Kế toán tài chính 1 - Chapter 1: Environment and theoretical structure of financial accounting

ENVIRONMENT AND THEORETICAL STRUCTURE OF FINANCIAL ACCOUNTINGChapter 1© 2013 The McGraw-Hill Companies, Inc.Financial Accounting EnvironmentProfit-orientedcompaniesNot-for-profitentitiesHouseholdsProviders ofFinancial InformationExternalUser GroupsInvestorsCreditorsEmployeesLabor unionsCustomersSuppliersGovernmentagenciesFinancialintermediariesRelevantFinancialInformationFinancial Accounting Environment Relevant financial information is provided primarily through financial statements and related disclosure notes. Statement of Financial Position Statement of Comprehensive Income Statement of Cash Flows Statement of Changes in EquityThe Economic Environment and Financial ReportingA sole proprietorshipis owned by asingle individual.A partnership isowned by two ormore individuals.A corporation is ownedby shareholders,frequently numberingin the tens of thousandsin large corporations.A highly-developed system of financial reporting is necessary to communicate financial information from a corporation to its many shareholders.Investment-Credit Decisions ─ A Cash Flow Perspective Corporate shareholders receive cash from their investments through . . .Periodic dividend distributions from the corporation.The ultimate sale of the ownership shares.Accounting information should help investors evaluate the amount, timing, and uncertaintyof the enterprise’s future cash flows.Cash Versus Accrual AccountingCash Basis Accounting Revenue is recognized when cash is received. Expenses are recognized when cash is paid.Cash Versus Accrual Accounting Cash Basis Accounting Carter Company has sales on account totaling $100,000 per year for three years. Carter collected $50,000 in the first year and $125,000 in the second and third years. The company prepaid $60,000 for three years’ rent in the first year. Utilities are $10,000 per year, but in the first year only $5,000 was paid. Payments to employees are $50,000 per year.Let’s look at the cash flows.Cash Versus Accrual AccountingCash Basis AccountingCash flows in any one year may notbe a predictor of future cash flows.Cash Versus Accrual AccountingAccrual AccountingRevenue is recognized when earned.Expenses are recognized when incurred.Let’s reconsider the CarterCompany information.Accrual AccountingRevenue is recognized when earned.Expenses are recognized when incurred.Let’s reconsider the CarterCompany information.Cash Versus Accrual AccountingThe Development of Financial Accountingand Reporting StandardsConcepts, principles, andprocedures weredeveloped to meet theneeds of external users.Two major sets of accounting standards – IFRSU.S. GAAPHistorical Perspective and StandardsInternational Standard SettingStandards set by private-sectorStandards set by governmental bodyInternational Financial Reporting StandardsIASC formed in 1973Members from countries such as France, Germany, Japan, U.K., and U.S.IASC reorganized to IASB in 2001.International Accounting Standards Board (IASB) and supporting organizationsIASB members include accounting profession, analysts, academics, regulators, and government.IFRS Foundation selects members, oversees, and ensures adequate funding.IFRS Advisory Council advises on agenda and work priorities.IFRS Interpretations Committee seeks to resolve accounting issues and interpret existing IFRS.International Organization of Securities Commissions (IOSCO) provides regulatory oversight of IASB.IASB is a private and non-governmental body with no authority to enforce the use of IFRS.Structure of IASBEstablishment of Accounting StandardsDue ProcessUnderstand the nuances of the economic transactions the standards address and the views of key constituents concerning how accounting would best capture that economic realitySteps include open hearings, deliberations, and requests for written comments from interested partiesRole of the AuditorIndependent intermediary to helpensure that management has appropriately applied accounting standards.Financial Reporting Reform in U.S.As a result of numerous financial scandals, the U.S. Congress passed the Public Company Accounting Reform and Investor Protection Act of 2002, commonly referred to as the Sarbanes-Oxley Act for the two congressmen who sponsored the bill.Ethics in AccountingTo be useful, accounting information must be objective and reliable.Management may be under pressure to report desired results and ignore or bend existing rules.Model for Ethical Decisions Determine the facts of the situation. Identify the ethical issue and the stakeholders. Identify the values related to the situation. Specify the alternative courses of action. Evaluate the courses of action. Identify the consequences of each course of action. Make your decision and take any indicated action.IASB conceptual framework provides structure and direction to financial accounting and reportingIASB and FASB are working together to develop a common conceptual framework through 8 phasesThe Conceptual FrameworkThe Conceptual FrameworkUnderlying AssumptionsRecognition of ElementsMeasurement of ElementsCapital and Capital MaintenanceObjectives of Financial Reporting(Phase A)Qualitative Characteristicsof Accounting Information(Phase A)Elements ofFinancial StatementsObjectivesTo provide financial information that is useful tocapital providersElementsUnderlying AssumptionsRecognition of ElementsMeasurement of ElementsCapital andCapital MaintenanceConstraintsConceptual FrameworkQualitativeCharacteristicsFinancialStatementsContinuedElementsFinancial PositionAssetsLiabilitiesEquityPerformanceIncomeExpensesUnderlying AssumptionsGoing concernRecognition of ElementsProbability of futureeconomic benefitsReliability ofmeasurementMeasurement of ElementsBasis of measurementCapital and CapitalMaintenanceConcepts of capitalConcepts of capitalmaintenance anddetermination of profitObjective of financial reportingFinancial StatementsStatement of financial positionIncome statementStatement of comprehensive incomeStatement of cash flowsStatement of changes in shareholder’s equityNotes and supplementary disclosuresConstraintsCost effectivenessQualitativeCharacteristicsUnderstandabilityFundamentalRelevanceFaithful representationEnhancingComparabilityVerifiabilityTimelinessUnderstandabilityQualitative Characteristics of Financial Reporting InformationKey ConstraintCostEffectivenessElements of Financial Statements© 2013 The McGraw-Hill Companies, Inc.Recognition and Measurement ConceptsMeasurement of Elements of Financial Statements© 2013 The McGraw-Hill Companies, Inc.Measurement attributes in IFRS:Historical costNet realizable valueCurrent costPresent value of future cash flowFair valueThe attribute chosen to measure a particular item should be the one that maximizes the combination of relevance and representational faithfulness.The Move Toward Fair Value© 2013 The McGraw-Hill Companies, Inc.Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date.Market ApproachesIncome ApproachesCostApproachesFair Value Hierarchy© 2013 The McGraw-Hill Companies, Inc.IFRS gives a company the option to value financial assets and liabilities at fair value End of Chapter 1© 2013 The McGraw-Hill Companies, Inc.