FSA: Financial Reporting Standards Flashcards Preview

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Flashcards in FSA: Financial Reporting Standards Deck (15):

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.
  • Consistency.
  • Materiality.
  • Aggregation.
  • 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.