Contents of the book

• Part one: Framework, Theory and Regulation

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
Chapter 1

A brief introduction to
financial reporting

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Contents

• International reporting before and since International Financial

Reporting Standards IFRS
• Financial reporting in different types of business entity
• The objectives of corporate financial reporting standards and
regulation
• Aims of IFRS in the European Union EU and globally
• The main functions of general purpose financial reporting
• Users of financial reporting information
• Challenges for the International Accounting Standards Board
IASB

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Learning objectives

• compare the meanings of international financial reporting

before and since IFRS
• compare the roles of financial reporting in different types of
business entity
• explain the objectives of financial reporting standards and
financial reporting regulation
• explain the objectives of IFRS in the EU and globally
• describe the main functions of general purpose financial
reporting
• with reference to these functions, describe the major types
of users of published financial information and discuss the
implications of their different needs
• Discuss two major challenges for the IASB
International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
International financial reporting
before and since IFRS

Before IFRS: international financial reporting used to

involve 2 areas of study:
1) comparative accounting systems and
2) accounting for international transactions and
multinational enterprises

After IFRS:
Financial reporting is prepared in accordance with
IFRS

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
International financial reporting
before and since IFRS
Before IFRS, companies seeking to raise capital from international
investors usually did one of five things in response to the problem
of different accounting standards across different countries:
• Do nothing
• Provide translations in another language, usually English
• Provide translations in the language as well as the currency of
the country from which investments was sought
• Provide partial restatements
• Prepare secondary financial statements
After IFRS:
Financial reporting is prepared in accordance with IFRS
International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Financial accounting

• Definition of accounting by American Accounting

Association: ‘accounting is the process of identifying,
measuring, and communicating economic information to
permit judgements and decisions by users of the
information.’
• Accounting can be divided into
• Management accounting: produces information for
internal decision making
• Financial accounting: produces information in the
from of financial reports designed to be useful to parties
with an interest in the reporting entity.
International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Financial reporting in different
business entities
• In sole traders and basic partnerships: no legal
obligation to produce financial statements.

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Financial reporting in different
business entities
• Public limited companies issue their shares to the
general public. A stock exchange is a market for
trading in the issued shares of public limited
companies. Financial reporting fulfils the
accountability and stewardship functions, and it is
also meant to aid current and potential investors to
make decisions about whether to hold, buy or sell
the shares or other securities in the company.

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
The main functions of corporate financial
reporting and reporting standards and
financial reporting regulation

• To establish a minimum standard for quality, quantity

and presentation of useful financial information, so
that users can improve resource allocation decisions

• To improve transparency and access to information

to create a more level playing field for investors. The
idea is to prevent capital markets from breaking
down due to lack of public confidence

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Aims of IFRS in the EU and
globally

• EU: To enable the creation of a single

integrated and efficient European capital market

• World: IASB aims to bring transparency,

accountability and efficiency to financial
markets around the word – to enable the
creation of integrated and efficient capital
markets around the world

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 The objective of general
purpose financial statements

• ‘The objective of general purpose financial reporting

is to provide information that is useful to existing and
potential 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 credit’.

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
The main functions of general
purpose financial reporting

• Accountability
• Stewardship
• Resource allocation decision making
• Efficient contracting
• Reconciliation of conflicting interests of
stakeholders

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
Accountability function of general
purpose financial reporting
• Accountability refers to the action of
providing information in order to account fro
one’s actions to those to whom one is
accountable.
• Historically, corporate financial reporting has
been a tool that enables the senior
management of a company to provide
accountability to the owners, for how the
managers have performed their stewardship
responsibilities.
International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
Stewardship function of general
purpose financial reporting
• Firstly, the financial statements enabled the
senior management of a company to provide
accountability for how they have used the
company’s resources during the year to
achieve the company’s objectives.
• Secondly, the financial statements enabled
the owners to judge if they were satisfied with
the financial performance of the company
and the proposed dividends.

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Decision-usefulness function of
general purpose financial reporting
• The decision-usefulness function is to
provide information to help prospective users
in a market setting to make decisions about
providing resources to the reporting entity.

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Efficient contracting function of
general purpose financial reporting
• The efficient contracting perspective regards
the main function of general purpose
financial reporting as providing information to
enable contracting between entities and
lenders, or between reporting entities and
senior managers.

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
Social function of general purpose
financial reporting
• The social function of general purpose
financial reporting is the reconciliation of
conflicting interests of stakeholders.
• For example, financial reporting provides
data for negotiations between employers and
trade unions.

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
Different users – different needs

• Shareholders • Return on the

investment and risk
involved

• Loan creditors • Possibility to repay

loans and pay interest

• Stability and profitability

• Employees of the firm, employment
and remuneration
opportunities
International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
Different users – different needs

• Financial analysts • Information to advise

whether to hold, buy
or sell shares
• Suppliers and trade • Ability to pay the
creditors amounts due

• Customers • Going concern of the

enterprise, corporate
responsibility
• Competitors • Performance of the
competition
International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
Different users – different needs

• Government • To determine
taxable income, to
supervise
regulation, to judge
efficient allocation of
resources
• The public • The viability of the
company, the
corporate
responsibility
International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 Summary of user needs

• Many, although not all, of the information

requirements are essentially forward looking
• Different users, with different purposes, may
require different information about the same
items
• Different users will require different degrees
of complexity and depth
• Not all the information required is likely to be
included in financial accounts
International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
Challenges for the IASB

• Promoting the global adoption of

IFRS
• Consistent application across
different institutional environments

International Financial Reporting and Analysis, 7th edition

David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA
 International Financial Reporting and Analysis, 7th edition
David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik
ISBN 9781473725454 © 2017 Cengage Learning EMEA