ACC410 Financial ReportingLecturerDr. J. JosiahOffice: 245/111josiahj@mopipi.ub.bw

Semester 1

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ACC410 - AssessmentACC410 Week1 L*Coursework2 Tests 40%Degree exam 60% ReadingJennings, A.R.: Financial Accounting, 2nd edition.Wood, F. and Sangster, A.: Business Accounting IIGee, P.: Spicer and Peglers Bookkeeping and Accounts. Lexis Law Publishing

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The Regulation of Financial Reporting; standard setting process.

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ContentsAnnual financial statementsUses of financial statementsAccounting choicesQualitative characteristicsAccounting regulationInternational Financial Reporting StandardsACC410 Week1 L*

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Annual financial statements

Old terminologyIncome statement Balance sheet Notes to the accountsCash flow statementStatement of changes in equityAudit report

New terminologyStatement of comprehensive incomeStatement of financial position Notes to the financial statementsStatement of cash flowsStatement of changes in equityAudit report

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Uses of Financial StatementsObjective of financial statementsUser groupsAccounting traditionsAnglo-Saxon accountingContinental EuropeLink with taxationBotswanaCompanies 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 statementsACC410 Week1 L*

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Fund ProvidersEquity investorsLendersOther creditorsTo 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 providersACC410 Week1 L*

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Accounting traditionsAnglo-Saxon traditionContinental European tradition

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Anglo-Saxon accountingMainly US, UK, Australia, Canada, New ZealandFinancial statements as a function of a companys financingMarket solution to accounting rulesPowerful accounting profession

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Continental European accountingFinancial statement as a product of government regulating of the economyAll businesses are subject to accounting rules, with extra rules for:Limited liability companiesListed companies

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Accounting choicesAccounting is not necessarily a set of precise measurement rules which permit the exact measurement of company profit and company valueMeasurement of profit can never be anything but an estimateAccounting measurement is full of choicesChoices made should be stated clearly in the annual financial statements

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Accounting choicesAttributes of financial information that underpin the decision-usefulness of financial reportingFundamental versus enhancing characteristicsMateriality and cost as pervasive constraints

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Fundamental qualitative characteristicsRelevanceFaithful representationCompleteNeutralFree from bias

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Enhancing qualitative characteristicsVerifiabilityComparabilityUnderstandabilityTimeliness

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Qualitative characteristics Fundamental QC

Relevance Faithful representationCompleteNeutral Free from material error

Enhancing QC

Verifiability Comparability Understandability Timeliness

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Accounting regulationAccounting regulation disciplines accounting choicesTypes of regulatory body:GovernmentStock exchangePrivate sector bodyProfessional accountantsSpecialist industry organizationsSeparate rules for banks and insurance companiesACC410 Week1 L*

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Government as accounting regulatorRegulation of accounting designed to ensure that the markets can operate free from fraud and misrepresentationAccounting lawsCommercial codesGovernment regulatory agenciesRegulation of accounting for tax collection purposes

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

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Private sector as accounting regulatorDelegation 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-makingTechnical committees from professional accounting bodies may function as catalyst

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International bodiesInternational Accounting Standards Board (IASB)The worlds leading accounting standards-setterIssues the International Financial Reporting Standards (IFRS)IFRS either compulsory or allowed in more than 100 countriesIntergovernmental 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 problemsInternational Federation of Accountants (IFAC)International representative of the accounting profession

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International Financial Reporting StandardsSingle set of global accounting and reporting standards, issued by the IASBIncreasingly used by many large and multinational companiesAccepted by most security market authoritiesUsed as a basis for national accounting requirements (partially or in full) or as a benchmark for the development of national accounting rulesACC410 Week1 L*

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International Accounting Standards BoardA private sector bodyOperates under the International Accounting Standards Committee Foundation (IASCF)Has no responsibility to any governmental organizationHas no enforcement authorityDevelops 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)ACC410 Week1 L*

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Fig. 1.3 - Standard-setting due process of the IASB (W&A p, 27 )ACC410 Week1 L*

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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*ACC410 Week1 L

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Economic interest group theoryassumes groups will form to protect particular economic interestsgroups are often in conflict with each other and will lobby government to put in place legislation which will benefit them at the expense of othersno notion of public interest inherent in the theoryregulators (and all other individuals) deemed to be motivated by self interestthe regulator is not a neutral arbiter but is seen as an interest group itself*ACC410 Week1 L

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Economic interest group theory - continuedregulator motivated to ensure re-election or maintenance of its position of powerregulation serves the private interests of politically effective groupsthose groups with insufficient power will not be able to effectively lobby for regulation to protect its own interestsThe 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 *ACC410 Week1 L

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Accounting regulation as an output of a political processthe view that financial accounting should be objective, neutral and apolitical can be challengedwill inevitably be political as it affects wealth distribution within societystandard-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 considerationstied to the values, norms and expectations of the society in which standards are developedquestionable whether financial accounting can claim to be neutral and objective *ACC410 Week1 L

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Table 1.1 - List of IASB rules as of September 2008 (W & A, pp. 22-24 )ACC410 Week1 L*

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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

Table 1.1 - List of IASB rules as of September 2008 (cont.)ACC410 Week1 L*

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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

Table 1.1 - List of IASB rules as of September 2008 - InterpretationsACC410 Week1 L*

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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

Table 1.1 - List of IASB rules as of September 2008 Interpretations (cont.)ACC410 Week1 L*

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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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