ACC410 Financial Reporting

Lecturer
Dr. J. Josiah
Office: 245/111
josiahj@mopipi.ub.bw

Semester 1

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ACC410 - Assessment
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Coursework
2 Tests 40%
Degree exam 60%
Reading
Jennings, A.R.: Financial Accounting, 2
nd
edition.
Wood, F. and Sangster, A.: Business Accounting II
Gee, P.: Spicer and Peglers Bookkeeping and Accounts. Lexis Law Publishing

The Regulation of Financial
Reporting; standard setting process.

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Contents
Annual financial statements
Uses of financial statements
Accounting choices
Qualitative characteristics
Accounting regulation
International Financial Reporting Standards
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Annual financial statements

Old terminology
Income statement
Balance sheet
Notes to the accounts
Cash flow statement
Statement of changes in
equity
Audit report

New terminology
Statement of comprehensive
income
Statement of financial position
Notes to the financial statements
Statement of cash flows
Statement of changes in equity
Audit report

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Uses of Financial Statements
Objective of financial statements
User groups
Accounting traditions
Anglo-Saxon accounting
Continental Europe
Link with taxation
Botswana
Companies Act
Accountants Act


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Objective of financial statements

The...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 in
their capacity as capital providers. Information that is
decision useful to capital providers may also be
useful to other users of financial reporting who are
not capital providers.

Source: IASB, Conceptual Framework for Financial Reporting: The Objective of Financial Reporting
and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting
Information, para OB2, exposure draft issued on May 29, 2008

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Users of financial statements
Management
Shareholders
Government
Lenders
Potential
investors
Public
Customers
Suppliers
Employees
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Fund Providers
Equity investors
Lenders
Other creditors
To the extent that suppliers, customers or other
groups make decisions relating to providing capital
to the entity in the form of credit, they are capital
providers
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Accounting traditions
Anglo-Saxon tradition
Continental European tradition

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Anglo-Saxon accounting
Mainly US, UK, Australia, Canada, New
Zealand
Financial statements as a function of a
companys financing
Market solution to accounting rules
Powerful accounting profession


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Continental European accounting
Financial statement as a product of
government regulating of the economy
All businesses are subject to accounting rules,
with extra rules for:
Limited liability companies
Listed companies


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Accounting choices
Accounting is not necessarily a set of precise
measurement rules which permit the exact
measurement of company profit and company
value
Measurement of profit can never be anything
but an estimate
Accounting measurement is full of choices
Choices made should be stated clearly in the
annual financial statements

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Accounting choices
Attributes of financial information that
underpin the decision-usefulness of financial
reporting
Fundamental versus enhancing characteristics
Materiality and cost as pervasive constraints

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Fundamental qualitative
characteristics
Relevance
Faithful representation
Complete
Neutral
Free from bias

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Enhancing qualitative characteristics
Verifiability
Comparability
Understandability
Timeliness

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Qualitative characteristics
Fundamental QC

Relevance
Faithful representation
Complete
Neutral
Free from
material error

Enhancing QC

Verifiability
Comparability
Understandability
Timeliness


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Accounting regulation
Accounting regulation disciplines accounting choices
Types of regulatory body:
Government
Stock exchange
Private sector body
Professional accountants
Specialist industry organizations
Separate rules for banks and insurance companies
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Government as accounting regulator
Regulation of accounting designed to ensure that the
markets can operate free from fraud and
misrepresentation
Accounting laws
Commercial codes
Government regulatory agencies
Regulation of accounting for tax collection purposes


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Stock exchange as accounting regulator
Stock exchange regulates the financial information to
be provided by listed companies
In some countries this is done by a government
regulator


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Private sector as accounting regulator
Delegation of responsibility of writing detailed accounting
rules to private sector bodies, financed by contributions from
companies, audit industry, etc..
Global: International Accounting Standards Board (IASB)
Flexible and rapid rule-making, as opposed to governmental
rule-making
Technical committees from professional accounting bodies
may function as catalyst


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International bodies
International Accounting Standards Board (IASB)
The worlds leading accounting standards-setter
Issues the International Financial Reporting Standards (IFRS)
IFRS either compulsory or allowed in more than 100 countries
Intergovernmental Working Group of Experts on International
Standards of Accounting and Reporting (ISAR)
Under the auspices of the UN Conference on Trade and Development
(UNCTAD)
Commissions research reports into current accounting problems
International Federation of Accountants (IFAC)
International representative of the accounting profession



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International Financial Reporting
Standards
Single set of global accounting and reporting
standards, issued by the IASB
Increasingly used by many large and
multinational companies
Accepted by most security market authorities
Used as a basis for national accounting
requirements (partially or in full) or as a
benchmark for the development of national
accounting rules
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International Accounting Standards
Board
A private sector body
Operates under the International Accounting
Standards Committee Foundation (IASCF)
Has no responsibility to any governmental
organization
Has no enforcement authority
Develops and issues both main standards (IAS
/ IFRS) and interpretations (SIC / IFRIC)

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Fig. 1.2 - The structure of the IASB
(W&A, p. 25)
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IASC Foundation
22 Trustees
Appoint, oversee, raise funds
Standards Advisory
Council
30 or more members
Board
12 full time and 2 part time
Set technical agenda. approve standards,
exposure drafts and interpretations
Working groups
for major agenda projects
International Financial Reporting
Interpretations Committee
12 members
Key:
Appoints
Reports to
Advises
Fig. 1.3 - Standard-setting due
process of the IASB (W&A p, 27 )
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Discussion
paper
Comment
analysis

Exposure
draft
Standard
Effective
Date
Comment
analysis
Research
National Standard
Setters Others
9-15 months 9-15 months 6-18 months
Economic and social impacts
of accounting regulation
new standards have social and economic
impacts through their impact on the
accounts e.g.
IFRS 2 has no impact on cash flows directly,
but arguably affects managerial motivations
(UK) accounting standard on pension
liabilities
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Economic interest group
theory
assumes groups will form to protect particular
economic interests
groups are often in conflict with each other and
will lobby government to put in place legislation
which will benefit them at the expense of others
no notion of public interest inherent in the
theory
regulators (and all other individuals) deemed to
be motivated by self interest
the regulator is not a neutral arbiter but is seen
as an interest group itself
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Economic interest group theory -
continued
regulator motivated to ensure re-election or
maintenance of its position of power
regulation serves the private interests of politically
effective groups
those groups with insufficient power will not be able
to effectively lobby for regulation to protect its own
interests
The regulator will utilise their power to regulate to
transfer wealth from those people with low levels of
political power to those parties with greater levels of
political power
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Accounting regulation as an output of a
political process
the view that financial accounting should be objective, neutral
and apolitical can be challenged
will inevitably be political as it affects wealth distribution
within society
standard-setters encourage affected parties to make
submissions on drafts of proposed standards
if standard-setters give consideration to views in
submissions, accounting standards and therefore
financial reports are the result of various social and
environmental considerations
tied to the values, norms and expectations of the society in which
standards are developed
questionable whether financial accounting can claim to be neutral
and objective
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Table 1.1 - List of IASB rules as of
September 2008 (W & A, pp. 22-24 )
Conceptual Framework
CF
Framework for the Preparation and Presentation of Financial Statements
Main standards
IAS 1 Presentation of Financial Statements
IAS 2

Inventories
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10 Events after the Reporting Period
IAS 11 Constructions Contracts
IAS 12 Income Taxes
IAS 14 Segment Reporting
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures

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Table 1.1 - List of IASB rules as of September 2008 (cont.)
Main standards (continued)
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 30 Disclosure in the Financial Statements of Banks and Similar Financial Institutions
IAS 32 Financial Instruments: Disclosure and Presentation
IAS 33 Earnings per Share
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
IAS 41 Agriculture

IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating segments

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Table 1.1 - List of IASB rules as
of September 2008 -
Interpretations
Interpretations
SIC 7 Introduction of the Euro (IAS 21)
SIC 10 Government Assistance No Specific Relation to Operating Activities (IAS 20)
SIC 12 Consolidation Special Purpose Entities (IAS 27)
SIC 13 Jointly Controlled Entities Non-Monetary Contributions By Venturers (IAS 31)
SIC 15 Operating Leases Incentives (IAS 17)
SIC 21 Income Taxes Recovery of Revalued Non-Depreciable Assets (IAS 12)
SIC 25 Income Taxes Changes in the Tax Status of an Enterprise or its Shareholders IAS (12)
SIC 27 Evaluating the Substance of Transactions involving the Legal Form of a Lease
SIC 29 Disclosure Service Concession Arrangements
SIC 31 Revenue Barter Transactions Involving Services
SIC 32 Intangible Assets Web Site Costs

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
IFRIC 2 Members Shares in Co-operative Entities and Similar Instruments
IFRIC 3 Emission Rights (withdrawn by the Board in June 2005)
IFRIC 4 Determining Whether an Arrangement contains a Lease
IFRIC 5
Rights to Interests arising from Decommissioning, Restoration and Environmental
Rehabilitation Funds

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Table 1.1 - List of IASB rules as of
September 2008 Interpretations (cont.)
Interpretations
IFRIC 6
Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic
Equipment
IFRIC 7 Applying the Restatement Approach under IAS 29
IFRIC 8 Scope of IFRS 2
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 11 Group and Treasury Share Transactions (IFRS 2)
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14
The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their
Interaction (IAS 19)
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 16 Hedges for a Net Investment in a Foreign Operation

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