Accounting - the universal language of business.

THE ESSENTIAL CHARACTERISTICS OF CCOUNTING ARE:

1. Identification – determining if it exists and whether it is a monetary transaction related to business
2. Measurement – the representation of data in terms of specific method such as currency, hours, unit
3. Communication of financial information
⁃ About economic entities
⁃ to interested parties
Financial Accounting - The process that culminates in the preparation of financial reports on the
enterprise for use by both internal and external parties. Users of these financial reports include investors
creditors managers unions in government agencies.
Managerial Accounting - The process of identifying, measuring, analyzing, and communicating financial
information needed by management to plan control and evaluate a company's operations.
Financial statements - are the principle means through which a company communicates its financial
information to those outside the business.
- These statements providing companies history quantified in money terms.
The financial statements most frequently provided are:
1. The statement of financial position
2. The income statement or a statement of comprehensive income
3. The statement of cash flows
4. The Statement of changes in equity
⁃ Note Disclosures are integral part of each financial statement.
 Accountants must measure performance accurately and fairly on a timely basis, so that the right
managers and companies will able to attract investments capital.
 Relevant financial information that faithfully represents financial results allows investors and
creditors to compare the income and assets employed by such companies.
 An effective process of capital allocation is critical to a healthy economy. It promotes productivity,
encourages innovation, and provides and efficient and liquid market for buying and selling
securities and obtaining and granting credit. Unreliable and irrelevant information leads to poor
capital allocation, which adversely affects the securities markets.
 To facilitate efficient capital allocation, investors need and a faithful representation of that
information to enable them to make comparisons across borders.
What is the objective (or purpose) of financial reporting?
The objective of general-purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and other creditors in
making decisions about providing resources to the entity. Those decisions involve buying, selling, or
holding equity and debt instruments, and providing or settling loans and other forms of credits.
General-purpose financial statements provide financial reporting information to a wide variety of
users. For example, when Nestlé (CHE) issues its financial statements, these statements help
shareholders, creditors, suppliers, employees, and regulators to better understand its financial position
and related performance. Nestle's users need this type of information to make effective decisions. To be
cost-effective in providing this information, general-purpose financial statements are most appropriate.
In other words, general-purpose financial statements provide, at the least cost, the most useful
information possible.
 The objective of financial reporting identifies investors and creditors as the primary user group
for general-purpose financial statements. Identifying investors and creditors as the primary user
group provides an important focus of general-purpose financial reporting.
Entity Perspective - As part of the objective of general-purpose financial reporting, an entity perspective
is adopted. Companies are viewed as separate and distinct from their owners (present shareholders)
using this perspective. The assets of Nestlé are viewed as assets specific creditor or shareholder. Rather,
these investors have claims on Nestlé's assets in the form of liability or equity claims. The entity
perspective is consistent with the present business environment, where most companies engaged in
financial reporting have substance distinct from their investors (both shareholders and creditors). Thus,
the perspective that financial reporting should be focused only on the needs of shareholders-often
referred to as the proprietary perspective-is not considered appropriate.
 Investors are interested in financial reporting because it provides information that is useful for
making decisions (referred to as the decision-usefulness approach).
As indicated earlier, when making these decisions, investors are interested in assessing:
(1) the company's ability to generate net cash inflows and
(2) management's ability to protect and enhance the capital providers' investments.
 Financial reporting should therefore help investors assess the amounts, timing, and uncertainty of
prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption,
or maturity of securities or loans. In order for investors to make these assessments, the economic
resources of an enterprise, the claims to those resources, and the changes in them must be
understood. Financial statements and related explanations should be a primary source for
determining this information.
 The emphasis on "assessing cash flow prospects" does not mean that the cash basis is preferred
over the accrual basis of accounting. Information based on accrual accounting generally indicates
more accurately a company's present and continuing ability to generate favorable cash flows than
does information limited to the financial effects of cash receipts and payments.
Accrual-basis accounting - it ensures that a company records events that change its financial statements
in the periods in which the events occur, rather than only in the periods in which it receives or pays cash.
Using the accrual basis to determine net income means that a company recognizes revenues when it
provides the goods or performs the services (that is, satisfies its performance obligation) rather than
when it receives cash. Similarly, it recognizes expenses when it incurs them rather than when it pays
them. Under accrual accounting, a company generally recognizes revenues when it makes sales or
performs services. The company can then relate the revenues to the economic environment of the period
in which they occurred. Over the long run, trends in revenues and expenses are generally more
meaningful than trends in cash receipts and disbursements.
International Accounting Standards Board (IASB) - The main international standard-setting
organization is based in London, England. The IASB issues International Financial Reporting
Standards (IFRS), which are used on most foreign exchanges.
 IFRS has the best potential to provide a common platform on which companies can report,
resulting in financial statements investors can use to compare financial information.
As a result, our discussion focuses on IFRS and the organization involved in developing these standards—
the International Accounting Standards Board (IASB). The two organizations that have a role in
international standard-setting are the International Organization of Securities Commissions (IOSCO) and
the IASB.
The International Organization of Securities Commissions (IOSCO) - is an association of
organizations that regulate the world's securities and futures markets.
- Members are generally the main financial regulator for a given country. IOSCO does not set
accounting standards. Instead, this organization is dedicated to ensuring that the global markets
can operate in an efficient and effective basis. The member agencies (such as from France,
Germany, New Zealand, and the United States) have resolved to:
• Cooperate to promote high standards of regulation in order to maintain just, efficient,
and sound markets.
• Exchange information on their respective experiences in order to promote the development of domestic
markets.
• Unite their efforts to establish standards and an effective surveillance of international securities
transactions.
• Provide mutual assistance to promote the integrity of the markets by a rigorous application of the
standards and by effective enforcement against offenses.
IOSCO supports the development and use of IFRS as the single set of high-quality international standards
in cross-border offerings and listings. It recommends that its members allow multinational issuers to use
IFS in cross-border offerings and listings, as supplemented by reconciliation, disclosure, and
interpretation where necessary to address outstanding substantive issues at a national or regional level.
1. The IFRS Foundation provides oversight to the IASB, IFRS Advisory Council, and IFRS Interpretations
Committee. In this role, it appoints members, reviews effectiveness, and helps in the fundraising efforts
for these organizations.
2. The International Accounting Standards Board (IASB) develops, in the public interest, a single set of
high-quality, enforceable, and global international financial reporting standards for general-purpose
financial statements.
3. The IRS Advisory Council (the Advisory Council) provides advice and counsel to the IASB on major
policies and technical issues.
4. The IFRS Interpretations Committee assists the IASB through the timely identification, discussion,
and resolution of financial reporting issues within the framework of IFRS.
In addition, as part of the governance structure, a Monitoring Board was created. The purpose of this
board is to establish a link between accounting standard-setters and those public authorities (e.g., IOSCO)
that generally oversee them. The Monitoring Board also provides political legitimacy to the overall
organization.
In establishing financial accounting standards, the IASB has a thorough, open, and transparent due
process. The IASB due process has the following elements:
(1) an independent standard-setting board overseen by a geographically and professionally diverse body
of trustees:
(2) a 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.
- To implement its due process, the IASB follows specific steps to follow a typical IFRS.
• Membership - The Board consists of 14 full-time members. Members are well-paid, appointed for five-
year renewable terms, and come from different countries.
• Autonomy - The IASB is not part of any other professional organization. It is appointed by and
answerable only to the IRS Foundation.
• Independence - Full-time IASB members must sever all ties from their past employer. The members are
selected for their expertise in standard-setting rather than to represent a given country.
• Voting - A majority of votes are needed to issue a new IFRS. In the event of a tie, the chairperson is
granted an additional vote
Types of Pronouncements
The IASB issues three major types of pronouncements:
1. International Financial Reporting Standards.
2. Conceptual Framework for Financial Reporting.
3. International Financial Reporting Standards Interpretations.
Significant Financial Reporting Issues
While our reporting model has worked well in capturing and organizing financial information in a useful
and reliable fashion, much still needs to be done. For example, if we move ahead to the year 2030 and
look back at financial reporting today, we might read the following.
• Non-financial measurements - Financial reports failed to provide some key performance measures
widely used by management, such as customer satisfaction indexes, backlog information, and reject rates
on goods purchased.
• Forward-looking information - Financial reports failed to provide forward-looking information
needed by present and potential investors and creditors. One individual noted that financial statements in
2022 should have started with the phrase, "Once upon a time," to signify their use of historical cost and
accumulation of past events.
• Soft assets - Financial reports focused on hard assets (inventory, plant assets) but failed to provide
much information about a company's soft assets (intangibles). The most valuable assets are often
intangible. Consider Sony's (JPN) expertise in electronics and Ikea's (NLD) brand image.
• Timeliness - Companies only prepared financial statements quarterly and provided audited financials
annually. Little to no real-time financial statement information was available.
IASB and IOSCO – The major key organization on the international side
IOSCO – most influencing influential in enforcing IFRS
Accounting standard-setters use the following process in establishing international standards:
 Research, preliminary views, exposure draft, standard.
IFRS is comprised of:
 International Financial Reporting Standards, International Accounting Standards, and
International Accounting Standards Interpretations.
The authoritative status of the Conceptual Framework for Financial Reporting is as follows:
 It is used when there is no standard or interpretation related to the reporting issues under
consideration.
The objective of financial reporting places most emphasis on:
 reporting to capital providers.
General-purpose financial statements are prepared primarily for:
 external users
Economic consequences of accounting standard-setting means:
 accounting standards can have detrimental impacts on the wealth levels of the providers of
financial information.
The expectations gap is the difference between:
 what the public thinks accountants should do and what accountants think they can do.
Generally Accepted Accounting Principles (GAAP)
Oversight of accounting standard-setting is as follows:
 SEC oversees FASB, IOSCO oversees IASB
Governance of the FASB involves:
 FASB, FAF, FASAC, and staff and task forces
 The IASB structure is quite similar to the FASB's, with a Foundation, Board, Advisory Council, and Interpretations
Committee.