CHAPTER 1
Financial Reporting and Accounting
Standards
LEARNING OBJECTIVES
1. Describe the growing importance of global financial markets and its relation to
financial reporting.
2. Identify the major financial statements and other means of financial reporting.
3. Explain how accounting assists in the efficient use of scarce resources.
CHAPTER REVIEW
1. Chapter 1 describes the environment that has influenced both the development and use
of the financial accounting process. The chapter traces the development of financial
Global Markets
2. (L.O. 1) World markets are becoming increasingly intertwined. And, due to technological
advances and less onerous regulatory requirements, investors are able to engage in
3. (L.O. 2) Financial accounting is the process that culminates in the preparation of
financial reports on the enterprise for use by both internal and external parties.
4. Financial statements are the principal means through which a company communicates
its financial information to those outside it. The financial statements most frequently
5. (L.O. 3) Accounting is important for markets, free enterprise, and competition because it
6. (L.O. 4) To facilitate efficient capital allocation, investors need relevant information and a
faithful representation of that information to enable them to make comparisons across
borders. A single, widely accepted set of high-quality accounting standards is a necessity
7. The major standard-setters of the world, coupled with regulatory authorities, now
recognize that capital formation and investor understanding is enhanced if a single set of
high-quality accounting standards is developed.
Objective of Financial Reporting
8. (L.O. 5) The objective of general-purpose financial reporting is 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 resources to
the entity.
a. General-purpose financial statements provide at the least cost the most useful
9. Information generated using the accrual basis of accounting provides a better indication
of a company’s present and continuing ability to generate favorable cash flows than the
cash basis.
Standard-Setting Organizations
10. (L.O. 6) The main international standard setting organization is the International
11. The two organizations that have a role in international standard-setting are the
International Organization of Securities Commissions (IOSCO) and the IASB. (A
detailed discussion of the U.S system is provided at the book’s companion website)
a. The IOSCO does not set accounting standards; it is dedicated to ensuring that the
global markets can operate in an efficient and effective basis.
b. The member agencies have agreed to:
12. IOSCO recommends that its members allow multinational issuers to use IFRS in cross–
13. The international standard-setting structure is composed of the following four
organizations:
a. The IFRS foundation (22 trustees) provides oversight to the IASB, IFRS Advisory
Council, and IFRS Interpretations Committee. It appoints members, reviews
effectiveness, and helps in fundraising efforts for these organizations.
14. In addition, as part of the governance structure, a Monitoring Board was created. It
establishes a link between accounting standard-setters and those public authorities that
generally oversee them (e.g. IOSCO). It also provides political legitimacy to the overall
organization.
15. The IASB has a thorough, open and transparent due process in establishing financial
accounting standards. It consists of the following elements:
a. An independent standard-setting board overseen by geographically and professionally
diverse body of trustees.
16. To implement its due process, the IASB follows specific steps to develop a typical IFRS.
a. Topics are identified and placed on the Board’s agenda.
17. The following characteristics of the IASB are meant to reinforce the importance of an
open, transparent, and independent due process.
a. Membership: The Board consists of 13 well-paid members, from different countries,
serving 5-year renewable terms.
18. The IASB issues three major types of pronouncements.
a. International Financial Reporting Standards: To date the IASB has issued 17
standards. In addition, the previous international standard-setting body, the
International Accounting Standards Committee (IASC) issued 41 International
19. (L.O. 7) The IASB has no regulatory mandate and no enforcement mechanism. It relies
on other regulators to enforce the use of its standards. For example, the European Union
requires publicly traded member country companies to use IFRS. Any company indicating
Financial Reporting Challenges
20. (L.O. 8) Although IFRS are developed by using sound research and a conceptual
framework that has its foundation in economic reality, a certain amount of pressure and
21 The expectations gap is the difference between what the public thinks accountants
22. The significant financial reporting challenges facing the accounting profession are:
a. Non-financial measurements such as customer satisfaction indexes, backlog infor-
mation, and reject rates on goods purchased.
23. In accounting, ethical dilemmas are encountered frequently. The whole process of ethical
sensitivity and selection among alternatives can be complicated by pressures that may
take the form of time pressure, job pressures, client pressures, personal pressures, and
peer pressures. And, there is no comprehensive ethical system to provide guidelines.
LECTURE OUTLINE
The material in this chapter usually can be covered in one on two class sessions, depending
on whether the chapter appendix is discussed.
A. (L.O. 1) Global Markets and IFRS.
1. World markets are becoming more intertwined.
B. (L.O. 2) What are the major financial statements and other means of financial reporting?
Identification, measurement, and communication of financial information (discuss
difference between financial statements and financial reporting).
a. Financial statements:
(1) Income statement or statement of comprehensive income.
b. Financial reporting:
(1) President’s letter or supplementary schedules in the annual report.
C. (L.O. 3) How does accounting assist in the allocation of scarce resource?
1. A world of scarce resources. Accounting helps to identify efficient and inefficient users
of resources.
D. (L.O. 4) Why the need for high-quality standards?
1. To facilitate efficient capital allocation.
3. Identify the elements involved:
a. A single set of high-quality accounting standards established by a single standard–
setting body.
4. Major standard-setters and regulatory authorities around the world recognize that
capital formation and investor understanding will be enhanced by a single set of high–
quality accounting standards.
E. (L.O. 5) Define the objective of financial reporting.
2. Describe the elements of the objective:
a. General-Purpose Financial Statements: provide the most useful information
possible to a wide variety of users for the least cost.
b. Equity Investors and Creditors: are the primary user group and have the most
critical and immediate need for information in financial reports, in order to:
c. Entity Perspective: companies are viewed as separate and distinct from both
their shareholders and creditors.
shareholders is not appropriate.
e. Decision-Usefulness: information contained in the financial statements should
be useful to investors in order to:
F. (L.O. 6) Identify the major standard-setting bodies and their roles in the standard-setting
process.
1. International Organization of Securities Commissions (IOSCO):
(a) Does not set accounting standards.
2. International standard-setting structure.
a. International Financial Reporting Standards Foundation (IFRS Foundation):
(1) Selects members of the IASB, the IFRS Advisory Council, and the IFRS
Interpretations committee.
b. International Accounting Standards Board (IASB): Develops a single set of
high quality enforceable, and global IFRS for general-purpose financial
statements.
d. IFRS Advisory Council: Consults with the IASB on major policies and technical
issues.
G. Discuss the elements comprising due process:
1. An independent standard-setting board overseen by a geographically and profession–
ally diverse body of trustees.
2. A thorough and systematic process for developing standards.
F. Describe the specific steps the IASB takes to implement due process:
1. Topics identified and placed on the Board’s agenda.
G. Discuss the characteristics of the IASB.
1. Membership
H. The IFRS issues 3 major types of pronouncements.
1. International Financial Reporting Standards (IFRS) (includes remaining Interna-
tional Accounting Standards (IAS))
I. (L.O. 7) IFRS hierarchy.
1. Hierarchy of pronouncements in the following order:
a. IFRS, International Accounting Standards (IAs) that have not been amended a
J. (L.O. 8) Describe the challenges facing financial reporting.
1. IFRS in a Political Environment.
2. The expectations gap: What people think accountants should be doing versus what
accountants think they can do.
3. Describe significant financial reporting issues:
a. Non-financial measurements
4. Discuss the steps to take in solving an ethical dilemma.
a. Recognize an ethical dilemma exists.
K. Global Accounting Insights
1. Why a single set of international accounting standards is needed.
a. Multinational corporations
2. U. S. GAAP versus IFRS
a. Similarities