History Outline;
1973: founding of International
Accounting Standards Committee (IASC)
● ‘Owned’ by accountancy bodies
● Basic standards, numerous option
1987: first contacts with securities regulators (IOSCO)
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, ● More rigorous standards, reduction of options
● Aim is endorsement by US Securities and Exchange Commission (SEC) for
cross-border listing
2000:
● SEC effectively refuses endorsement
● European Commission announces mandatory application in EU by 2005
2001: IASC restructured into IASB
● Fully independent body, accountancy profession relinquishes control
2001-2012:
● Significant rewriting of standards, new standards
● Close cooperation (‘convergence’) with US Financial Accounting Standards Board
(FASB)
● Many countries follow EU and adopt IFRS, IFRS adoption seriously considered in US
● Extensive debates over governance of IASB, creation of Monitoring Board
2012-2020:
● US adoption of IFRS off the cards, completion of main convergence projects
with FASB
● Focus on improvement and maintenance of existing standards
2021:
● IFRS Foundation moves into non-financial reporting
Due Process;
Independence is key:
- Full-time Board
- Board controls technical agenda and makes all decisions on standards
Balanced by:
- Transparency: public meetings; most documentation in public
domain
- Wide consultation: discussion papers, exposure drafts, invitations to comment,
advisory groups, roundtables, etc.
- Due process oversight by trustees
- Public accountability to Monitoring Board
Undue Processes;
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, - Direct lobbying of IASB by reporting companies
- Indirect lobbying:
- through national governments, legislatures, regulators
- ultimate threat: withold, revoke, modify legal status of IFRS
IFRS in EU;
IFRS in the US;
Prior to 2000:
- Unchallenged dominance of US GAAP
Since 2002:
- Weakening position of US capital markets (‘Enron’ etc.)
- Successive convergence agreements with IASB, joint projects
- IASB criticized in rest of world for focusing on US
2007:
- Foreign issuers allowed to use IFRS without reconciliation to US GAAP
- SEC opens discussions on IFRS-use by US companies
- Intensified IASB/FASB cooperation on convergence
2012:
- Growing opposition to IFRS
- After repeated delays, SEC finally makes ‘non-decision’ in 2012
- IASB and FASB decide to finish ongoing projects, no new convergence work
What’s next?;
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, How will company reporting evolve? IASB may have done a good job in codifying traditional
financial reporting, but can it deal with more fundamental innovation?
– Impact of information/communication technology
– Broadening scope: environmental/sustainability, social responsibility
Non-financial reporting;
‘Not new’:
- Companies have ‘always’ reported ‘other’ information together with, or outside, the
financial statements. Attempts since the 1970s/1980s to develop ‘social reporting’ or
‘environmental reporting’
New urgency:
- Concerns over global issues: climate change, degradation of natural environment,
human rights ...
Proliferation of standards initiatives:
- ‘Integrated Reporting’, ‘Global Reporting Initiative’, ‘Sustainability Accounting
Standards Board’, ‘Task force on Climate-related Financial Disclosures’, etc, etc.
2021: European Union announces major legislation
- Revision of Non-financial Reporting Directive; European ‘Sustainability Reporting
Standards’
2021: IFRS Foundation responds
- Will create International Sustainability Standards Board (ISSB) next to IASB
- Issued exposure drafts of first standards (2022)
What exactly is IFRS?;
IFRS is (see IAS 1.7, IAS 8.9):
- International Accounting Standards (IAS)
- International Financial Reporting Standards (IFRS)
- Appendices/guidance explicitly identified as part of the standards
- SIC / IFRIC Interpretations
Relevant, but not part of IFRS:
- IASB’s Conceptual Framework → PART OF EXAM
What do we focus on?;
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