Objective of financial statements and importance of standards =
Provide useful information to potential investors/creditors
Standards provide consistency (as companies' transactions/assumptions can vary hugely and could be presented in many different ways)
Standards must allow enough discretion for management to properly describe the economics of the firm.
FR is not designed solely for valuation, but provides important inputs for valuation purposes
Standard setting bodes vs Regulatory authorities =
SSBs are professional organizations that set FR standards:
- FASB in US sets GAAP
- IASB in rest of world sets IFRS
- Many are (incl FASB) are moving towards IFRS
Reg Auth are established by governments
- SEC (US), FSA (UK)
- Most belong to IOSCO
- IOSCO financial market regulation objectives: protect investors, ensure fairness/transparency/efficiency in markets, reduce systemic risk
Desired attributes of standard setting bodies (FASB, IASB) =
Observe high professional standards.
Have adequate authority, resources, and competencies to accomplish its mission.
Have clear and consistent standard-setting processes.
Guided by a well-articulated framework.
Operate independently while still seeking input from stakeholders.
Should not be compromised by special interests.
Decisions are made in the public interest.
SEC Required Filings =
S-1: registration before selling new securities to the public
10-K: Annual filing of FS (40-F for Canadian companies, 20-F for foreign)
10-Q: Quarterly update (do not have to be audited like a 10-K)
DEF-14A: Filing of a proxy statement that will be used by shareholders
8-K: Disclosure of material events (significant acquisitions, changes to mgmt/FS/market in which it trades etc)
144: notification of issuance of securities to qualified buyers without registering with SEC
3, 4 and 5: beneficial ownership of securities by company's officers and directors (anlaysts can use to learn about transactions by corporate insiders)
Convergence of standards/barriers to a universal set of standards =
Efforts to achieve convergence of local accounting standards with IFRS are underway in most major countries that have not adopted IFRS.
- differences of opinion
- political pressure within countries from groups affected by changes in reporting standards.
IFRS "Conceptual Framework for Financial Reporting" (x3)
- fundamental and enhancing qualitative characteristics of financial statements
- specifies required reporting elements
- constraints and assumptions in preparing FS
IFRS: Fundamentals/Enhancing factors of FS =
Fundamental characteristics: relevance and faithful representation
Enhancing characteristics: comparability, verifiability, timeliness and understandability
IFRS: Elements =
Assets, Liabilities, Owners' equity (for measuring financial position)
Income and Expenses (for measuring performance)
IFRS: Constraints and Assumptions =
Constraints: Cost vs Benefit (of including enhancing characteristics)
Difficulty of capturing non-quantifiable info (reputation, brand loyalty)
Assumptions: Accrual Basis
Going Concern Assumption - firm will sontinue to exist until management intends to/is forced to liquidate it (if this is not the case the presentation of financial statements requires adjustments)
IFRS: General requirements =
5x Financial Statements: Balance sheet, income statement, cash flow statement, statement of change in owners' equity, explanatory notes
- Fair presentation.
- Going concern.
- Accrual accounting.
- No offsetting.
- Reporting frequency.
- Comparative information.
IFRS vs GAAP (x3) =
The IASB lists income and expenses as performance elements, while the FASB lists revenues, expenses, gains, losses, and comprehensive income.
There are minor differences in the definition of assets. Also, the FASB uses the word probable when defining assets and liabilities.
The FASB does not allow the upward revaluation of most assets.
Characteristics of a coherent FR framework (x3) =
Barriers to a coherent FR framework =
Issues of valuation - ie historical cost vs fair value
Standard Setting - principles-based, rules-based or objectives oriented. IFRS = principles based, GAAP = more rule based, but moving to OO
Measurement - asset/liability approach focused on the BS vs revenue/expense approach focused on the IS
Analysts POV - implications of different FRS and importance of monitoring changes =
An analyst should be aware of evolving financial reporting standards and new products and innovations that generate new types of transactions.
LOS 24.i: Analyze company disclosures of significant accounting policies.
Under IFRS and U.S. GAAP, companies must disclose their accounting policies and estimates in the footnotes and MD&A. Public companies are also required to disclose the likely impact of recently issued accounting standards on their financial statements.