INTERMEDIATE
FINANCIAL ACCOUNTING
SUMMARY OF ALL LECTURES
,1 FINANCIAL REPORTING, IFRS DEVELOPMENT AND
CONCEPTUAL FRAMEWORK
WHAT IS (FINANCIAL) ACCOUNTING?
Financial Accounting is a collection and processing of financial information to meet the decision-
making needs of parties external to the organization. This is the gathering of all economic transactions
that happened over a period that is summarized and later reported to third parties, such as investors
governments, citizenship, etc. It is regulated by a set of accounting standards.
Management Accounting is a collection and processing of financial and nonfinancial information to
meet the decision-making needs of parties internal to the organization. This includes analyses that
managers can do to better inform themselves about certain issues within the company. This
information is not regulated at all and differs from firm to firm.
FINANCIAL REPORTING IN CAPITAL MARKETS
ECONOMIC (THEORY) REASONING
Firms need economic resources, capital providers. Capital providers however do not know anything
about the firm → information asymmetry. The firm has a lot of information, but the capital providers
don’t. So there is a demand for information from these capital providers. This information is
standardized in financial reporting. (Absence of reporting = Wild Wild West! → Adverse selection) The
capital providers will analyze this financial information and then decide to fund the firm with money or
not.
For an efficient functioning, capital providers write contracts to prevent agency conflicts and moral
hazard behavior.
Firms are global and need to communicate. They can do this through social media, public events,
conference calls and business press. Conference calls are standardized events that happen quarterly
for every public company to report quarterly earnings.
Another way to communicate information from the firm to capital providers and stakeholders, is via
an annual report, which is our focus in this course.
The annual report generally starts with a letter from the CEO or the chairman of the board of directors
to shareholders. It also includes information with respect to the financial statements.
ANNUAL REPORT VS. FINANCIAL STATEMENTS
The Annual Report is unregulated and voluntary. It is generally a non-standard summary of company
activities, companies can include any information that they want. It usually includes financial
statements, but many other things like a CEO letter, employee and gender issues, operation
improvements, new technological developments etc.
It is distributed through media, firm websites, etc.
,Financial statements is very standardized information and are regulated by Generally Accepted
Accounting Principles (GAAP). The preparation of these statements is heavily regulated by a set of
rules/standards. They must be deposited into national registers → Chamber of Commerce (KvK) in the
NL and Registro Mercantil in Spain. They comply with accounting standards (e.g. German GAAP or US
GAAP) and usually include all financial statements and notes, depending on firm characteristics
(broader or more limited, differs per company).
In the Netherlands the financial statements comprise:
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Financial statements (FS):
▪ Statement of financial position (balance sheet)
▪ (Comprehensive) Income statement (Profit & Loss Account)
▪ Statement of cash flows
▪ Statement of changes in shareholders’ equity
Accompanying notes to the above FS are also mandatory.
ACCOUNTING STANDARDS
ROLE OF FINANCIAL REPORTING STANDARDS
To satisfy the need for financial reporting, governments establish a set of rules:
General Accepted Accounting Principles (GAAP)
A lot of developed countries have their own accounting standards:
▪ US GAAP
▪ UK GAAP
▪ Plan General de Comptabilite (France)
▪ Plan General Contable (Spain)
▪ …
But a need for an international set of rules was obvious. There was a need for a single set of rules
established by a single standard-setting body which is:
▪ High-quality
▪ Understandable
▪ Enforceable
▪ Globally accepted
▪ Comparable (companies are comparable across the globe)
to ensure that relevant and faithful information is disclosed.
For this, the International Financial Reporting Standards (IFRS) were developed.
DEVELOPMENT OF IFRS
There was a need of globalizing operations from companies, so investors started looking beyond their
borders to invest and get return in the 80s. Then they started thinking: how can we compare financial
information of companies throughout the world? For this a set of countries, namely Australia, Canada,
France, Japan, Mexico, Netherlands, USA, UK, Ireland and West Germany, started an initiative to
converge all the domestic standards into a single set of accounting standards. They formed the
International Accounting Standards Committee (IASC) that performed a series of international
accounting standards from its foundation in 1973 till 2001. They made 41 International Accounting
Standards: IAS 1 to 41.
, In 2001 there was a change. The IASC was renamed to International Accounting Standards Board
(IASB) which was in charge of developing the new international standards. Those standards were now
called the International Financial Reporting Standards (IFRS). From 2001 until now there are 17 IFRS:
IFRS 1 to 17. There are new updates and additions to the old IAS. Whenever there is an IFRS that
touches upon a topic covered by IAS, IFRS fully amends or replaces the content written in IAS. So IFRS
1 to 17 are always active, but IAS 1 to 41 are not always active if one IFRS has covered any of the IAS
set before 2001.
Alongside there is also a Standards Interpretations Committee (SIC) that was formed in 1997. This
committee comments on the accounting standards set by the IASC. In 2002 this committee was
renamed the International Financial Reporting Interpretations Committee (IFRIC). It still comments on
the different IFRS issues, like when companies have doubts about how to interpret and apply any of
the IFRS set by the IASB. Interpretations issued by the IFRS Interpretations Committee are considered
authoritative and must be followed. These interpretations cover (1) newly identified financial
reporting issues not specifically dealt with in IFRS and (2) issues where unsatisfactory or conflicting
interpretations have developed, or seem likely to develop, in the absence of authoritative guidance.
All the IFRS can be found here: https://www.iasplus.com/en/standards
IFRS is used by most countries in the world. One of the exceptions is the USA. It does not use IFRS, but
does allow companies to disclose using IFRS. Also China and Japan are not using IFRS.
IASB STANDARD-SETTING STRUCTURE
The IASB consists of 13 members that are mandated to provide the accounting standards to
companies and countries. The IASB is surrounded by governing bodies of members that help them
produce these standards.
The IFRS Foundation is the mother of the IASB. It provides oversight to the IASB, IFRS Advisory Council,
and IFRS Interpretations Committee. In this role, it appoints members, reviews effectiveness, and
helps in the fundraising efforts for these organizations. It is the legal entity that is making revenue. It is
in charge of talking to countries that ask for funding, producing different interpretations /
documentation and sell this, etc. It provides the funding for all the International Accounting Standards
to be produced. It has 22 trustees. They appoint the members of the IFRS Advisory Council. This
council informs the foundation about the developments of the standards and advices the 13 members
