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Overview of Financial Reporting

Environment
FRS Course
Dr Sudershan Kuntluru
IIM Kozhikode

Financial Reporting Environment


Reporting Environment
Statutory Financial Reports
Factors affecting statutory financial reports

Nature and Purpose of Accounting


Desirable qualities of accounting information
Principles of accounting
Relevance and limitations of accounting

Accruals-Cornerstone of Accounting

Reporting Environment
Statutory Financials Reports
What are the statutory financial reports the
companies are required to present?

Reporting Environment
Statutory Financials Reports
Financial Statements
Revised Schedule IV
Annual
Quarterly

Earnings Announcements
Other Statutory Reports

Current update

ICAI
ASB
NACAS
Ministry of Corporate Affairs
SEBI
RBI
IRDA

Current Update (2)


IASC IAS
IASB IFRS & IAS
Accounting as a language of business
IFRS as a global language of business
Note: no material difference exists between recently issued India
accounting standards and IFRS (AS 7, Construction Contracts)

NEWS
No IFRS, but strict norms take over
ET Bureau, Mar 29, 2011, 03.09am IST
IFRS, has been put off for now, but the
government is pressing ahead with the reforms in
the way companies present their financials.
The Corporate Affairs Ministry has made it
mandatory for large companies to prepare their
financials as per a revised format that is expected
to provide greater clarity about their finances and
liquidity position.

Schedule VI
(see Section 211)
Government of India has notified
new format of Financial Statements

List of Accounting Standards in India

What is IFRS?
IFRS is a set of accounting standards
developed by the IASB an independent
group of 15 experts
It is the global language of business
Aprox. 120 nations require IFRS (90 made it
mandatory and for the rest it is optional
As part of commitment in the G20 summit,
India will converge in a phased manner
starting April 1, 2011

IFRS

29
IAS (revised)

+31
SICs

+13
IFRS

+19
IFRICs

IFRS
The main constituents are
International Financial Reporting Standards (IFRS):
1-13
International Accounting Standards (IAS): Till 41
International Financial Reporting Interpretations
Committee (IFRIC) 19 Interpretations
Standing Interpretations Committee (SIC): 31
Interpretations

Financial Statements
Statement of Financial Position (SFP)
Statement of Comprehensive Income and
Other Comprehensive Income (SOCI)
Statement of Changes in Equity (SOCIE)
Statement of Cash Flows (SCF)
Notes
Opening Balance Sheet

What are the key IFRS implementation


issues
Does convergence with IFRS is a step in the
right direction ?
What are key challenges for companies?

What are the key IFRS implementation


issues
IFRS contains many areas where management
needs to exercise its judgments.
These areas are significant
Like how revenue is recognized and how assets
are depreciated

Embedding IFRS reporting into the financial


reporting systems and processes is a
cumbersome process and may take some time

What are the key IFRS implementation


issues
Need for more clarity on the changes to the
regulatory environment
Like Income Tax Act, Companies Act and Banking
Regulations Act.

Significant time and effort is required to train


both internal and external stakeholders and
create awareness of the impact of IFRS

(Annual Report)

(Quarterly Report)

Statutory Financial Reports

Prospectus)

Other
SEBI Filings

Earnings Announcements

Key summary measures (pre-audit)


Often one to six week lag
Informative to market
Lacks supporting financial details

Factors Affecting Statutory Financial


Reports
GAAP
GAAP defined
Setting Accounting Standards
Role of the Securities and Exchange Commission
IFRS

Environmental Factors
Managers of Companies
Main
for fair &Accounting
accurate reports
Setresponsibility
by International
Applies
accounting
to reflect business
Standards
Board
activities
Not currently
accepted
in U.S.
Managerial
discretion
is necessary
in
accounting
SEC
underonpressure
to accept
Major
lobbyist
GAAP

IAS

Environmental Factors
Auditing
SEC
requires
Audit Report Accounting
Set
by International
Audit
opinion can
be:
Standards
Board
- clean (fairly presented)
Not -currently
accepted
qualified (except
for) in U.S.
Auditors
- disclaimer (no opinion)

SEC
under
pressure
to
accept
Check Auditor quality & independence

IAS

Environmental Factors
Corporate Governance
Board
oversightAccounting
Set of
bydirectors
International
Audit
committeeBoard
of the board
Standards
- oversee accounting process
Not currently
accepted in U.S.
-oversee
internal control
- oversea internal/external audit

SEC
under
pressure
to
accept
Internal Auditor

IAS

Environmental Factors
Internal Users

External Users

Managers
Officers
Internal Auditors
Sales Managers
Budget Officers
Controller

Lenders
Shareholders
Governments
Labor Unions
External Auditors
Customers

Environmental Factors
Equity Investors
Active & Speculative Investors rely on
financial reports

Creditors
Solvency & Liquidity analysis relies
on financial reports

Environmental Factors
Economic, Industry & Company News
Impacts current & future financial condition and
performance

Voluntary Disclosure
Many factors encourage voluntary disclosure by
managers

Information Intermediaries
Industry devoted to collecting, processing, interpreting
& disseminating company information
Includes analysts, advisers, debt raters, buy- and
sell-side analysts, and forecasters
Major determinant of GAAP

Desirable Qualities of Accounting


Information
Relevance - the capacity of information to
affect a decision
Reliability - For information to be reliable it
must be verifiable, representationally
faithful, and neutral. Verifiability means
the information is confirmable.
Representational faithfulness means the
information reflects reality, and neutrality
means it is truthful and unbiased.

Factors Affecting Statutory Financial


Reports
Managers
Monitoring and Enforcement Mechanisms
Auditors
Corporate Governance
Securities and Exchange Commission
Litigation

Factors Affecting Statutory Financial


Reports
Alternative Information Sources
Economic, Industry, and Company Information
Voluntary Disclosure
Information Intermediaries

Nature and Purpose of Financial


Accounting
Desirable Qualities of Accounting Information
Relevance
Timeliness

Reliability
Verifiable, representationally faithful and neutral

Important Principles of Accounting


Accrual Accounting
Historical Cost and Fair Value
Materiality
Conservatism

Limitations of Financial Statement


Information
Timeliness
Frequency
Forward-looking

AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS
AS

1 Disclosure of Accounting Policies


2 Valuation of Inventories
3 Cash Flow Statements
4 Contingencies and Events Occuring after the Balance Sheet Date
5 Net Profit or Loss for the period,Prior Period Items and Changes in Accounting Policies
6 Depreciation Accounting
7 Construction Contracts (revised 2002)
9 Revenue Recognition
10 Accounting for Fixed Assets
11 The Effects of Changes in Foreign Exchange Rates (revised 2003),
12 Accounting for Government Grants
13 Accounting for Investments
14 Accounting for Amalgamations
15 Employee Benefits (revised 2005)
16 Borrowing Costs
17 Segment Reporting
18 Related Party Disclosures
19 Leases
20 Earnings Per Share
21 Consolidated Financial Statements
22 Accounting for Taxes on Income.
23 Accounting for Investments in Associates in Consolidated Financial Statements
24 Discontinuing Operations
25 Interim Financial Reporting
26 Intangible Assets
27 Financial Reporting of Interests in Joint Ventures
28 Impairment of Assets
29 Provisions,Contingent` Liabilities and Contingent Assets