R23 p5

msk2222's version from 2018-02-01 02:05

Section 1

Question Answer
Characteristics of an Effective Financial Reporting Frameworktransparency, comprehensiveness, consistency
TransparencyA framework should enhance the transparency of a company’s financial statements. Transparency means that users should be able to see the underlying economics of the business reflected clearly in the company’s financial statements
Comprehensiveness a framework should encompass the full spectrum of transactions that have financial consequences. This spectrum includes not only transactions currently occurring, but also new types of transactions as they are developed. So an effective financial reporting framework is based on principles that are universal enough to provide guidance for recording both existing and newly developed transactions.
ConsistencyAn effective framework should ensure reasonable consistency across companies and time periods. In other words, similar transactions should be measured and presented in a similar manner regardless of industry, company size, geography, or other characteristics. Balanced against this need for consistency, however, is the need for sufficient flexibility to allow companies sufficient discretion to report results in accordance with underlying economic activity.
Three areas of conflictvaluation, standard-setting approach, and measurement.
Valuationvarious bases for measuring the value of assets and liabilities exist, such as historical cost, current cost, fair value, realizable value, and present value. Historical cost valuation, under which an asset’s value is its initial cost, requires minimal judgment. In contrast, other valuation approaches, such as fair value, require considerable judgment but can provide more relevant information.
Standard-Setting Approach Financial reporting standards can be established based on 1) principles, 2) rules, or 3) a combination of principles and rules (sometimes referred to as “objectives oriented”). A principles-based approach provides a broad financial reporting framework with little specific guidance on how to report a particular element or transaction.
Measurement balance sheet presents elements at a point in time, whereas the income statement reflects changes during a period of time. Because these statements are related, standards regarding one of the statements have an effect on the other statement. Financial reporting standards can be established taking an “asset/liability” approach
analyzing financial reporting disclosures, the following questions should be addressed:What policies have been discussed? Do these policies appear to cover all of the significant balances on the financial statements? Which policies are identified as requiring significant estimates? Have there been any changes in these disclosures from one year to the next?

Section 2

Question Answer
Monitoring Developments:Analysts can remain aware of ongoing developments in financial reporting by monitoring three areas: new products or types of transactions; actions of standard setters, regulators, and other groups; and company disclosures regarding critical accounting policies and estimates.
Comparison of IFRS with Alternative Reporting Systems user of financial statements will lack the information necessary to make specific adjustments required to achieve comparability between companies that use IFRS and companies that use US GAAP. Instead, an analyst must maintain general caution in interpreting comparative financial measures produced under different accounting standards and monitor significant developments in financial reporting standards
Characteristics of a Coherent Financial Reporting FrameworkEffective frameworks share three characteristics: transparency, comprehensiveness, and consistency. Effective standards can, however, differ on appropriate valuation bases, the basis for standard setting (principle or rules based), and resolution of conflicts between balance sheet and income statement focus.