LO1: Understanding the requirement of Financial Reporting

Ω Why do we need financial reporting standards?

• To provide accurate and reliable information, the accounting profession requires rules and guidelines on how to report information.

• That is the purpose of accounting standards – to provide guidance to the accounting profession.

• Importance to Key Players

o Accounting standards allow accountants to provide information through financial statements in a manner that can be understood by people important to the organization – management, board of directors, investors and stakeholders.

o This information must be presented accurately so that key decisions based off the information are made appropriately.

o Well-designed accounting standards enhance investor confidence in the business.

Ω Why do we need financial reporting standards?

1. Role in the Company

o Accounting standards provide day-to-day guidance to accountants to ensure the steady operation of the business.

o It is the duty of an accountant to provide financial information that is relevant, reliable, neutral and comparable – all of which is achievable by following accounting standards.

2. Comparability

o The ability to compare financial statements is vital to the accounting profession.

o Investors will compare one company’s information to another's and choose which one to go with.

o Following accounting standards ensures businesses are playing by the same rules, making comparability easier.

o However, standards vary by country, so the situation can arise where financial information of two businesses is being compared yet was compiled using different standards.

3. Harmonization

o As of June 2011, the United States mandates generally accepted accounting principles, commonly referred to as U.S. GAAP, as its accounting standard.

o It is governed by the Financial Accounting Standards Board (FASB).

o The International Accounting Standards Board (IASB) governs International Financial Reporting Standards (IFRS), which are used by over 120 countries.

o Both the FASB and IASB are in talks to converge U.S. GAAP and IFRS.

o One of the driving factors for convergence is to have one accounting standard used by all accountants around the world.

Ω International Accounting Standards

• International Accounting Standards (IASs) were issued by the originator International Accounting Standards Council (IASC) and endorsed and amended by the International Accounting Standards Board (IASB).

• The IASB will also reissue standards in this series where it considers it appropriate.

Ω International Accounting Standards Board (IASB)

• The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs).

• The IASB operates under the oversight of the IFRS Foundation.

• The IASB was formed in 2001 to replace the International Accounting Standards Committee (IASC).

Ω The IASB’s Conceptual Framework

• The 1989 Framework for the Preparation and Presentation of Financial Statements was replaced in 2010 by the Conceptual Framework for Financial Reporting (IASB).

• This is the result of a joint project with the FASB.

• The Introduction to the Conceptual Framework points out the fundamental reason why financial statements are produced worldwide, i.e. to satisfy the requirements of external users, but that practice varies due to the individual pressures in each country.

• These pressures may be social, political, economic or legal, but they result in variations in practice from country to country, including the form of statements, the definition of their component parts (assets, liabilities etc), the criteria for recognition of items and both the scope and disclosure of financial statements.

• It is these differences which the IASB wishes to narrow by harmonising all aspects of financial statements, including the regulations governing their accounting standards and their preparation and presentation.