Summary Intermediate Accounting

CHAPTER 1 Financial Reporting and Accounting Standards LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Describe the global financial markets and their relation to financial reporting. 2. Explain the objective of financial reporting. 3. Identify the major policy-setting bodies and their role in the standard-setting process. 4. Discuss the challenges facing financial reporting. This chapter also includes numerous conceptual discussions that are integral to the topics presented here. PREVIEW OF CHAPTER 1 As the following opening story indicates, countries are moving quickly to adopt International Financial Reporting Standards (IFRS). It is estimated that over 300 of the 500 largest global companies are using IFRS. However, the accounting profession faces many challenges in establishing these standards, such as developing a sound conceptual framework, use of fair value measurements, proper consolidation of financial results, off-balance-sheet financing, and proper accounting for leases and pensions. This chapter discusses the international financial reporting environment and the many factors affecting it, as follows. Continuing Evolution of International Financial Reporting The age of international trade and the interdependence of national economies continue to evolve. Many of the largest companies in the world often do more of their business in foreign lands than in their home countries. Companies now access not only their home country capital markets for financing, but others as well. With this globalization, companies are recognizing the need to have one set of financial reporting standards. For globalization of capital markets to be efficient, what is reported for a transaction in Beijing should be reported the same way in Paris, New York, or London. In the past, many countries used their own sets of accounting standards or followed standards set by larger countries, such as those used in Europe or in the United States. That protocol has changed through the adoption of a single set of rules, called International Financial Reporting Standards (IFRS). As indicated in the following chart, there is broad acceptance of IFRS around the world. As indicated, 126 jurisdictions require the use of IFRS by all or most public companies, with most of the remaining jurisdictions permitting their use. Indeed, 27,000 of the 49,000 companies listed on the 88 largest securities exchanges in the world use IFRS. IFRS also has appeal for non-public companies; since its publication, the IFRS for SMEs (small and medium-sized entities) is required or permitted in 57 percent, or 85 of 150, profiled jurisdictions, while a further 11 jurisdictions are also considering adopting IFRS. Changing to IFRS does not come without cost and effort. However, academic research and studies by adopting jurisdictions provide overwhelming evidence that the use of IFRS has brought the following net benefits to capital markets: IFRS was successful in creating a common accounting language for capital markets (European Commission, 2015).