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Book 2: Chpater 17 Flashcards

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1
Q

According to the IASB’s conceptual framework for financial reporting what is the objective of financial reporting?

A

To provide information about the firm to current and potential investors and creditors to help them with their decisions about investing or lending to the firm

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2
Q

What is the conceptual framework for financial reporting used in?

A

The development of accounting standards

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3
Q

Why are financial reporting standards needed?

A

To provide consistency by narrowing the range of acceptable financial reports (think of the complexity of possible transactions and the estimates and assumptions a firm must make when presenting its performance)

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4
Q

What ensures that transactions are reported by firms similarly?

A

Reporting standards

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5
Q

Why must reporting standards remain flexible?

A

To allow discretion to management to properly describe the economics of the firm

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6
Q

What is the relationship between the design of financial reporting and valuation?

A

Financial reporting wasn’t designed specifically for valuation purposes but it does provide important inputs for it!

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7
Q

What is a standard setting body?

A

A professional organisation of accountants and auditors that establishes financial reporting standards

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8
Q

What is a regulatory authority?

A

Government agencies that have the legal authority to enforce compliance with financial reporting standards

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9
Q

Who are the two primary standard-setting bodies?

A

The financial accounting standards board (FASB) (US) and the international accounting standards board (IASB) (outside the US)

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10
Q

What does the FASB set?

A

Generally accepted accounting principles (GAAP)

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11
Q

What does the IASB establish?

A

International financial reporting standards (IFRS)

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12
Q

True or false, there are no other national standard-setting bodies other than the FASB and IASB?

A

False

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13
Q

What are some of the older IASB standards referred to as?

A

International accounting standards (IAS)

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14
Q

Name the regulatory authorities in the US and the UK established by their respective national governments

A

Securities and exchange commission (SEC) and the financial conduct authority (FCA)

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15
Q

What do most national authorities belong to?

A

The international organisation of securities commissions (IOSCO)

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16
Q

What % of the world’s financial markets does the international organisation of securities commissions (IOSCO) regulate?

A

95%

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17
Q

Is IOSCO a regulatory body?

A

No but its members work together to make national regulation and enforcement more uniform across the world

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18
Q

List the SEC’s requirements for financial reporting by US companies

A

Form S-1, form 10-K, form 10-Q, form DEF-14A, form 8-K, form 144, forms 3,4 and 5

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19
Q

Which act does the SEC have the responsibility of enforcing?

A

The Sarbanes-Oxley Act of 2002

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20
Q

What does the Sarbanes-Oxley Act of 2002 entail?

A

1) prohibits a company’s external auditor form providing additional paid services to the company (to avoid conflicts fo interest and to promote auditor independence)
2) executive management must certify that the financial statements are presented fairly and make a statement about the effectiveness of the company’s internal controls of financial reporting
3) the external auditor must provide a statement confirming the effectiveness of the company’s internal controls

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21
Q

What is a Form S-1?

A

Registration statement filed prior to the sale of new securities to the public, including audited financial statements, risk assessment,t underwriter identification and the estimated amount and use of the offering proceeds

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22
Q

What is a Form 10-K?

A

A required annual filing that includes info about the business and its management, audited financial statements and disclosures, disclosures about legal matters. Similar info so that in an annual report to shareholders but the annual report isn’t a substitute to the Form 10-K!

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23
Q

What are equivalent SEC forms to a Form 10-K for foreign issuers in US markets?

A

Form 40-F for Canadian companies
Form 20-F for other foreign issuers

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24
Q

What is a Form 10-Q?

A

US firms are required to file this form quarterly, with updated financial statements (but they don’t need to be audited) and disclosures about certain events eg significant legal proceedings or changes in accounting policy

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25
What are non-US companies typically required to file semiannually that’s the equivalent of a Form 10-Q?
Form 6-K
26
What is a form DEF-14A?
When a firm prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it files the statement with the SEC too (as a From DEF-14A)
27
What is a form 8-K?
Companies must file this form to disclose material events eg significant asset acquisitions and disposals, change in management or corporate governance or matters relating to accountants, financial statements or the markets in which its securities trade
28
What is a Form-144?
A company can issue securities to certain qualified buyers without registering the securities with the SEC, but it must notify the SEC that it intends to do so, with a Form-144
29
What are Forms 3, 4 and 5?
They involve the beneficial ownership of securities by a company’s officers and directors. Analysts use these forms to learn about the purchase and sales of company securities by corporate insiders
30
True or false, in the European Union each member state uses the same securities regulations and all countries are required to report using IFRS?
False, they all report using IFRS but each member state has its own securities regulations
31
Which 2 bodies did the European Commission set up and why?
1) the European Securities Commission which advises the European Commission on securities regulation issues 2) the European securities and market authority (ESMA) which coordinates regulation within the EU
32
Where are the ideas that the IASB (international accounting standards board) bases its standards on expressed?
In the conceptual framework for financial reporting
33
When did the IASB adopt the conceptual framework for financial reporting? And when was it revised?
In 2010, revised in 2018
34
What does the IASB framework detail?
The qualitative characteristics of financial statements and it specifies the required reporting elements
35
What is at the centre of the IASB conceptual framework?
The objective to provide financial information that is useful in making decisions about providing resources to an entity (these resource providers include investors, lenders and other creditors)
36
What do users of financial statements want to find out?
Information about the firm’s performance, financial position and cash flow
37
Which 2 fundamental characteristics make financial information useful?
Relevance and faithful representation
38
Define relevance of a financial statement
If the information can influence users’ economic decisions or affect their evaluations of past events or forecast future events. Information should have predictive value, confirmatory value (confirm prior expectations) or both. Materiality is also an aspect of relevance
39
Define faithful representation of a financial statement
The information contained is complete, neutral (no bias) and free from error
40
Which 4 characteristics enhance relevance and faithful representation?
Comparability, verifiability, timeliness and understandability
41
Define comparability
Financial statement presentation should be consistent among firms and across time periods
42
Define verifiability
Independent observers using the same methods obtain similar results
43
Define timeliness
Information is available to decision makers before the information is stale
44
Define understandability
Users with a basic knowledge of business and accounting and who make a reasonable effort to study the financial statements should be able to readily understand the information the statements present. Useful information shouldn’t be omitted just because it’s complicated
45
What are the 5 required reporting elements of the conceptual framework for financial reporting?
Assets, liabilities, equity, income and expenses
46
What do assets, liabilities and owners’ equity get you to measure?
Financial position
47
What do income and expenses get you to measure?
Performance
48
How does the conceptual framework for financial reporting define assets?
Resources controlled as a result of past transactions that are expected to provide future economic benefits
49
How does the conceptual framework for financial reporting define liabilities?
Obligations as a result of past events that are expected to require an outflow of economic resources
50
How does the conceptual framework for financial reporting define equity
The owner’s residual interest in the assets after deducting the liabilities
51
How does the conceptual framework for financial reporting define income
An increase in economic benefits either increasing assets or decreasing liabilities in away that increases owner’s equity (but not including contributions by owners) Includes revenues and gains
52
How does the conceptual framework for financial reporting define expenses?
A decrease in economic benefits either decreasing assets or increasing liabilities in a way that decreases owners’ equity (but not including distributions to owners) Includes losses
53
What does the amount at which items are reported in the financial statement elements depend on?
Their measurement base
54
When should an item be recognised in its financial statement element?
If a future economic benefit (flowing to or from the firm) is probable pand the item’s value or cost can be measured reliably
55
Measurement bases include…
Historial cost Amortised cost Current cost Net realizable value Present value Fair value
56
Define historical cost
The amount originally paid for the asset
57
Define amortised cost
Historial cost adjusted for depreciation, amortisation, depletion and impairment
58
Define current cost
The amount the firm would have to pay today for the same asset
59
Define net realisable value
The estimated selling price of the asset in the normal course of business minus the selling costs
60
Define present value
The discounted value of the asset’s expected future cash flows
61
Define fair value
The price at which the asset could be sold, or a liability transferred, in an orderly transaction between willing parties
62
According to the conceptual framework what has a cost-benefit trade off?
The 4 enhancing characteristics, so the benefit that users gain from the information should be greater than the cost of presenting it
63
What is a constraint not specifically mentioned in the conceptual framework for financial reporting?
That’s non-qualifiable information about a company (its reputation, brand loyalty, capacity for innovation etc) cant be captured directly in financial statements
64
What are 2 important underlying assumptions of financial statements
Accrual accounting and going concern
65
Define accrual accounting
It means financial statements should reflect transactions at the time they actually occur not necessarily when cash is paid
66
What is going concern
The assumption that the company will continue to exist for the foreseeable future
67
Which financial statements are required to be reported under IFRS?
Balance sheet (statement of financial position) Statement of comprehensive income Cash flow statement Statement of changes in owners’ equity Explanatory notes, including a summary of accounting policies
68
What are the general features for preparing financial statements under IFRS?
Fair presentation Going concern basis Accrual basis Consistency Materiality Aggregation No offsetting Reporting frequency Comparative information
69
Define fair presentation of financial statements according to the IFRS
Faithfully representing the effects of the entity’s transactions and events according to the standards for recognising assets, liabilities, revenues and expenses
70
Define going concern bias of financial statements according to the IFRS
The financial statements are based on the assumption that the firm will continue to exist unless its management intends to (or must) liquidate it
71
Define accrual bias of accounting according to the IFRS
This is used to prepare the financial statements other than the statement of cash flows
72
Define consistency of financial statements according to the IFRS
Consistency between periods in how items are presented and classified, with prior-period amounts disclosed for comparison
73
Define materiality of financial statements according to the IFRS
They should be free of misstatements or omissions that could influence the decisions of users of financial statements
74
Define aggregation of financial statements according to the IFRS
Aggregation of similar items and separation of dissimilar items
75
Define no offsetting of financial statements according to the IFRS
No offsetting of assets against liabilities or income against expenses unless a specific standards permits or requires it
76
Define the reporting frequency of financial statements according to the IFRS
Must be at least annually
77
Define comparative information of financial statements according to the IFRS
Comparative information for prior periods should be included unless a specific standard states otherwise
78
What are the 3 requirements for structure and content of financial statements according to the IFRS
Classified balance sheet Minimum information Comparative information
79
Define a classified balance sheet according tot he ISFR
Balance sheet includes current and non current assets and liabilities
80
Define minimum information according to IFRS
This si required on the face of each financial statement and in the notes. Eg the face of the balance sheet must show specific items such as cash and cash equivalents, PP&E and inventories The face of the comprehensive income statement needs to include revenue, profit or loss, tax expense, finance cost etc
81
Define comparative information according to the IFRS
This ensures that prior periods should be included unless a specific standard states otherwise
82
What should an analyst do about the fact that financial reporting standards continue to evolve?
Monitor how these developments will effect the financial statements they use. Be aware or new products and innovations in the financial markets that generate new types of transactions because these might not fall neatly into the existing financial reporting standards
83
What can an analyst use as a guide for evaluating what effect new products or transactions might have on financial statements?
Financial reporting framework
84
What can an analyst use to keep up to date on the evolving financial reporting standards?
They can monitor professional journals and other sources such as IASB and FASB websites
85
Where does the CFA institute produce position papers on financial reporting issues?
The CFA institute centre for financial market integrity
86
What must analysts monitor company disclosures for?
Significant accounting standards and estimates

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