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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Harmonisa+onoffinancialrepor+nginEurope:IASRegula+onI
Memberstateop0onIFRSrequiredConsolidated
accounts
Memberstateop0onMemberstateop0onIndividualaccounts
Notcapitalmarket
orientated
Capitalmarket
orientated
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Harmonisa+onoffinancialrepor+nginEurope:IASRegula+onI
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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