1. Financial Reporting – Evolution of Global Standards
Chapter 9
Financial Reporting – Evolution of Global Standards

2. Why are FRSs needed?
Accounting numbers are important when making contracts. Eg.
Management and directors' pay is often related to the firm's performance.
The required performance may not be achieved under one method of producing accounting reports, but it could be under an alternative method.
With no restraints, the methods used to produce the report can be changed to suit the desired performance requirements.

3. Role of accounting numbers in defining contractual entitlements – temptation to manage the numbers
Typical ways to influence accounting measures:
Delay discretionary expenditure to the next accounting period, for example research, advertising, training expenditure
Delay amortisation, for example make optimistic sales projections in order to classify research as development expenditure which can be capitalised and
Reclassify deteriorating current assets as fixed assets to avoid the need to recognise a loss under the lower of cost and net realisable value rule applicable to current assets.

4. Role of accounting numbers in defining contractual entitlements – temptation to manage the numbers
Mandatory standards restrict management’s ability to adopt measures such as those listed above.
This affects wealth distribution within the firm.
For example, IF managers cannot delay the amortisation of development expenditure, bonuses related to profit will be lower and there will be a transfer of wealth from managers to shareholders.
Profit before amortisation $10,000 $10,000
Amortisation ,
Profit after amortisation , ,000
10% bonus to managers ,000
Profit available to shareholders 7, ,000

5. Shareholders are in the dark
Shareholders are usually unaware that financial statements are inaccurate.
Only aware in restricted circumstances
When a third party has a vested interest in revealing adverse facts following a takeover, or
When a company falls into the hands of an administrator, inspector or liquidator, whose duty it is to enquire and report on shortcomings in the management of a company.

6. Arguments in support of standards
Comparability
Need to make valid inter-company comparisons of performance and trends
Credibility
Credibility lost if companies select different accounting policies for similar events
Discipline
Comparisons are distorted if companies can select accounting policies with the intention of disguising changes in performance and trends.

7. Arguments against standards (Continued)
Consensus-seeking
Can lead to the issuing of standards that are over- influenced by those with easiest access to the standard setters as the subject matter becomes more complex, for example capital instruments

8. Arguments against standards (Continued)
Overload
Too many standards
Too detailed
Too general-purpose and fail to recognise the differences between large and small entities
Too many standard setters with differing requirements, for example FASB, IASB, ASB, national Stock Exchange listing requirements.

9. Reasons for differences in reporting
The character of the national legal system
The way in which industry is financed
The relationship of the tax and reporting systems
The influence and status of the accounting profession
The extent to which accounting theory is developed
Accidents of history
Language.

10. Ways in which industry is financed Different information needs
Equity investors
Objective information for stewardship
Fair information for investment decision-making
Reliance on external information
Loan creditors
Banks principal lenders and shareholders
Access to internal information
Published disclosures less relevant.

11. Relationship of the tax and reporting systems
Reporting and tax separate
Separate rules for calculating profit for tax
Financial reporting less prescriptive.
Primacy to taxation rules
- Allowance only if in the financial accounts
- Possible misinterpretation when comparing different companies
- Example: treatment of depreciation.

12. Influence and status of the accounting profession
Where market-sensitive information is needed
Reliable and relevant information required
Growth of established profession and audit function
Impact on accounting regulation.
Where there has been less need for market- sensitive information
- Less need for expertise
- Less need for financial management.

13. Accidents of history Effect of commercial scandals Pooling resources
In US led to SEC being set up
In UK led to publishing accounting standards
Financial reporting less prescriptive
Pooling resources
External pressures
Joining EU and becoming subject to Directives
Imposed.

14. US GAAP
There has been competition for international supremacy between US GAAP and IFRSs
UK and the USA systems of financial reporting have much in common, BUT
In the USA
there are more rules than in the UK, and
A greater standardisation and disclosure of information.

15. US GAAP (Continued) Legislation
No direct equivalent of the UK Companies Acts in the USA
The Securities and Exchange Commission (SEC) is responsible for requiring the publication of financial information for the benefit of shareholders.
Power to dictate the form and content of reports
Monitors financial reports.

16. US GAAP – Standard setting
FASB
The Financial Accounting Standards Board (FASB) sets accounting standards in the USA, and issues:
Statements of Financial Accounting Standards, which deal with specific issues
Statements of Concepts, which give general information
Interpretations which clarify existing standards
Emerging Issues Task Force.

17. US GAAP – other mandatory pronouncements
The APB
The Accounting Principles Board (APB) publishes Opinions
The AICPA
The American Institute of Certified Public
Accountants (AICPA) publishes Accounting Practice Bulletins and Opinions
APB and AICPA pronouncements should all be regarded as mandatory.

18. The wider reach of IFRS
Transition to IFRSs occurring in EU, Africa and Asia-Pacific Region, but different national editions of IFRSs appearing
China - in the process of converting Chinese Accounting Standards to be compliant with IFRS. Current standards are substantially compliant
The External Reporting Board (XRB) has issued New Zealand equivalents (NZIFRS) that are fully compliant with IFRS, but are not identical to IFRS – there are specific additional requirements considered appropriate to the New Zealand environment
This means that New Zealand companies’ accounts will be meet IFRS requirements, but foreign companies following IFRS will not necessarily fully follow NZIFRS requirements.

19. Progress towards adoption by the USA of International standards
Since 2002, there has been collaboration between the Financial Accounting Standards Board (FASB) and the IASB to the development of high-quality, compatible accounting standards that could be used for both domestic and cross- border financial reporting.
This convergence is continuing in 2015.

20. Review questions
1. Why is it necessary for financial reporting to be subject to (a) mandatory control and (b) statutory control?
2.‘The most favoured way to reduce information overload was to have the company filter the available information set based on users’ specifications of their needs.’ Discuss how this can be achieved given that users have differing needs.