lecture 1(introduction to financial accounting)

8/3/2019 Lecture 1(Introduction to Financial Accounting)

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FinancialAccoun+ng

Lecture1Introduc)ontoFinancialAccoun)ng

SerenaMorricone


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Agenda

nWhatisaccoun0ngnManagementandFinancialaccoun0ngnUsersoffinancialInforma0onnRegula0onoffinancialaccoun0ngoAccoun0ngstandardsoHarmoniza0onoffinancialrepor0ng

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Whatisaccoun+ng?

Example:DonBlair,CFONIKEInc.

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Whatisaccoun+ng?

Example:JamesSingh,CFONestle

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Whatisaccoun+ng?

Theinforma0onsystemthat...

nmeasuresbusinessac0vi0esnprocessesdataintoreportsncommunicatesresultstodecisionmakersnpresentsinforma0oninmonetaryterms

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Whoaretheusersoffinancialinforma+on?

Financialinforma+on

Managers,

internalauditors,

officersofthecompany

Investors,

creditors,

analysts,

compe0tors

Tax/supervisoryauthori0es

Regulators

Management

accoun0ng

Financial

accoun0ng

Decisionmakers

INSIDE

thecompany

Decisionmakers

OUTSIDE

thecompany

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FinancialandManagerialAccoun+ng

FinancialAccoun+ngo Itisconcernedwiththeprepara0onoffinancialstatementsfordecision

makersoutsidethecompany

o Itisgovernedbybothlocalandinterna0onalaccoun0ngstandardso Periodicfinancialstatementsandrelateddisclosures

ManagerialAccoun+ngo Itisconcernedwiththeprovisionsanduseofaccoun0nginforma0onto

managerswithinorganiza0ons,toprovidethemwiththebasistomake

informedbusinessdecisionsthatwillallowthemtobebeVerequippedin

theirmanagementandcontrolfunc0ons.

o Detailedplanscon0nuousperformancereports

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FinancialandManagerialAccoun+ng

MaindifferencesManagementaccoun0ngis:

o designedandintendedforusebymanagerswithintheorganiza0on,insteadofbeingintendedforusebyshareholders,creditors,andpublicregulators;

o usuallyconfiden0alandusedbymanagement,insteadofpubliclyreported;o forward-looking,insteadofhistorical;o computedbyreferencetotheneedsofmanagers,o\enusingmanagement

informa0onsystem,insteadofbyreferencetogeneralfinancialaccoun0ng

standards.

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Externalusersandtheirinforma+onrequirements

User Informa+onRequirements

InvestorsNeedsforinforma0ontohelpthemdecidewhethertobuy,holdorsellequity

securi0esinthecompany,andwhetherthecompanycanpaydividends.

Employees

Needinforma0onaboutthestabilityandtheprofitabilityofthebusiness.

Employeesneedfinancialinforma0ontobeabletoassessthecompany sability

toprovideemploymentopportuni0es,andtopaycompensa0onandre0rement

benefits.

Lenders

Themajorconcerniswhethertheirloansandtheassociatedinterestwillbepaid

whendue.Financialinforma0onisneededtounderstandwhetherthebusiness

en0tycanpayitsdebts,andifnot,whatassetsareavailabletosecuredebts.

SuppliersInterestedinwhetheramountstheyareowedbythecompanywillbepaid.

Customers Interestedinthelong-termviabilityoftheen0ty

GovernmentsNeedinforma0onforregulatorypurposes,taxa0onandtodevelopna0onal

incomeandothersta0s0cs.

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Usersoffinancialinforma+on

SupposeyouarethemanagerofGregsTunes,Inc.Thecompanyneedsabankloanin

ordertopurchasemusicequipment.

Inevalua0ngtheloanrequest,thebankerasksabouttheassetsandliabili0esofthe

business.Inpar0cular,thebankerwantstoknowtheamountofthebusinesss

stockholdersequity.

Requirements:

1.Isthebankerconsideredaninternalorexternaluseroffinancialinforma0on?

2.Whichfinancialstatementwouldprovidethebestinforma0ontoanswerthebankersques0ons?

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FinancialRepor+ngandInvestmentDecisions

Dynamicnature Managersmustunderstand:o Economicconsequencesoffinancialstatementso Howfinancialstatementsareused

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REGULATION

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Whydoesfinancialaccoun+ngneedregula+on?

nUsers of financial informa0on rely on credible, transparent andcomparablefinancialinforma0on

nPrepara0onoffinancialstatementsinvolvestwoelements

Recordingforindividualtransac0onBookkeeping

Summaryandaggrega0onintoaformsuitableforpresenta0on

nAccoun0ng standards contain the detailed rules that govern theaccoun0ng treatment of transac0ons and other items shown in

financialstatements.

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Accoun+ngStandards

Financial repor0ng standard seVers establish the rules underwhich firmsreportfinancialresultstoexternalpar0es.

Accoun0ng standards aim to regulate the repor0ng choices available tomanagers in presen0ng thefirms financial statements in order to reduce

processing costs for financial statement users by providing a commonly

acceptedlanguagethatmanagerscanusetocommunicatewithinvestors

IAS1definesIFRSsascomprising:

o Interna0onalFinancialRepor0ngStandards;o Interna0onalAccoun0ngStandards;ando Interpreta0onsoriginatedbytheIFRSInterpreta0onsCommiVee(IFRIC)or

theformerStandingInterpreta0onsCommiVee(SIC).

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Interna+onalFinancialRepor+ngStandards(IFRS)

IFRS

IFRSInternational

Accounting StandardsBoard (IASB)

International

AccountingStandards (IAS)

InternationalAccounting Standards

Committee (IASC)replaced by the IASB

Interpretations

International FinancialReporting

InterpretationsCommittee (IFRIC)

StandingInterpretations

Committee replacedby the IFRIC

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Standard-

seVngapproaches

Rules-basedSpecificguidelines

Principles-based

Broadobjec+veswhichleaveroomforinterpreta+on

Interna)onalFinancialRepor)ng

Standards(IFRS

Accoun+ngStandards

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Standard-SeVngApproaches

Rules-based standards Principles-based standards

Provide specific guidelines for those whoprepare financial statements

Focus on broad objectives which leaveroom for interpretation

Rules must be clear and understandablein their application and enforcement

Can be applied flexiblyto differentjurisdictions to satisfy local laws and

cultureRules must be comprehensive to avoidgaps that fail to provide guidance in all

circumstances

Those who prepare financial statementsare expected to comply or explain

Critics believe that management has anincentive to apply by the letter of the

law rather than spirit of the law

Critics believe that principles-basedstandards create uncertainty about

compliance

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Whodoessetstandards?

IASB:Global(private)standardseVer;> Interna0onalFinancialRepor0ngStandard(IFRS,formerIAS)

EuropeanUnion:>direc0ves,regula0ons,implemen0ngmeasures

Na0onallegislator:>na0onallawsuchasthecodeofobliga0ons(Swiss);

CommercialCode(German)etc.

Na0onalprivatestandardseVer>standards/accoun0ngandrepor0ngrecommenda0ons

Otherlegislators:FASB>USGAAP

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GoverningOrganiza+ons

Interna0onalAccoun0ngStandardsBoardPublishestheInterna0onalFinancialRepor0ngStandards,theinterna0onalaccoun0ngrulebook

IASB

FinancialAccoun0ngStandardsBoardAprivatelyfundedorganiza0on,formulatesaccoun0ngstandards.FASB

Securi0esandExchangeCommissionU.S.governmentalagencythatoverseesU.S.financialmarkets.SEC

AmericanIns0tuteofCer0fiedPublicAccountantsPrivateorganiza0onofpublicaccountantsAICPA

GenerallyAcceptedAccoun0ngPrinciplesMainU.S.accoun0ngrulebookGAAP

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TheAccoun+ngPolicymakingProcess

GenerallyAcceptedAccoun0ng

Principles(GAAP)

EconomicConsequences

Policymakers

SEC

FASB/IASB

ActualAccoun0ngPrac0ces

Publichearings,leers

Congress,WhiteHouse,

governmentagenciesPublicInput

Perceivedeconomic

consequences

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Lawsandstandards-Direc0ves/regula0ons-Swisslaw,standards-IASBStandards

Basicvalua0onprinciples-Recogni0on-alua0on-...

determine

Specificrules-Goodwill-Leasing-...

specify

Legisla0vebackground

-EU-Legislator,FER-IASB

develop

StandardseVer

Financialrepor0ng-Individualaccounts-Consolidatedaccounts-Otherpublica0ons

regulate

Managementrepor0ng-Basisfordecisions-Informa0on-Compensa0on...

Company

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IASB

TheInterna0onalAccoun0ngStandardsBoardisanindependent,private-sectorbodythatdevelopsandapprovesInterna0onalFinancialRepor0ngStandards(IFRSs).

MainObjec0ve:develop, in the public interest, a single set of high quality, understandable and

enforceable global accounting standard s that require high quality, transparent andcomparable information in financial statements and other financial reporting to help

participants in the world's capital markets and other users make economic decisions

The IASB operates under the oversight of the Interna0onal Financial Repor0ngStandardsFounda0on.

The IASB was formed in 21 to replace the Interna0onal Accoun0ng StandardsCommiVee(IASC).

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Dis+nc+onbetweenIASsandIFRSs

Narrowly:oIFRSsreferstothenewnumberedseriesofpronouncementsthattheIASBisissuing(e.g.IFRS1,IFRS3)

oIASsreferstotheoldnumberedseriesofpronouncementsissuedbyIASC(e.g.IAS1,IAS38)

Morebroadly:o IFRSsreferstotheen0rebodyofIASBpronouncements(IFRSs)andIASCstandards(IASs)

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Harmonisa+onoffinancialrepor+nginEurope

Priorto25everyna0onapplieditsdomes0caccoun0ngstandards(LocalGAAP)developedbyna0onalstandardseVerssuchasFinancialAccoun0ng

StandardsBoardinUSA,ConsiglioNazionaledeiDoVoriCommercialis0in

Italy,CompagnieNa0onaledesCommissairesauxComptes inFranceand

RechnungslegungsStandardsCommiVeeinGermany.

Overlastthirtyyears,therapidglobaliza0onofstockmarketsaroundtheworldhasprogressivelyraisedtherequirementforacommonlanguagefor

bothcompaniesandinvestorsthat,respec0vely,arewillingtobelistedand

investinforeigncapitalmarkets.

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Harmonisa+onoffinancialrepor+nginEurope

In order to achieve a more comparability of financial statements andconsequentlyabroaderintegra0onofcapitalmarketsacrosscountries,the

interna0onalharmoniza0onofaccoun0ngstandardshasbeenundertaken

since22.

Theaccoun0ngharmoniza0onaimsatmakingfinancialrepor0ngconsistentaroundtheworldthroughtwo-prongedapproaches:o theadop0onofonesinglesetofaccoun0ngstandards,o theprogressiveconvergencebetweenaccoun0ngstandards.

Morethanonehundredcountries permitor require some or allfirms toreplacingna0onalGAAPswith Interna0onalFinancialRepor0ng Standards

(IFRS).

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Harmonisa+onoffinancialrepor+nginEurope:IASRegula+onI

Themilestoneoftheharmoniza0onofaccoun0ngstandards:

n InJune22theCounciloftheEuropeanUnionhasadoptedan'IASRegula0on'requiringcapitalmarketorientatedcompaniestopreparetheirconsolidatedaccountsinaccordancewithIAS/IFRSfrom25onwards.

n TheRegula0onhastheforceoflawwithoutrequiringtransposi0onintona0onallegisla0on.

nMemberStatesmaydeferapplica0onun0l27forthosecompaniesthatarelistedbothintheEUandelsewhereandthatcurrentlyuseUSGAAP(orotherGAAP)astheirprimarybasisofaccoun0ng,aswellasforcompaniesthathaveonlypubliclytradeddebtsecuri0es.

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Memberstateop0onIFRSrequiredConsolidated

accounts

Memberstateop0onMemberstateop0onIndividualaccounts

Notcapitalmarket

orientated

Capitalmarket

orientated

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Consolidated

accounts,notcapital

marketoriented

Individualaccounts,

capitalmarket

oriented

Individualaccounts,

notcapitalmarket

oriented

Enterpriseop+on

AT,BE,DK,FI,FR,DE,

GR,IT,IR,LU,NL,PT,

ES,SE,GB,CZ,EE,HU,SI

DKun0l29,FI,IR,

LU,NL,SE,GB,PL

DK,FI,GR,IT,IR,LU,

NL,PL,SE,GB,EE,SI

Required

CY*,MT*,SK

BE,IT,SE,EE,LT,PL,SI

forfinancial

ins0tu0ons

DKa\er29,GR,IT,

PL,CZ,CY*,EE,LT,

MT*,SK,SI

CY*,MT*

EE,LT,SIforbanks

Forbidden

L,LT,PL AT,BE,FR,DE,ES,HU,

L

AT,BE,FR,DE,ES,CZ,

HU,L,LT,PL,SK

*=IFRSna0onalfinancialrepor0ngstandard

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Harmonisa+onoffinancialrepor+nginEurope:RequirementsforSwissorEUcompanies

Typeofissuer

Switzerland

EUmemberstates

Equitymainsegment

IFRS,USGAAP

IFRS(USGAAPun0l26)

Equityothersegments

(investment,realestate,

localcap)

FER,IFRS,USGAAP

IFRS

(USGAAPun0l26)

Debtonly

FER,IFRS,USGAAP

IFRSfrom27

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Harmonisa+onoffinancialrepor+nginEurope:Accoun+ngstandardsappliedinSwitzerland

Accoun+ngStandard 2008 2007 2006 2005 2004

IFRS 192 193 187 186 146

USGAAP 17 17 2 18 19

SwissGAAPFER

(incl.RR-EBK)5 52 54 59 11

Total 259 262 261 263 266

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Convergencebetweenaccoun+ngstandards

SomecountriessuchasU.S.,Japan,andChinaprefertoconvergetheirstandardswithIFRS

In22,theFASBandtheIASBformalisedtheircommitmenttotheconvergenceofUS GAAP and IFRS by issuing a memorandum of understanding (the Norwalkagreement) in which the two boards pledged to make their financial repor0ng

standards fully compa0ble and to coordinate their future work programmes to

ensurethatonceachieved,compa0bilityismaintained

In27theSECremovedthereconcilia0onrequirementfornon-U.S.companiesthatareregisteredintheUnitedStatesanduseIFRS.

Planfortransi0ontoIFRSsforUSdomes0cissuersstar0ngforfiscalyearsendingonora\er15December214

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Ques)onson:Introduc)ontoFinancialAccoun)ng

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Ques+ons

1. Dis0nguishmanagerialaccoun0ngfromfinancialaccoun0ng,anddescribehowtheinforma0onprovidedbythetwosystemsisuseddifferently.

2. Whataretheaccoun0ngstandards?Whatistheirmaingoal?3. Whodoessettheaccoun0ngstandards?4. Whatistheharmoniza0onofaccoun0ngstandards?5. WhichcompaniesaredirectlyinfluencedbytheIASRegula0on?

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6. Con0nental Airlines signed contracts with its major creditors (mostlybanks)thatrequirethecompanytomaintainaminimumcashbalanceof$6million, aminimum shareholders equity balance of $972million,

anddividendpaymentsrestricted tonomorethan$576million.Discuss

whythecreditorsimposesuchrestric0onsonCon0nental.

7. TheFASBandIASBareworkingonconvergingU.S.GAAPandIFRSintoasingle repor0ng system. Currently, the SEC accepts IFRS financial

statementsfromnon-U.S.companies,whilerequiringU.S.GAAPfromU.S.

companies. Commenton thedifficul0es faced byfinancial analystswho

analyze financial statements to assess the financial condi0on and

performanceofcompanies.

Consider, for example, the plight of an analyst in the pharmaceu0cal

industrywhomustassessandcomparethefinancialperformanceofgiantsNovar0s(aSwissfirmusingIFRS)andJohnson&Johnson(aU.S.firmusing

U.S.GAAP).

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Mul+plechoice

1. Generallyacceptedaccoun0ngprinciples(GAAP)areformulatedbythe:a. FinancialAccoun0ngStandardsBoard(FASB).b. Securi0esandExchangeCommission(SEC).c. Ins0tuteofManagementAccountants(IMA).d. AmericanIns0tuteofCer0fiedPublicAccountants(AICPA).

2. Accoun0ngistheinforma0onsystemthat:a. measuresbusinessac0vity.b. communicatestheresultstodecisionmakers.c. processesdataintoreports.d. doesalloftheabove.

3. Whichofthefollowingis leastlikelytobeauserofabusiness sfinancialinforma0on?a. Taxingauthori0esb. Customersc. Creditorsd. Investors

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lecture 1(introduction to financial accounting)

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