Advanced Financial Accounting
Lecture 1: Setting the scene
Focus on the International Financial Reporting Standards (IFRS)
What is IFRS?
- Globally accepted set of standards for financial reporting → by regulators, security-
regulators.
- Developed by the International Accounting Standards Board (IASB)
o Set up in 2001 succeeding the International Accounting Standards Committee
(IASC) that was set up in 1973
o An independent private organization in London → not linked to government,
not accountable to another party. The board is independent and should not
take instructions from anyone → unique, because often influenced by others,
like the FASB.
o Funded by contributions from both private and public sector → large audit
firms, EU, companies, etc.
o Very elaborate and transparent due process to safeguard independence and
high quality → process is also overlooked by trustees, they monitor the
process to make it independent and high quality.
IFRS organization overview
- Public oversight (on process, not content) by
Monitoring Board comprising securities
regulators and European Commission
- Independent oversight by Foundation Trustees
- Various advisory bodies
- Interpretations Committee to address
upcoming urgent application issues
If someone have a question about the IFRS then IFRS
IC has to study the question and come up with an
answer → happens quite frequently.
Monitoring board: oversees the IFRS foundation → EU commission, security regulators, they
look after public interests. They can ask IASB to address certain topics.
Success so far – 166 countries surveyed
- IASB continues monitors countries about using
IFRS
- 144 require IFRS standards for all/most
companies
,GAAPs applied by Global Fortune 500 companies
- 500 largest companies in the world using
IFRS
- Number of companies using IFRS is
increasing after 2004
- US GAAP declining
- Some countries like China, has converged
their rules with IFRS
IASB’s agenda: what is next?
- Finalized four major standards (revenue, leases, financial instruments, and insurance
contracts)
- Focus areas:
o Better communication of financial reporting → transparency.
o Promoting consistency in application
o Sector-specific standards (rate-regulated sector (power & utility), extractive
sector (metal))
o Blank spots in the standards (e.g., Business Combinations under Common
Control)
o Emerging issues (such as Climate change, crypto-assets, Covid-19, IBOR
reform)
Changing role of financial reporting
Value relevance of accounting information
- Production economy to
service economy → they have
people/knowledge
- Huge change in value of
companies.
- Value of a company is in
the knowledge/people.
- Those are typically not on
the BS of the company
- It is much easier to audit
whether a building is still there →
now it is harder to show value of a
company and harder to audit.
- For intangibles there are less strict standards.
- The gap between accounting equity and market value is growing
- Relevance of financial accounting needs to be improved
Long term value
Embankment Project on Inclusive Capitalism (EPIC, 2018)
, How can we include long term value
creation in the financial statements?
- Value of knowledge, brands, people
cannot be seen on the BS.
- On the right hand side → put them on the
BS till the amount what can be reliably
measured.
- Get to reporting that is much more
relevant.
Earnings relevance
- To what extent are investors responding to
earnings numbers?
- Relevance has decreased over time.
- Declined for “new” companies → start-ups, tech
companies.
Earnings relevance
Potential causes
- Increasing importance of sometimes unrecognized intangible assets
o R&D
o Branding
o Software
o People
- Alternative real-time sources of financial information
- Growing importance of non-financial information
What IASB has done under the new chairman → if the gap is mainly intangible, should we
focus a lot more on the intangible, not only put a number on the BS but describe the
intangible.
They looked a lot more at intangibles and how the value of these are set.
Changing role of annual report
- IFRS states that they provide standards
for the investors → but why only investors?
- Short term → focus more on short term
profits to earn more and earn the bonusses.
The more you focus on the short term and
boost long term perspective, the lesser the
quality of the decisions are → missing the
boat.
- Stopped producing quarterly FS, but investors want frequent information.
Continuous reporting is not getting weekly FS, but give some highlights (revenues,
, critical financial events). Frequency can help, you can think about how to report to
your investors, like KPI’s. Giving standardized information to the investors.
- Accounting standards assume that the FS are like a book. New format → 2021 the
first year where companies in the EU where they file the FS not in the form of a PDF,
but a fixed format webpage → key data tagged, take an IFRS number and search for
this number of listed EU companies. You can drill down to details in the webpage →
flexible to navigate.
Importance of non-financial information
- Externalities
o Effect on people, environment, society
- Internalization of externalities
o Carbon pricing
o Penalties
o Customer behavior
o Reputational risks
- Sustainability goals
o Paris agreement → reducing CO2
Investors write letters to companies to force companies to provide them with information
about the Paris agreement. But they also look at the auditor who signs the FS → not voting
for this auditor in the next year.
- Shift from Financial capitalism to inclusive capitalism
o Coalition for inclusive capitalism set up by Lady Lynn Forester de Rothschild
o Inclusive capitalism according to her: business shouldn’t only benefit
investors, but a wider group of stakeholders → improve communication of FS.
It’s not only about sustainability, but also about: diversity etc.
- Diversity and inclusiveness
- Paying your fair share of tax
→ Government force companies to give information about how much tax they pay in
every country.
- Impact investment (e.g. EU sustainability taxonomy)
- Stewardship
→ Financial reporting is not only about what the effects are on the FS, but also what the
cashflow consequences are on the future.
What we have seen over the years
- All sorts of requirements for non-financial information in financial statements or in
annual report
o Remuneration management
o Corporate governance
o Country-by-country reporting of tax payments
o Sustainability information
o Health and safety information
o Diversity information
o Inequality
- Annual report is considered by government/regulators as a convenient mailbox for
disclosures by organizations
Lecture 1: Setting the scene
Focus on the International Financial Reporting Standards (IFRS)
What is IFRS?
- Globally accepted set of standards for financial reporting → by regulators, security-
regulators.
- Developed by the International Accounting Standards Board (IASB)
o Set up in 2001 succeeding the International Accounting Standards Committee
(IASC) that was set up in 1973
o An independent private organization in London → not linked to government,
not accountable to another party. The board is independent and should not
take instructions from anyone → unique, because often influenced by others,
like the FASB.
o Funded by contributions from both private and public sector → large audit
firms, EU, companies, etc.
o Very elaborate and transparent due process to safeguard independence and
high quality → process is also overlooked by trustees, they monitor the
process to make it independent and high quality.
IFRS organization overview
- Public oversight (on process, not content) by
Monitoring Board comprising securities
regulators and European Commission
- Independent oversight by Foundation Trustees
- Various advisory bodies
- Interpretations Committee to address
upcoming urgent application issues
If someone have a question about the IFRS then IFRS
IC has to study the question and come up with an
answer → happens quite frequently.
Monitoring board: oversees the IFRS foundation → EU commission, security regulators, they
look after public interests. They can ask IASB to address certain topics.
Success so far – 166 countries surveyed
- IASB continues monitors countries about using
IFRS
- 144 require IFRS standards for all/most
companies
,GAAPs applied by Global Fortune 500 companies
- 500 largest companies in the world using
IFRS
- Number of companies using IFRS is
increasing after 2004
- US GAAP declining
- Some countries like China, has converged
their rules with IFRS
IASB’s agenda: what is next?
- Finalized four major standards (revenue, leases, financial instruments, and insurance
contracts)
- Focus areas:
o Better communication of financial reporting → transparency.
o Promoting consistency in application
o Sector-specific standards (rate-regulated sector (power & utility), extractive
sector (metal))
o Blank spots in the standards (e.g., Business Combinations under Common
Control)
o Emerging issues (such as Climate change, crypto-assets, Covid-19, IBOR
reform)
Changing role of financial reporting
Value relevance of accounting information
- Production economy to
service economy → they have
people/knowledge
- Huge change in value of
companies.
- Value of a company is in
the knowledge/people.
- Those are typically not on
the BS of the company
- It is much easier to audit
whether a building is still there →
now it is harder to show value of a
company and harder to audit.
- For intangibles there are less strict standards.
- The gap between accounting equity and market value is growing
- Relevance of financial accounting needs to be improved
Long term value
Embankment Project on Inclusive Capitalism (EPIC, 2018)
, How can we include long term value
creation in the financial statements?
- Value of knowledge, brands, people
cannot be seen on the BS.
- On the right hand side → put them on the
BS till the amount what can be reliably
measured.
- Get to reporting that is much more
relevant.
Earnings relevance
- To what extent are investors responding to
earnings numbers?
- Relevance has decreased over time.
- Declined for “new” companies → start-ups, tech
companies.
Earnings relevance
Potential causes
- Increasing importance of sometimes unrecognized intangible assets
o R&D
o Branding
o Software
o People
- Alternative real-time sources of financial information
- Growing importance of non-financial information
What IASB has done under the new chairman → if the gap is mainly intangible, should we
focus a lot more on the intangible, not only put a number on the BS but describe the
intangible.
They looked a lot more at intangibles and how the value of these are set.
Changing role of annual report
- IFRS states that they provide standards
for the investors → but why only investors?
- Short term → focus more on short term
profits to earn more and earn the bonusses.
The more you focus on the short term and
boost long term perspective, the lesser the
quality of the decisions are → missing the
boat.
- Stopped producing quarterly FS, but investors want frequent information.
Continuous reporting is not getting weekly FS, but give some highlights (revenues,
, critical financial events). Frequency can help, you can think about how to report to
your investors, like KPI’s. Giving standardized information to the investors.
- Accounting standards assume that the FS are like a book. New format → 2021 the
first year where companies in the EU where they file the FS not in the form of a PDF,
but a fixed format webpage → key data tagged, take an IFRS number and search for
this number of listed EU companies. You can drill down to details in the webpage →
flexible to navigate.
Importance of non-financial information
- Externalities
o Effect on people, environment, society
- Internalization of externalities
o Carbon pricing
o Penalties
o Customer behavior
o Reputational risks
- Sustainability goals
o Paris agreement → reducing CO2
Investors write letters to companies to force companies to provide them with information
about the Paris agreement. But they also look at the auditor who signs the FS → not voting
for this auditor in the next year.
- Shift from Financial capitalism to inclusive capitalism
o Coalition for inclusive capitalism set up by Lady Lynn Forester de Rothschild
o Inclusive capitalism according to her: business shouldn’t only benefit
investors, but a wider group of stakeholders → improve communication of FS.
It’s not only about sustainability, but also about: diversity etc.
- Diversity and inclusiveness
- Paying your fair share of tax
→ Government force companies to give information about how much tax they pay in
every country.
- Impact investment (e.g. EU sustainability taxonomy)
- Stewardship
→ Financial reporting is not only about what the effects are on the FS, but also what the
cashflow consequences are on the future.
What we have seen over the years
- All sorts of requirements for non-financial information in financial statements or in
annual report
o Remuneration management
o Corporate governance
o Country-by-country reporting of tax payments
o Sustainability information
o Health and safety information
o Diversity information
o Inequality
- Annual report is considered by government/regulators as a convenient mailbox for
disclosures by organizations
