Financial Statements - Financial Reporting Objectives and Enforcement
I. Financial Reporting Objectives
There are six steps in completing the financial analysis framework:
1. The first step is to determine the scope and purpose of the analysis. When stating the objective and context, definitive goals should be stated as well as what form the analysis will take and what resources will be required to complete it.
2. In order to complete the analysis the analyst must gather data. In addition to the financial data, a physical inspection should be completed and company stakeholders should be interviewed, if applicable.
3. Analysts must then process the data and make adjustments to the financial statements, to assumptions or estimates, and any other necessary calculations.
4. Once the data has been reviewed and updated then the analyst must analyze and interpret it to determine if the analysis achieves the original goals that were set in the first step.
5. Once the analysis has been completed then the analyst must report the conclusions or recommendations and communicate it to the appropriate audience.
6. Since the factors and assumptions made in the analysis are subject to change over time, the analyst should update the analysis periodically, to see if the conclusions or recommendations change.
Objectives of Financial Reporting
Objectives of financial reporting identified in SFAC 1 are to do the following:
- They are to provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. (Note the FASB's emphasis on investors and creditors as primary users. However, this does not exclude other interested parties.)
- They are to provide information to help present and potential investors and creditors and other users in assessing the amounts, timing and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption or maturity of securities or loans. (Emphasize the difference between the cash basis and the accrual basis of accounting.)
- They are to provide information about the economic resources of an enterprise, the claims on those resources and the effects of transactions, events and circumstances that change its resources and claims to those resources.
The main barrier to convergence or one universally accepted set of financial standards is the fact that the international boards that set standards cannot agree on the best way to deal with particular issues or situations affecting the preparation of financial statements. Different local issues often take priority over determining ways to deal with international accounting problems. The political environment and the resultant political pressure on governmental standards authorities also create an impediment to a global standards framework.
The major standard setting authorities such as the International Accounting Standards Board and the U.S. Financial Accounting Standards Board, the International Organization of Securities Commissions, the U.K. Financial Services Authority, and the U.S. Securities and Exchange Commission all have their own projects to solve domestic financial accounting and performance reporting issues. However, international convergence has become a greater priority as more foreign companies become available for investment
II. Enforcing and Developing
FASB Role in Enforcing and Developing
The Financial Accounting Standards Board (FASB) is a nongovernmental body. This board sets the accounting standards for all companies that issue audited
Both the Securities Exchange Commission (SEC) and American Institute of Certified Public Accountants (AICPA) recognize that the Statement of Financial Accounting Standards (SFAS) statements as authoritative.
GAAP comprises a set of principles that are patterned over a number of sources including the FASB, the Accounting Principles Board (APB) and the AICPA research bulletins.
Prior to the creation of the FASB, the Accounting Principles Board (APB) set the accounting standards. As a result some of these standards are still in use.
SEC Role in Enforcing and Developing
The form and content of the financial statements of public companies are governed by the SEC. Even though the SEC delegates most of the authority to the FASB, it frequently adds its own requirements, such as the requirement for a company to provide a management discussion and analysis with its financial statements, quarterly financial statements (10-Q) and current reports (8-K). These discussions indicate things like changes in control, acquisition and divestitures, etc.)
Accounting Pronouncements Considered Authoritative
Accounting pronouncements are segmented into four categories. Category A is the most authoritative, and Category D is the least authoritative:
- FASB Standards and Interpretations
- APB Opinions and Interpretations
- CAP Accounting Research Bulletins
- AICPA Accounting and Audit Guides
- AICPA Statements of Position
- FASB Technical Bulletins
- FASB Emerging Issues Task Force
- AICPA AcSEC Practice Bulletins
- AICPA Issues Papers
- FASB Concepts Statements
- Other authoritative pronouncements
ProfessionalsThe Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
Personal FinanceA strong balance sheet sets a company apart and boosts investor confidence. How healthy is Costco based on an analysis of its balance sheets from the last two years?
Investing BasicsBrokers and registered investment advisors have some key differences. Here's what you need to know.
ProfessionalsDCF and Comparables models are widely used in equity valuation. We explain the pros and cons of each method.
ProfessionalsAlthough it seems simple, Tobin's Q Ratio is more complex than it appears. We explore some of its main strengths and weaknesses.
TaxesEvery advisor and saver needs to know these three estate planning secrets.
ProfessionalsWhy is cash flow so important, and what steps can a business take to improve it?
EntrepreneurshipRunning a business in healthcare? You might want to rethink cash flow management practices.
ProfessionalsSometimes your spending gets out of hand or income has a hiccup. Here's how financial advisors can help clients who have cash flow issues.
ProfessionalsHere are 10 ways to to improve a manufacturer's cash flow.
Professionals who help individuals manage their finances by providing ...
Formerly known as the Association for Investment Management and ...
A professional designation given by the CFA Institute (formerly ...
A financial professional who studies various industries and companies, ...
The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
According to the CFA Institute, a person who holds a CFA charter is not a chartered financial analyst. The CFA Institute ... Read Full Answer >>
The types of positions that a Chartered Financial Analyst (CFA) is likely to hold include any position that deals with large ... Read Full Answer >>
Prepaid expenses benefit both businesses and individuals. Prepaid expenses are the types of expenses that are bought or paid ... Read Full Answer >>
If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ... Read Full Answer >>
You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Full Answer >>