1/11/21

Corporate Accounting & Reporting I

Lecture 1

Regulatory Environment and Conceptual Framework

o Instructor: Dr. XUE Wenjie (薛文颉)

o Email: [email protected]
o Office: BIZ1 #07-24
o Consultation hours: Friday 3pm – 5pm

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What is this course about?

o Builds on 1701 Accounting For Decision Makers:
• Accounting in Business
• Analyzing and Recording Transactions
• Completing the Accounting Cycle
• Receivables
• Inventories and Cost of Sales
• Long-Term Assets
• Current Liabilities
• Income and Equity
• Cash and Internal Control
• Statement of Cash Flows
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What is this course about?

o Topics in this course:
• Regulatory environment and conceptual framework
• Valuation, risk, and time value of Money
• Reporting financial performance
• Reporting financial position
• Property, plant, and equipment
• Investment property Long-term asset
• Intangible assets
• Preparing statement of cash flows (indirect method)
• Accounting changes, error, and other disclosure issue

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What is this course about?

o The next course (ACC2708 CA&R II):
• Current Liabilities, Provisions and Contingencies
• Non-Current Liabilities
• Leases
• Income Taxes
• Financial Instruments
• Derivatives and Hedge Accounting
• Share-based Compensation

What is this course about?

o 12 lectures
o Textbook: Intermediate Accounting: IFRS Edition (4th edition)
o After-class quiz and practice questions (not-graded)
o Class participation (10%)
o Mid-term test (30%) – week 7
o Final exam (60%)

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Lecture 1 Topics

Topic 1 Objectives of financial reporting

Topic 2 Regulatory and standard-setting organizations
Topic 3 The conceptual framework of financial reporting

Topic 1
Objectives of Financial Reporting

Topic 1 8

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Objective of Financial Reporting

Objective: Provide financial information about the reporting entity

that is useful to
• present and potential equity investors,
• creditors, and
• other stakeholders (e.g., government)

Topic 1 9

Objective of Financial Reporting

Objective: Provide financial information about the reporting entity

that is useful to
• present and potential equity investors,
• creditors, and
• other stakeholders (e.g., government)
Decision-usefulness:
• Users are interested in assessing
1. the company’s ability to generate future cash flow
2. management’s performance (stewardship)

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Objective of Financial Reporting

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Objective of Financial Reporting

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Objective of Financial Reporting

Future cash flows:
• Why does it matter?

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Objective of Financial Reporting

Future cash flows:
• Why does it matter?

• Three dimensions:
o Amount
o Timing
o Uncertainty

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Objective of Financial Reporting

Future cash flows:
• Why does it matter?

• Three dimensions:
o Amount
o Timing
o Uncertainty
• Net income (loss) ≠ realized cash flows; but predicts future cash
flows better than realized cash flows.

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Topic 2
Regulatory and Standard-setting
Organizations

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Standard-Setting Organizations
International Accounting Standards Board (IASB)

Main international standard-setting organization:

o Issues International Financial Reporting Standards (IFRS).
o IFRS used in over 149 countries.
o Adoption of IFRS is voluntary.
o Funded 52% by public authorities, 27% by accounting firms,
and 21% by publishing.
o https://www.ifrs.org

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Standard-Setting Organizations
International Financial Reporting Standard (IFRS)

• The IASB has issued 17 IFRSs.

• IASB’s predecessor International Accounting
Standards Committee issued 41 International
Accounting Standards (IAS)
• Many of the IASs have been amended or
superseded. Remaining ones are considered under
the umbrella of IFRS.

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Standard-Setting Organizations
Accounting Standard Council Singapore (ASC)

Singapore standard-setting organization:

o Issues Singapore Financial Reporting Standards (SFRS).
o Substantially converged with IFRS.
o Singapore-based companies listed on the Singapore
Exchange (SGX) are required to use SFRS (or IFRS with
special permission).
o Foreign companies listed on the SGX can use SFRS, IFRS, or
US GAAP.
o https://www.asc.gov.sg

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Standard-Setting Organizations
Accounting Standard Council Singapore (ASC)

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Standard-Setting Organizations
Why an International Standard?

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Standard-Setting Organizations
Why an International Standard?

Listings decomposition of SGX:

• IFRS was successful in creating a common accounting language for capital

markets (European Commission, 2015).
• IFRS adoption helped to reduce investment risk in domestic firms, mitigate
the “Korea discount,” and attract foreign capital via overseas shares listing,
bond issuance, or mergers and acquisitions (Korean Accounting Standards
Board, 2016).
• Evidence suggests that IFRS adoption was largely positive for listed companies
in Australia (Australian Accounting Standards Board, 2016).

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Standard-Setting Organizations
Does One Always Fit All?

Other factors to consider:

vEconomy
vRole of government
vLegal system
vCulture and social norm

“In the U.K. everything is permitted unless it is prohibited. In

Germany, it is the other way around; everything is prohibited unless
it is permitted. In the Netherlands, everything is prohibited even if it
is permitted. And in France, everything is permitted even if it is
prohibited.’’

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Standard-Setting Organizations
Due Process of IASB

Ø Membership The board has 14 full-time members. Members have

5 years renewable tenure.
Ø Autonomy The IASB is not part of any other professional
organization. It is appointed by and answerable only to the IFRS
Foundation.
Ø Independence Members must sever all ties from their past
employer and are selected for their expertise rather than to
represent a given country.
Ø Voting A majority of votes are needed to issue/amend an IFRS. In
the event of a tie, the chairperson is granted an additional vote.

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Standard-Setting Organizations
Due Process of IASB

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Standard-Setting Organizations
Interest Groups

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Topic 3
The Conceptual Framework of Financial
Reporting

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Conceptual Framework

Conceptual Framework establishes the fundamental concepts

that underlie financial reporting.

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Conceptual Framework

Conceptual Framework establishes the fundamental concepts

that underlie financial reporting.

Need for a Conceptual Framework

• Rule-making should build on and relate to an established
body of concepts.
• Enables IASB to issue more consistent pronouncements
over time.

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Conceptual Framework
• To ensure that the objective is
achieved, the financial statements
should contain some basic
elements, and the information
communicated by the financial
statements should satisfy several
qualitative characteristics.

• The implementation of financial

reporting is based on several
assumptions and principles,
subject to cost constraints.

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Conceptual Framework
Objectives of Financial Reporting

Objective: Provide financial information about the reporting entity

that is useful to
• present and potential equity investors,
• creditors, and
• other stakeholders (e.g., government)
Decision-usefulness:
• Users are interested in assessing
1. the company’s ability to generate future cash flow
2. management’s performance (stewardship)

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Conceptual Framework
Basic Elements

A present economic resource controlled by

the entity as a result of past events. An
economic resource is a right with the
potential to produce economic benefits.

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Conceptual Framework
Basic Elements

A present obligation of the entity to

transfer an economic resource as a result
of past events.

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Conceptual Framework
Basic Elements

The residual interest in the assets of the

entity after deducting all its liabilities.

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Conceptual Framework
Basic Elements

Increases in assets, or decreases in

liabilities, that result in increases in equity,
other than those relating to contributions
from holders of equity claims.

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Conceptual Framework
Basic Elements

Decreases in assets, or increases in

liabilities, that result in decreases in
equity, other than those relating to
distributions to holders of equity claims.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

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Conceptual Framework
Qualitative Characteristics of Accounting Information

To be relevant, accounting information must be capable of

making a difference in a decision.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Financial information has predictive value if it has value as

an input to predictive processes used by investors to form
their own expectations about the future.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Relevant information also helps users confirm or correct prior

expectations.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Information is material if omitting it or misstating it could

influence decisions that users make on the basis of the
reported financial information.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Faithful representation means that the numbers and descriptions

match what really existed or happened.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Completeness means that all the information that is

necessary for faithful representation is provided.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Neutrality means that a company cannot select information to

favor one set of interested parties over another.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

An information item that is free from error will be a more

accurate (faithful) representation of a financial item.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Enhancing qualitative characteristics are complementary to the

fundamental qualitative characteristics.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Information that is measured and reported in a similar manner for different

companies is considered comparable.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Verifiability means different knowledgeable and independent observes

could reach consensus.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Timeliness means having information available to decision-makers before it

loses its capacity to influence decisions.

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Conceptual Framework
Qualitative Characteristics of Accounting Information

Understandability is the quality of information that lets reasonably informed

users see its significance.

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Conceptual Framework
Assumptions

Economic Entity - company keeps its activity separate from its

owners and any other business unit.
Going Concern - company to last long enough to fulfill objectives
and commitments.
Monetary Unit - money is the common denominator.
Periodicity - company can divide its economic activities into time
periods.
Accrual Basis of Accounting - transactions are recorded in the
periods in which the events occur.

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Conceptual Framework
Measurement Principle

IFRS has a mixed-attribute system in which two measurement

bases are used:
• Historical Cost - assets and liabilities are measured basing on
the cost at which they were obtained or issued.
• Current Value - assets and liabilities are measured according to
updated information sine they were obtained or issued.
1. Current cost
2. Fair value
3. Value in use of assets / fulfillment value of liabilities

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Conceptual Framework
Measurement Principle

• Current cost (asset) - cost of an equivalent asset at the

measurement date, comprising the consideration that would be
paid at the measurement date plus the transaction costs that
would be incurred at that date.
• Current cost (liability) - consideration that would be received
for an equivalent liability at the measurement date minus the
transaction costs that would be incurred at that date.

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Conceptual Framework
Measurement Principle

• Current cost (asset) - cost of an equivalent asset at the

measurement date, comprising the consideration that would be
paid at the measurement date plus the transaction costs that
would be incurred at that date.
• Current cost (liability) - consideration that would be received
for an equivalent liability at the measurement date minus the
transaction costs that would be incurred at that date.
• Historical cost and current cost are also referred to as ‘‘entry
value’’.

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Conceptual Framework
Measurement Principle

• Fair value - the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between
market participants at the measurement date.

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Conceptual Framework
Measurement Principle

• Fair value - the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
• Value in use (asset) - present value of the cash flows, or other
economic benefits that a company expects to derive from the
use of an asset and from its ultimate disposal.
• Fulfillment value (liability) - present value of the cash, or other
economic resources that a company expects to be obliged to
transfer as it fulfills a liability.

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Conceptual Framework
Measurement Principle

• Fair value - the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
• Value in use (asset) - present value of the cash flows, or other
economic benefits that a company expects to derive from the
use of an asset and from its ultimate disposal.
• Fulfillment value (liability) - present value of the cash, or other
economic resources that a company expects to be obliged to
transfer as it fulfills a liability.
• Fair value, value in use, and fulfillment value are also referred
to as ‘‘exit value’’.
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Conceptual Framework
Revenue and Expense Recognition Principle

• The company recognizes revenue when the performance

obligation is satisfied (not when cash is received).
• Expenses are matched with revenue (not when cash is
disbursed).

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Conceptual Framework
Full Disclosure Principle

Information that is of sufficient importance to influence the

judgment and decisions of an informed user should be
provided:
Provided through:
• Financial Statements
• Notes to the Financial Statements
• Supplementary information

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Conceptual Framework
Cost Constraint

Must weigh the costs of providing the information against the

benefits that can be derived from using it.
• Include book-keeping cost, valuation cost, auditing cost,
disseminating cost, internal control cost, etc.
• In order to justify requiring a particular measurement or
disclosure, the benefits to be derived from it must exceed the
costs to be associated with it.

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Conceptual Framework
Cost Constraint

Must weigh the costs of providing the information against the

benefits that can be derived from using it.
• Include book-keeping cost, valuation cost, auditing cost,
disseminating cost, internal control cost, etc.
• In order to justify requiring a particular measurement or
disclosure, the benefits to be derived from it must exceed the
costs to be associated with it.
• But benefits and costs are typically hard to measure.
• The parties who enjoy the benefit and bear the cost know more
about them.

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Conceptual
Framework
Summary

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