Chapter 2: Financial Reporting and Analysis Week 3 ( October 2nd – 6th) _ Part 1 FINA321 – Fall 2016 Abdullah Al Shukaili

Topics covered 1 Introduction to Assets 2 Statutorily Financial Reports 3 Accrual Accounting 4 Auditing and Financial statement Analysis

Statutory financial reports product of the financial reporting environment Judged by:- (1) the information needs of financial statement users and (2) alternative sources of information such as economic and industry data, analyst reports, and voluntary disclosures by managers factors that affect the nature and content of financial reports:- accounting rules (GAAP or IFRAS), manager motivations, monitoring and enforcement mechanisms, regulators, industry practices, and other information sources

Statutory financial reports Annual and quarterly financial statements are made available to the public only after the financial statements are prepared and audited. Earnings announcements provide key summary information about company position and performance for both quarterly and annual periods. While financial statements provide detailed information that is useful in analysis, research shows that much of the immediate stock price reaction to quarterly financial information (at least earnings) occurs on the day of the earnings announcement instead of when the full financial statements are released. This means an investor is unlikely to profit by using summary information that was previously released. The detailed information in financial statements can be analyzed to provide insights about a company’s performance and future prospects that are not available from summary information in earnings announcements.

Factors Affecting Statutory Financial Reports 1- Generally Accepted Accounting Principles (GAAP) Financial statements are prepared in accordance with GAAP, which are the rules and guidelines of financial accounting ( US guidelines) . OR to International Financial Reporting Standards. International Financial Reporting Standards (IFRS) are formulated by the International Accounting Standards Board (IASB), which is a body representing accountants and other interested parties from different countries Generally Accepted Accounting Principles (GAAP) Financial statements are prepared in accordance with GAAP, which are the rules and guidelines of financial accounting. These rules determine measurement and recognition policies such as how assets are measured, when liabilities are incurred, when revenues and gains are recognized, and when expenses and losses are incurred.

Factors Affecting Statutory Financial Reports 2- Managers Primary responsibility for fair and accurate financial reporting rests with managers. Managers have ultimate control over the integrity of the accounting system and the financial records that make up financial statements Typically, managers oppose a standard that: (1) decreases reported earnings; (2) increases earnings volatility; or (3) discloses competitive information about segments, products, or plans.

Factors Affecting Statutory Financial Reports 3- Monitoring and Enforcement Mechanisms A. External auditing is an important mechanism to help ensure the quality and reliability of financial statements. All public companies’ financial statements must be audited by an independent certified public accountant (CPA) or (ACCA) B. Another important monitor of financial reports is corporate governance mechanisms within a company. Financial statements need approval by a company’s board of directors C. Securities and Exchange Commission. The SEC plays an active role in monitoring and enforcing accounting standards D. Another important monitor of managers (and auditors) is the threat of litigation

Organization of capital market Legislation of capital market Regulation of capital market

Legislation & Regulation of CMA https://www.cma.gov.om/Home/DecisionsCirculars

Names of Auditing office in Oman http://omanyellowpagesonline.com/finance/accountants- _and_-auditors.htm

Relevance and Limitations of Accounting 1- Relevance of Financial Accounting Information Financial accounting is and remains the only relevant and reliable system for recording, classifying, and summarizing business activities.

2- Limitations of Financial Statement Information Timeliness. Financial statements are prepared as often as every quarter and are typically released from three to six weeks after the quarter-end. In contrast, analysts update their forecasts and recommendations on a nearly real-time basis—as soon as information about the company is available to them Frequency. Financial statements are prepared periodically, typically each quarter. However, alternative information sources, including analysts’ reports, are released to the market whenever business events demand their revision. Forward-looking. Financial statements contain limited forecasts Despite these drawbacks, financial statements continue to be an important source of information to financial markets. Limitations of Financial Statements (1) Financial Statements are normally prepared on the basis of accounting principles, conventions and past experiences. Therefore, they do not communicate much about the profitability, solvency, stability, liquidity etc. of the undertakers to the users of the statements. Financial Statements: Analysis and Interpretation 151 (2) Financial Statements emphasise to disclose only monetary facts, i.e., quantitative information and ignore qualitative information. (3) Financial Statements disclose only the historical information. It does not consider changes in money value, fluctuations of price level etc. Thus, correct forecasting for future is not possible. (4) Influences of personal judgments leads to opportunities for manipulation while preparing of financial statements. (5) Information disclosed by financial statements based on accounting concepts and conventions. It is unrealistic due to difference in terms and conditions and changes in economic situations.

2- Limitations of Financial Statement Information (1) Financial Statements are normally prepared on the basis of accounting principles, conventions and past experiences. Therefore, they do not communicate much about the profitability, solvency, stability, liquidity etc. of the undertakers to the users of the statements. (2) Financial Statements emphasize to disclose only monetary facts, i.e., quantitative information and ignore qualitative information. (3) Financial Statements disclose only the historical information. It does not consider changes in money value, fluctuations of price level etc. Thus, correct forecasting for future is not possible. (4) Influences of personal judgments leads to opportunities for manipulation while preparing of financial statements. (5) Information disclosed by financial statements based on accounting concepts and conventions. It is unrealistic due to difference in terms and conditions and changes in economic situations.