CHAPTER 1
Financial Reporting and Accounting Standards
ASSIGNMENT CLASSIFICATION TABLE
Topics
Questions
Concepts for
Analysis
1.
Global markets and financial reporting.
1, 2, 3, 4
4
2.
Objective of financial reporting.
5, 6, 7, 8, 9, 10
2, 3
15, 16, 17, 18
23, 24, 25
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
CA1.1
IFRS and standard-setting.
Simple
5–10
CA1.2
IFRS and standard-setting.
Simple
5–10
CA1.3
Financial reporting and accounting standards.
Simple
15–20
CA1.4
Financial accounting.
Simple
15–20
CA1.5
Need for IASB.
Simple
15–20
IASB role in standard-setting.
Simple
15–20
CA1.7
Accounting numbers and the environment.
Simple
10–15
CA1.8
Politicalization of IFRS.
15–20
CA1.10
Economic consequences.
10–15
CA1.11
Rule-making Issues.
20–25
CA1.12
Financial reporting pressures.
25–35
ANSWERS TO QUESTIONS
1. World markets are becoming increasingly intertwined. The tremendous variety and volume of both
exported and imported goods indicates the extensive involvement in international trade. As a
result, the move towards adoption of international financial reporting standards has and will continue
in the future.
2. Financial accounting measures, classifies, and summarizes in report form those activities and that
information which relate to the enterprise as a whole for use by parties both internal and external
to a business enterprise. Managerial accounting also measures, classifies, and summarizes in report
form enterprise activities, but the communication is for the use of internal, managerial parties, and
relates more to subsystems of the entity. Managerial accounting is management decision oriented
and directed more toward product line, division, and profit center reporting.
3. Financial statements generally refer to the four basic financial statements: statement of financial
position, statement of comprehensive income, statement of cash flows, and statement of changes in
equity. Financial reporting is a broader concept; it includes the basic financial statements and any
other means of communicating financial and economic data to interested external parties.
4. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right
managers and companies are able to attract investment capital. To provide unreliable and irrelevant
information leads to poor capital allocation which adversely affects the securities market.
5. A single set of high quality accounting standards ensures adequate comparability. Investors are
able to make better investment decisions if they receive financial information from a U.S. company
that is comparable to an international competitor.
6. 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 in about providing resources to the entity.
7. General-purpose financial statements provide financial reporting information to a wide variety of
users. To be cost effective in providing this information, general-purpose financial statements
provide at the least cost the most useful information possible.
8. Shareholders, creditors, suppliers, employees, and regulators all use general-purpose financial
statements. The primary user group is capital providers (shareholders and creditors).
9. The proprietary perspective is not considered appropriate because this perspective generally does
not reflect a realistic view of the financial reporting environment. Instead the entity perspective
is adopted which is consistent with the present business environment where most companies
engaged in financial reporting have substance separate and distinct from their owners.
Questions Chapter 1 (Continued)
10. This statement is not correct. The objective of financial reporting is primarily to provide information
to investors interested in assessing the company’s ability to generate net cash inflows and
management’s ability to protect and enhance the capital providers’ investments. Financial
reporting should help investors assess the amounts, timing and uncertainty of prospective cash
inflows.
11. The two organizations involved in international standard-setting are IOSCO (International Organi-
zation of Securities Commissions) and the IASB (International Accounting Standards Board.) The
IOSCO does not set accounting standards, but ensures that the global markets can operate in an
efficient and effective manner. Conversely, the IASB’s mission is to develop a single set of high
quality, enforceable and global financial reporting standards (IFRSs) for general-purpose financial
statements.
12. IOSCO is an association of organizations that regulate the world’s securities markets. Members
are generally the main financial regulators for a given country. IOSCO does not set accounting
standards.
13. The mission of the IASB is to develop, in the public interest, a single set of high quality,
enforceable global international financial reporting standards (IFRSs) for general-purpose financial
statements.
14. The purpose of the Monitoring Board is to establish a link between accounting standard-setters
and those public authorities (such as IOSCO) that generally oversee accounting standard-setters.
This board also provides political legitimacy to the overall organization.
15. The IASB preliminary views are based on research and analysis conducted by the IASB staff.
IASB exposure drafts are issued after the Board evaluates research and public response to
preliminary views. IASB standards are issued after the Board evaluates responses to the exposure
draft.
16. IASB International Financial Reporting Standards are financial accounting standards issued by the
IASB and are referred to as International Financial Reporting Standards (IFRS). The IFRS
Conceptual Framework for Financial Reporting sets forth fundamental objectives and concepts
that the Board uses in developing future standards of financial reporting. The intent of the
Conceptual Framework is to form a cohesive set of interrelated concepts that will serve as tools for
solving existing and emerging problems in a consistent manner.
17. International Financial Reporting Standards are the most authoritative, followed by International
Financial Reporting Standard Interpretations then the Conceptual Framework.
Questions Chapter 1 (Continued)
18. The International Financial Reporting Standards Interpretations Committee (IFRIC) applies a
principles-based approach in providing interpretative guidance. The IFRIC issues interpretations
that cover newly identified financial reporting issues not specifically dealt with in IFRS, and issues
where conflicting interpretations have developed, or seem likely to develop in the absence of
authoritative guidance.
19. Some major challenges facing the accounting profession relate to the following items:
Nonfinancial measurement—how to report significant key performance measurements such as
customer satisfaction indexes, backlog information and reject rates on goods purchased.
Forward-looking information—how to report more future oriented information.
Soft assets—how to report on intangible assets, such as market know-how, market dominance,
and well-trained employees.
Timeliness—how to report more real-time information.
20. The sources of pressure are innumerable, but the most intense and continuous pressure to change
or influence the development of IFRS come from individual companies, industry associations,
governmental agencies, practicing accountants, academicians, professional accounting organizations,
and investing public.
21. Economic consequences means the impact of accounting reports on the wealth positions of issuers
and users of financial information and the decision-making behavior resulting from that impact. In
other words, accounting information impacts various users in many different ways which leads to
wealth transfers among these various groups.
If politics plays an important role in the development of accounting rules, the rules will be subject
to manipulation for the purpose of furthering whatever policy prevails at the moment. No matter
how well intentioned the rule maker may be, if information is designed to indicate that investing in
a particular enterprise involves less risk than it actually does, or is designed to encourage invest–
ment in a particular segment of the economy, financial reporting will suffer an irreplaceable loss of
credibility.
22. No one particular proposal is expected in answer to this question. The students’ proposals, however,
should be defensible relative to the following criteria:
(1) The method must be efficient, responsive, and expeditious.
(2) The method must be free of bias and be above or insulated from pressure groups.
(3) The method must command widespread support if it does not have legislative authority.
(4) The method must produce sound yet practical accounting principles or standards.
The students’ proposals might take the form of alterations of the existing methodology, an accoun–
ting court (as proposed by Leonard Spacek), or governmental device.
23. Concern exists about fraudulent financial reporting because it can undermine the entire financial
reporting process. Failure to provide information to users that is accurate can lead to inappropriate
allocations of resources in our economy. In addition, failure to detect massive fraud can lead to
additional governmental oversight of the accounting profession.
Questions Chapter 1 (Continued)
24. The “expectations gap” is the difference between what people think accountants should be doing and
what accountants think they can do. It is a difficult gap to close. The accounting profession recognizes
it must play an important role in narrowing this gap. To meet the needs of society, the profession is
continuing its efforts in developing accounting standards, such as numerous pronouncements issued
by the IASB, to serve as guidelines for recording and processing business transactions in the
changing economic environment.
25. Accountants must perceive the moral dimensions of some situations because IFRS does not
define or cover all specific features that are to be reported in financial statements. In these
instances, accountants must choose among alternatives. These accounting choices influence
whether particular stakeholders may be harmed or benefited. Moral decision-making involves
awareness of potential harm or benefit and taking responsibility for the choices.
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 1.1 (Time 5–10 minutes)
Purpose—to provide the student with an opportunity to answer questions about IFRS and standard-
setting.
CA 1.2 (Time 5–10 minutes)
CA 1.3 (Time 15–20 minutes)
CA 1.4 (Time 15–20 minutes)
CA 1.5 (Time 15–20 minutes)
CA 1.6 (Time 15–20 minutes)
CA 1.7 (Time 10–15 minutes)
Purpose—to provide the student with an opportunity to describe how reported accounting numbers
might affect an individual’s perceptions and actions.
CA 1.8 (Time 15–20 minutes)
CA 1.9 (Time 10–15 minutes)
CA 1.10 (Time 10–15 minutes)
CA 1.11 (Time 20–25 minutes)
CA 1.12 (Time 25–35 minutes)
Purpose—to provide the student with a writing assignment concerning the ethical issues related to
meeting earnings targets.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 1.1
1. True.
CA 1.2
1. False. The objective emphasizes an entity perspective.
CA 1.3
CA 1.4
(a) Financial accounting is the process that culminates in the preparation of financial reports relative to
the enterprise as a whole for use by parties both internal and external to the enterprise. In contrast,
CA 1.4 (Continued)
(c) Financial statements are the principal means through which financial information is communicated to
those outside an enterprise. As indicated in (b), there are four major financial statements. However,
CA 1.5
It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily
disclose the type of information it considered important. Without a coherent body of accounting theory
and standards, each accountant or enterprise would have to develop its own theory structure and set of
CA 1.6
(a) The International Financial Reporting Standards Committee Foundation (The Foundation) is the
(b) The IASB issues three major types of pronouncements: International financial reporting standards,
conceptual framework for financial reporting, and International financial reporting standards
interpretations. Financial reporting standards issued by the IASB are referred to as International
Financial Reporting Standards (IFRS).
CA 1.6 (Continued)
The International Accounting Standards Committee (IASB predecessor) issued a document
entitled “Framework for the Preparation and Presentation of Financial Statements.” This framework
sets forth fundamental objectives and concepts that the Board uses in developing future standards
CA 1.7
Accounting numbers affect investing decisions. Investors, for example, use the financial statements of
different companies to enhance their understanding of each company’s financial strength and operating
results. Because these statements follow international accounting standards, investors can make
meaningful comparisons of different financial statements to assist their investment decisions.
Accounting numbers also influence creditors’ decisions. A commercial bank usually looks into a company’s
financial statements and past credit history before deciding whether to grant a loan and in what amount.
The financial statements provide a fair picture of the company’s financial strength (for example, short-
term liquidity and long-term solvency) and operating performance for the current period and over a
period of time. The information is essential for the bank to ensure that the loan is safe and sound.
CA 1.8
(a) Arguments for politicalization of the accounting standard-setting process:
1. Accounting depends in large part on public confidence for its success. Consequently, the
critical issues are not solely technical, so all those having a bona fide interest in the output of
accounting should have some influence on that output.
2. There are numerous conflicts between the various interest groups. In the face of this, compro-
CA 1.8 (Continued)
4. The public accounting profession made rules which business enterprises and individuals “had” to follow. For
many years, these businesses and individuals had little say as to what the standards would be, in spite of
the fact that their economic well-being was influenced to a substantial degree by those standards. It is only
natural that they would try to influence or control the factors that determine their economic well-being.
(b) Arguments against the politicalization of the accounting standard-setting process:
1. Many accountants feel that accounting is primarily technical in nature. Consequently, they feel
that substantive, basic research by objective, independent and fair-minded researchers ultimately
will result in the best solutions to critical issues, such as the concepts of income and capital,
even if it is accepted that there isn’t necessarily a single “right” solution.
2. Even if it is accepted that there are no “absolute truths” as far as critical issues are concerned,
many feel that professional accountants, taking into account the diverse interests of the various
CA 1.9
(a) Most believe the IASB process is a public private mixed approach. In many respects, the IASB is a
quasi-governmental agency in that its pronouncements are required to be followed in some
jurisdictions. For example, all public European companies are required to use IASB standards when
preparing financial statements. In fact, both the FASB and the IASB believe that IFRS has the best
potential to provide a common platform on which companies can report and investors can compare
financial information. The purely political approach is used in France and West Germany. The private,
professional approach is employed in Australia, Canada, and the United Kingdom.
CA 1.10
President Sarkozy put pressure on the IASB to craft fair value standards that favor banks. However,
by introducing politics into the standard-setting process will likely lead to the following
consequences:
1. Too many alternatives.
4. Not comprehensive in scope.
CA 1.10 (Continued)
When the resulting standards have these attributes, they will be of lower quality and the credibility
of the standard-setting process will be questioned. At the extreme, market participants will have
less confidence in accounting information and capital markets will be less liquid—cost of capital
CA 1.11
(a) Inclusion or omission of information that materially affects net income harms particular stakeholders.
Accountants must recognize that their decision to implement (or delay) reporting requirements will
have immediate consequences for some stakeholders.
CA 1.12
(a) The ethical issue in this case relates to making questionable entries to meet expected earnings
forecasts. As indicated in this chapter, businesses’ concentration on “maximizing the bottom line,”
“facing the challenges of competition,” and “stressing short-term results” places accountants in an
environment of conflict and pressure.
(b) Given that Normand has pleaded guilty, he certainly acted improperly. Doing the right thing, making
the right decision, is not always easy. Right is not always obvious, and the pressures to “bend the
rules,” “to play the game,” “to just ignore it” can be considerable.
FINANCIAL REPORTING PROBLEM
(a) The two organizations involved in international standard-setting are
International Organization of Securities Commissions (IOSCO) and the
International Accounting Standards Board (IASB).
(b) Different authoritative literature pertaining to methods of recording
FINANCIAL REPORTING CASE
(a) The International Accounting Standards Board is an independent, pri–
vately funded accounting standards-setter based in London, UK. The
Board is committed to developing, in the public interest, a single set of
(b) In summary, the following groups might benefit from the use of Inter–
national Accounting Standards:
• Investors, investment analysts and stockbrokers: to facilitate inter–
national comparisons for investment decisions.
(c) The fundamental argument against convergence is that, to the extent
that international differences in accounting practices result from under–
lying economic, legal, social, and other environmental factors, convergence
may not be justified. Different accounting has grown up to serve the
FINANCIAL REPORTING CASE (Continued)
The most obvious obstacle to convergence is the sheer size and deep
rootedness of the differences in accounting. These differences have
ACCOUNTING, ANALYSIS AND PRINCIPLES
ACCOUNTING
(a) The requirements will depend on the jurisdiction in which they intend
to sell the securities. The International Accounting Standards Board
(b) The two entities that are primarily responsible for establishing IFRS are
IOSCO (International Organization of Securities Commissions) and the
IASB (International Accounting Standards Board).
ANALYSIS
(a) Decision-usefulness involves providing investors interested in financial
reporting information that is useful for making decisions.
(b) The financial statements provide information on company performance
ACCOUNTING, ANALYSIS AND PRINCIPLES (Continued)
PRINCIPLES
The hierarchy of IFRS to determine what recognition, valuation, and disclosure
requirements should be used are:
1. International Financial Reporting Standards;
2. International Accounting Standards; and
RESEARCH CASE
The following responses are drawn from the IFRS Conceptual Framework
(a) As indicated in the Conceptual Framework for Financial Reporting,
“The objective of financial statements is to provide financial
(b) According to paragraph 21 of the Conceptual Framework, notes and
supplementary schedules serve in this role. For example, they may
(c) As indicated in paragraphs 13 and 14, financial statements prepared to
meet the objective of financial reporting meet the common needs of most
users. However, financial statements do not provide all the information
GAAP CONCEPTS and APPLICATION
GAAP1.1 Generally accepted accounting principles (GAAP) for U.S.
companies are developed by the Financial Accounting
GAAP1.2 Differences between U.S. GAAP and IFRS should not be
surprising because standard-setters have developed standards
in response to different user needs. In some countries, the