PREVIEW OF CHAPTER 1

FINANCIAL ACCOUNTING
LECTURE 1: OVERVIEW

FMT – HANU – DINH LE MAI

INTERMEDIATE ACCOUNTING
IFRS 2 ED Chapter 1, 2, 3
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
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Financial Reporting and GLOBAL MARKETS

1 Accounting Standards World markets are becoming increasingly intertwined.

Top 20 Global Companies In Terms of Sales

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the growing importance of 5. Identify the objective of financial reporting.

global financial markets and its relation 6. Identify the major policy-setting bodies and
to financial reporting. their role in the standard-setting process.
2. Identify the major financial statements and 7. Explain the meaning of IFRS.
other means of financial reporting.
8. Describe the challenges facing financial
3. Explain how accounting assists in the efficient reporting.
use of scarce resources. ILLUSTRATION 1-1

4. Explain the need for high-quality standards.

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GLOBAL MARKETS GLOBAL MARKETS

Significant number of foreign companies are found on Financial Statements and Financial Reporting
national exchanges. ILLUSTRATION 1-2 Essential characteristics of accounting are:
International Exchange Statistics

1. the identification, measurement, and communication of

financial information about

2. economic entities to

3. interested parties.

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 GLOBAL MARKETS GLOBAL MARKETS

Economic Entity Financial Statements Additional Information Accounting and Capital Allocation
Financial Statement of President’s letter
Information Resources are limited. Efficient use of resources often
Financial Position
Prospectuses determines whether a business thrives.
Accounting? Income Statement
Reports filed with
or Statement of ILLUSTRATION 1-3
Identify governmental Capital Allocation Process
Comprehensive
agencies
and Income
Measure News releases
Statement of Cash
and Flows Forecasts
Communicate Statement of Environmental
Changes in Equity impact statements
Note Disclosures Etc.

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GLOBAL MARKETS GLOBAL MARKETS

High Quality Standards High Quality Standards

Globalization demands a single set of high-quality Globalization demands a single set of high-quality
international accounting standards. Some elements: international accounting standards. Some elements:
1. Single set of high-quality accounting standards established by 7. Common delivery systems (e.g., eXtensible Business
a single standard-setting body. Reporting Language—XBRL).
2. Consistency in application and interpretation. 8. Common approach to corporate governance and legal
3. Common disclosures. frameworks around the world.

4. Common high-quality auditing standards and practices.

5. Common approach to regulatory review and enforcement.
6. Education and training of market participants.
(Continued)

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OBJECTIVE OF FINANCIAL ACCOUNTING OBJECTIVE OF FINANCIAL ACCOUNTING

Objective: Provide financial information about the reporting General-Purpose Financial Statements
entity that is useful to ► Provide financial reporting information to a wide variety
► present and potential equity investors, of users.

► lenders, and ► Provide the most useful information possible at the

least cost.
► other creditors

in making decisions about providing resources to the entity. Equity Investors and Creditors
► Investors and creditors are the primary user group.

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 OBJECTIVE OF FINANCIAL ACCOUNTING STANDARD-SETTING ORGANIZATIONS

Entity Perspective Main international standard-setting organization:

► Companies viewed as separate and distinct from their ► International Accounting Standards Board (IASB)
owners (shareholders).
● Issues International Financial Reporting Standards
(IFRS).
Decision-Usefulness
● Standards used on most foreign exchanges.
► Investors are interested in assessing
1. the company’s ability to generate net cash inflows and ● IFRS used in over 115 countries.

2. management’s ability to protect and enhance the capital ● Organizations that have a role in international standard-
providers’ investments. setting are the International Organization of Securities
Commissions (IOSCO) and the IASB.

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STANDARD-SETTING ORGANIZATIONS STANDARD-SETTING ORGANIZATIONS

International Organization of Securities International Accounting Standards Board

Commissions (IOSCO) (IASB)
► Does not set accounting standards. Composed of four organizations—

► Dedicated to ensuring that global ► IFRS Foundation

markets can operate in an efficient ► International Accounting Standards Board (IASB)

and effective basis.
► IFRS Advisory Council
http://www.iosco.org/
► Supports the use of IFRS as the
► IFRS Interpretations Committee
single set of international
standards in cross-border offerings
and listings.
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International Accounting Standards Board International Accounting Standards Board

ILLUSTRATION 1-4
International Standard-Setting Structure Due Process
The IASB due process has the following elements:

1. Independent standard-setting board;

2. Thorough and systematic process for developing
standards;
3. Engagement with investors, regulators, business leaders,
and the global accountancy profession at every stage of
the process; and
4. Collaborative efforts with the worldwide standard-setting
community.
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 International Accounting Standards Board International Accounting Standards Board

Types of Pronouncements
► International Financial Reporting Standards.

► Conceptual Framework for Financial Reporting.

► International Financial Reporting Standards Interpretations.

ILLUSTRATION 1-5
International
Standard-Setting
Structure

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STANDARD-SETTING ORGANIZATIONS FINANCIAL REPORTING CHALLENGES

Hierarchy of IFRS The Expectations Gap

Companies first look to: What the public thinks accountants should do vs. what
1. International Financial Reporting Standards; International accountants think they can do.
Financial Reporting Standards, International Accounting
Standards (issued by the predecessor to the IASB), and IFRS Significant Financial Reporting Issues
interpretations originated by the IFRS Interpretations
► Non-financial measurements
Committee (and its predecessor, the IAS Interpretations
Committee); ► Forward-looking information

2. The Conceptual Framework for Financial Reporting; and ► Soft assets

3. Pronouncements of other standard-setting bodies that use a ► Timeliness

similar conceptual framework (e.g., U.S. GAAP).
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FINANCIAL REPORTING CHALLENGES GLOBAL ACCOUNTING INSIGHTS

Ethics in the Environment of Financial INTERNATIONAL FINANCIAL REPORTING

Accounting Most agree that there is a need for one set of international accounting
standards. Here is why:
► Companies that concentrate on “maximizing the bottom
• Multinational corporations
line,” “facing the challenges of competition,” and
“stressing short-term results” place accountants in an • Mergers and acquisitions

environment of conflict and pressure. • Information technology

• Financial markets
► IFRS do not always provide an answer.

► Technical competence is not enough when encountering

ethical decisions.

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 GLOBAL ACCOUNTING INSIGHTS GLOBAL ACCOUNTING INSIGHTS

Relevant Facts Relevant Facts

Following are the key similarities and differences between U.S. GAAP and Similarities
IFRS related to the financial reporting environment. • Both the IASB and the FASB have essentially the same governance
Similarities structure, that is, a Foundation that provides oversight, a Board, an
• Generally accepted accounting principles (GAAP) for U.S. companies are Advisory Council, and an Interpretations Committee.
developed by the Financial Accounting Standards Board (FASB). The FASB • The FASB relies on the U.S. SEC for regulation and enforcement of its
is a private organization. The U.S. Securities and Exchange Commission standards. The IASB relies primarily on IOSCO for regulation and
(SEC) exercises oversight over the actions of the FASB. The IASB is also a enforcement of its standards.
private organization. Oversight over the actions of the IASB is regulated by • Both the IASB and the FASB are working together to find common grounds
IOSCO. for convergence. A good example is the recent issuance of a new standard
on revenue recognition that both organizations support. Also, the Boards
are working together on other substantial projects such as the
measurement and classification of financial instruments.
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GLOBAL ACCOUNTING INSIGHTS PREVIEW OF CHAPTER 2

Relevant Facts
Differences
• U.S. GAAP is more detailed or rules-based. IFRS tends to simpler and
more flexible in the accounting and disclosure requirements. The difference
in approach has resulted in a debate about the merits of principles-based
versus rules-based standards.
• 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 primary users of financial
statements are private investors. In others, the primary users are tax
authorities or central government planners. In the United States, investors
and creditors have driven accounting-standard formulation. Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
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Conceptual Framework CONCEPTUAL FRAMEWORK

2 for Financial Reporting Conceptual Framework establishes the concepts that
underlie financial reporting.
LEARNING OBJECTIVES
Need for a Conceptual Framework
After studying this chapter, you should be able to:

1. Describe the usefulness of a conceptual 5. Define the basic elements of financial ► Rule-making should build on and relate to an established
framework. statements.
body of concepts.
2. Describe efforts to construct a conceptual 6. Describe the basic assumptions of
accounting.
framework. ► Enables IASB to issue more useful and consistent
3. Understand the objective of financial 7. Explain the application of the basic principles
reporting. of accounting. pronouncements over time.
4. Identify the qualitative characteristics of 8. Describe the impact that the cost constraint
accounting information. has on reporting accounting information.

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 CONCEPTUAL FRAMEWORK CONCEPTUAL FRAMEWORK

Development of a Conceptual Framework Overview of the Conceptual Framework

Presently, the Conceptual Framework is comprises of the following. Three levels:
• Chapter 1: The Objective of General Purpose Financial Reporting
 First Level = Objectives of Financial Reporting
• Chapter 2: The Reporting Entity (not yet issued)
• Chapter 3: Qualitative Characteristics of Useful Financial  Second Level = Qualitative Characteristics and
Information
Elements of Financial Statements
• Chapter 4: The Framework, comprised of the following:
1. Underlying assumption—the going concern assumption;  Third Level = Recognition, Measurement, and
2. The elements of financial statements; Disclosure Concepts.
3. Recognition of the elements of financial statements;
4. Measurement of the elements of financial statements; and
5. Concepts of capital and capital maintenance.
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ASSUMPTIONS PRINCIPLES CONSTRAINTS

1. Economic entity
2. Going concern
1. Measurement
2. Revenue recognition
1. Cost
FIRST LEVEL: BASIC OBJECTIVE
Third level
3. Monetary unit 3. Expense recognition The "how"—
4. Periodicity 4. Full disclosure implementation
5. Accrual
OBJECTIVE
QUALITATIVE “To provide financial information about the reporting entity
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets that is useful to present and potential equity investors,
qualities 2. Liabilities Second level
2. Enhancing 3. Equity Bridge between
lenders, and other creditors in making decisions about
qualities 4. Income
levels 1 and 3 providing resources to the entity.
5. Expenses
ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting OBJECTIVE
Provide information  Provided by issuing general-purpose financial statements.
about the reporting
entity that is useful  Assumption is that users need reasonable knowledge of business
to present and potential First level and financial accounting matters to understand the information.
equity investors, The "why"—purpose
lenders, and other of accounting
creditors in their
capacity as capital
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SECOND LEVEL: FUNDAMENTAL CONCEPTS SECOND LEVEL: FUNDAMENTAL CONCEPTS

Qualitative Characteristics of Accounting

Information ILLUSTRATION 2-2
Hierarchy of Accounting
Qualities
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more useful)
information from inferior (less useful) information for
decision-making purposes.

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 SECOND LEVEL: FUNDAMENTAL CONCEPTS
Relevance
Fundamental Quality—Relevance

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

To be relevant, accounting information must be capable of making

a difference in a decision.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance Fundamental Quality—Relevance

Financial information has predictive value if it has value as an input to Relevant information also helps users confirm or correct prior
predictive processes used by investors to form their own expectations expectations.
about the future.
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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Faithful Representation
Fundamental Quality—Relevance

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

Information is material if omitting it or misstating it could influence

decisions that users make on the basis of the reported financial
information.
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SECOND LEVEL: FUNDAMENTAL CONCEPTS SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and descriptions Completeness means that all the information that is necessary for
match what really existed or happened. faithful representation is provided.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to favor An information item that is free from error will be a more accurate
one set of interested parties over another. (faithful) representation of a financial item.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities Enhancing Qualities

Information that is measured and reported in a similar manner for Verifiability occurs when independent measurers, using the same
different companies is considered comparable. methods, obtain similar results.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities Enhancing Qualities

Timeliness means having information available to decision-makers Understandability is the quality of information that lets reasonably
before it loses its capacity to influence decisions. informed users see its significance.

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SECOND LEVEL: BASIC ELEMENTS

Basic Elements Elements of Financial Statements

A resource controlled by the entity as a

Asset
result of past events and from which
future economic benefits are expected to
Liability flow to the entity.

ILLUSTRATION 2-7 Equity

Conceptual Framework
for Financial Reporting

Income

Expenses
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SECOND LEVEL: BASIC ELEMENTS SECOND LEVEL: BASIC ELEMENTS

Elements of Financial Statements Elements of Financial Statements

Asset Asset
A present obligation of the entity arising
from past events, the settlement of which
Liability Liability
is expected to result in an outflow from the
entity of resources embodying economic
The residual interest in the assets of the
Equity benefits. Equity
entity after deducting all its liabilities.

Income Income

Expenses Expenses
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 SECOND LEVEL: BASIC ELEMENTS SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements Elements of Financial Statements

Asset Asset

Liability Liability

Equity Increases in economic benefits during the Equity Decreases in economic benefits during the
accounting period in the form of inflows or accounting period in the form of outflows
enhancements of assets or decreases of or depletions of assets or incurrences of
Income Income
liabilities that result in increases in equity, liabilities that result in decreases in equity,
other than those relating to contributions other than those relating to distributions to
Expenses from equity participants. Expenses
equity participants.
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THIRD LEVEL: RECOGNITION, MEASUREMENT, THIRD LEVEL: ASSUMPTIONS

AND DISCLOSURE CONCEPTS
Basic Assumptions
These concepts explain how companies should recognize,
Economic Entity – company keeps its activity separate from its
measure, and report financial elements and events.
owners and other business unit.
Recognition, Measurement, and Disclosure Concepts Going Concern - company to last long enough to fulfill
ASSUMPTIONS PRINCIPLES CONSTRAINTS objectives and commitments.
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition Monetary Unit - money is the common denominator.
3. Monetary unit 3. Expense recognition
Periodicity - company can divide its economic activities into
4. Periodicity 4. Full disclosure
5. Accrual time periods.

ILLUSTRATION 2-7 Accrual Basis of Accounting – transactions are recorded in the

Conceptual Framework for
Financial Reporting periods in which the events occur.
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THIRD LEVEL: BASIC PRINCIPLES THIRD LEVEL: BASIC PRINCIPLES

Measurement Principles Revenue Recognition

 Historical Cost is generally thought to be a faithful When a company agrees to perform a service or sell a product to
representation of the amount paid for a given item. a customer, it has a performance obligation.

 Fair value is defined as “the price that would be received to Requires that companies recognize revenue in the accounting
sell an asset or paid to transfer a liability in an orderly period in which the performance obligation is satisfied.
transaction between market participants at the measurement
date.”

 IASB has given companies the option to use fair value as the
basis for measurement of financial assets and financial
liabilities.
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 THIRD LEVEL: BASIC PRINCIPLES THIRD LEVEL: BASIC PRINCIPLES

Expense Recognition - Outflows or “using up” of assets Full Disclosure

or incurring of liabilities during a period as a result of delivering
Providing information that is of sufficient importance to
or producing goods and/or rendering services.
ILLUSTRATION 2-6 influence the judgment and decisions of an informed user.
Expense Recognition

Provided through:
 Financial Statements

 Notes to the Financial Statements

 Supplementary information

“Let the expense follow the revenues.”

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THIRD LEVEL: COST CONSTRAINT

Cost Constraint
Companies must weigh the costs of providing the information
against the benefits that can be derived from using it.

 Rule-making bodies and governmental agencies use cost-

benefit analysis before making final their informational Summary of
requirements. the Structure
 In order to justify requiring a particular measurement or
disclosure, the benefits perceived to be derived from it
ILLUSTRATION 2-7
must exceed the costs perceived to be associated with it. Conceptual Framework
for Financial Reporting

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GLOBAL ACCOUNTING INSIGHTS GLOBAL ACCOUNTING INSIGHTS

THE CONCEPTUAL FRAMEWORK Relevant Facts

The IASB and the FASB have been working together to develop a common Following are the key similarities and differences between U.S. GAAP and
conceptual framework. This framework is based on the existing conceptual IFRS related to the Conceptual Framework for Financial Reporting.
frameworks underlying U.S. GAAP and IFRS. The objective of this joint project Similarities
is to develop a conceptual framework consisting of standards that are
• In 2010, the IASB and FASB completed the first phase of a jointly created
principles-based and internally consistent, thereby leading to the most useful
conceptual framework. In this first phase, they agreed on the objective of
financial reporting.
financial reporting and a common set of desired qualitative characteristics.
These were presented in the Chapter 2 discussion. Note that prior to this
converged phase, the Conceptual Framework gave more emphasis to the
objective of providing information on management’s performance
(stewardship).

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 GLOBAL ACCOUNTING INSIGHTS GLOBAL ACCOUNTING INSIGHTS

Relevant Facts Relevant Facts

Similarities Similarities
• The existing conceptual frameworks underlying U.S. GAAP and IFRS are • Both the IASB and FASB have similar measurement principles, based on
very similar. That is, they are organized in a similar manner (objective, historical cost and fair value. In 2011, the Boards issued a converged
elements, qualitative characteristics, etc.). There is no real need to change standard on fair value measurement so that the definition of fair value,
many aspects of the existing frameworks other than to converge different measurement techniques, and disclosures are the same between U.S.
ways of discussing essentially the same concepts. GAAP and IFRS when fair value is used in financial statements.
• The converged framework should be a single document, unlike the two
Differences
conceptual frameworks that presently exist. It is unlikely that the basic
• Although both U.S. GAAP and IFRS are increasing the use of fair value to
structure related to the concepts will change.
report assets, at this point IFRS has adopted it more broadly. As examples,
under IFRS, companies can apply fair value to property, plant, and
equipment; natural resources; and, in some cases, intangible assets.
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GLOBAL ACCOUNTING INSIGHTS GLOBAL ACCOUNTING INSIGHTS

Relevant Facts Relevant Facts

Differences Differences
• U.S. GAAP has a concept statement to guide estimation of fair values when • The economic entity assumption is also part of each framework although
market-related data is not available (Statement of Financial Accounting some cultural differences result in differences in its application. For
Concepts No. 7, “Using Cash Flow Information and Present Value in example, in Japan many companies have formed alliances that are so
Accounting”). The IASB has not issued a similar concept statement; it has strong that they act similar to related corporate divisions although they are
issued a fair value standard (IFRS 13) that is converged with U.S. GAAP. not actually part of the same company.
• The monetary unit assumption is part of each framework. However, the unit
of measure will vary depending on the currency used in the country in which
the company is incorporated (e.g., Chinese yuan, Japanese yen, and British
pound).

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