CFR Session 2

8/14/2019 CFR Session 2

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Corporate Financial Reporting

Session- 2

IIMC-PGP-2013: Prof. Arpita Ghosh

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asic Acco!nting "#!ation

Assets = Liabilities + Stockholders Equity

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Session- 2: $earning Goals

Basic Assumptions : Mone% Meas!re&ent' Separate "ntit%' Cost an( Fair )al!e' Going

Concern' Cash *ers!s Accr!al' Acco!nting Perio(' Re)en!e

Recognition' Matching Principle

Conceptual Framework +, ecti)es of Financial Reporting

!alitati)e characteristics "le&ents of Financial State&ents

Assets' $ia,ilities' +/ners "#!it%' i)i(en(s' Retaine("arnings' Re)en!es' " penses

Acco!nting Con)entions : Consistenc%' F!ll isclos!re' Materialit%' Cost- enefit'

Conser)atis& "thics : Sar,anes-+ le% S+ 4' Fra!(!lent Reporting

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Basic AssumptionsMoney Measurement Financial acco!nting recor(s onl% those e)ents /hich can ,e e presse( in

&onetar% ter&s Mone% pro)i(es a co&&on (eno&inator to all transactions FS prepare( in c!rrenc% of the co!ntr% /here incorporate( 5 /here liste(

if nee(e(4 For international transactions : " change rate to ,e !se totranslate4

$i&itations 6 !alitati)e infor&ation Inflation

Separate Entity !siness: Separate entit%' (istinct fro& its o/ners' cre(itors' c!sto&ers Acco!nts are 7ept for entities as (isting!ishe( fro& the persons

associate( /ith the entities . Its financial records and reports should referto the financial affairs of the business only.

So' capital ,ro!ght in ,% the o/ner to his ,!siness is the o,ligation of the,!siness entit% to its o/ner

8ol(s irrespecti)e of the for& of the ,!siness e)en if fro& legal point of

)ie/ separate entit% (oesn9t hol(


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Goin Concern or Continuity

An entit% /o!l( contin!e to operate in foreseea,le f!t!re' an( is notgoing to ,e li#!i(ate(

8elps to sprea( the effect of long ter& transactions o)er ti&e Meas!re&ent of Assets an( $ia,ilities on closing (ate Going Concern *al!e ; $i#!i(ation *al!e

Basic Assumptions

Cost and Fair !alue

Cost or historical cost principle' (ictates that co&panies recor( assetsat their cost

Fair *al!e: In(icates that assets an( lia,ilities sho!l( ,e reporte( atfair )al!e - the price recei)e( to sell an asset or settle a lia,ilit%


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asic Ass!&ptions: Accr!al )ers!s Cash asis

#imitation of Cash Basis Accountin $ So&e e a&ples of e)ents /here thetiming of cash flows is (ifferent to the substance of the transactionSelling goo(s on cre(it' ?sing ser)ices that /ill ,e pai( for in a later perio( /agespa%a,le4' Recei)ing &one% in a()ance for ser)ices to ,e pro)i(e( in the f!t!re

&aga ine s!,scription4

>i&ing of cash receipts &ight not ,e the sa&e as the ti&e of re)en!e,eing earne( an(

>i&ing of cash payments &ight not &atch the ti&ing of e pense ,eingnc!rre

>his Co&ple it% is a((resse( ,% Accrual Basis of Accountin %ransactions li7e re)en!es an( e penses4 are recorded when they

occur 5 not /hen cash is e change(4 and are reported in FS of the

period to which they relate >his is &ore appropriate than cash ,asis for calculation of profits

,eca!se it lea(s to matchin of re!enues with e&penses

It infor&s !sers of not onl% past cash transactions ,!t also f!t!re)en!es of cash receipts A=R4 an( pa%&ents A=P' $oan repa%&ent4

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Concept!al Fra&e/or7 for Financial Reporting

EthicsAccountincon!entions

ua a !eCharacteristicsof accountinInformation

E#EME(%Sof FinancialStatements

)B*EC%I+E of Financial ,eportin


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+, ecti)es of Financial Reporting

>he )b-ecti!e of Financial ,eportin is

>o pro)i(e financial infor&ation a,o!t the reporting entit% that is !sef!lto present an( potential e#!it% in)estors' len(ers an( other cre(itors

>o ,e !sef!l for &a7ing (ecisions in their capacit% as capital pro)i(ers

' .

Infor&ation that is (ecision !sef!l to capital pro)i(ers &a% also ,e!sef!l to other !sers

ecision-!sef!l infor&ation helps !sers

1. Assess Cash Flow "rospects

2. Assess Mana ement s Stewardship

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'ualitati!e Characteristics / 0ierarchy

Financial reporting infor&ation often res!lts fro& appro i&ate rather than acc!rate &eas!res10


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F!n(a&ental !alitati)e Characteristics,ele!ance &eans that the infor&ation hasthe a,ilit% to infl!ence (ecisions.Infor&ation &!st ha)e:1. "redicti!e !alue &eans that it /ill help

capital pro)i(ers &a7e (ecisions a,o!tthe f!t!re.

2. Confirmati!e !alue &eans that it /illhelp (eter&ine if e pectations ha)e

Faithful ,epresentation &eans that thefinancial reporting &!st ,e a relia,le(epiction of /hat an entit% p!rports torepresent. Infor&ation &!st ,e:1. Complete E incl!(es all infor&ation

nee(e( for a relia,le (ecision2. Neutral - free fro& ,ias3. Free from material error - &eets a

&ini&!& le)el of acc!rac%' (oes not(istort /hat the infor&ation (epicts 11


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"nhancing !alities :!alitati)e Characteristics that Co&ple&ent Infor&ation !alit%

Comparability$ >he #!alit% that ena,les !sers to i(entif% si&ilarities an(

(ifferences ,et/een t/o sets of econo&ic pheno&ena. +erifiability$ >he #!alit% that helps assure !sers that infor&ation as

presente( can ,e s!,stantiate(

%imeliness$ >he #!alit% that ena,les the !ser to recei)e infor&ation inti&e to infl!ence a (ecision.

3nderstandability$ >he #!alit% that ena,les !sers to co&prehen( the&eaning of the infor&ation the% recei)e

Presentation: Aggregation an( Classification' clear an( concise ?sers capa,ilit%: Reasona,le no/le(ge' illingness

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"le&ents of Financial State&ents S4: Assets

Asset$A reso!rce controlled ,% an entit% as a res!lt of past events an( fro& /hich

future economic benefits are e pecte( to flo/ to the entit%

1. F!t!re "cono&ic enefit is pro,a,le to flo/ in : Can ,e in the for& of(irect or in(irect cash inflo/

2. Control : Right to !se the ite& to the e cl!sion of others

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a4 Is In)est&ent in shares of a co&pan% /hich )anishe( after IP+ an asset 6,4 Is Salar% pai( to e&plo%ees an asset 6c4 Is intention to p!rchase an e#!ip&ent an asset 6

(4 Are patents o/ne( ,% an entit% an asset 6

" : !il(ing' Plant an( Machiner%' In)entories' Acco!nts recei)a,les' Cash


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"le&ents of Financial State&ents S4: $ia,ilities

#iability$Present o,ligation of the entit% arising fro& past e)ents' the settle&ent of/hich is e pecte( to res!lt in an o!tflo/ fro& the enterprise of reso!rcese&,o(%ing econo&ic ,enefits

1. "cono&ic ,enefit is e pecte( to flo/ o!t of the entit% to settle the lia,ilit% Settle&ent can occ!r thro!gh pa%&ent of cash' transfer of asset'

pro)ision of ser)ice' replace&ent /ith other lia,ilit%

2. >est : Assess /hether the fir& has an% realistic alternati)e ,!t to settlethe o,ligation H; If no' lia,ilit%

3. Res!lt of past o,ligating e)ent

Contract!al orro/ings' cre(itors4'

Arising fro& operation of la/ ta pa%a,le' penalt% i&pose(4 '

" a&ples: orro/ings' on(s= e,ent!res' A()ances fro& c!sto&ers'Acco!nts Pa%a,le' ages o!tstan(ing' >a es pa%a,le

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"le&ents of Financial State&ents S4: Sharehol(e rs9 "#!it%

Shareholders E4uity $>he o/ner9s f!n(s in)este( an( earne( in the ,!siness.

It is the resi(!al interest or clai&s of the o/ners in the assets of the

entit% after (e(!cting all its lia,ilities Contri,!te( Capital +riginal Je/4 Retaine( "arnings Profits less

istri,!tions to e#!it% hol(ers4

1he% res!lt in increase in Retaine( "arnings an( hence increase +/ners9"#!it%


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"le&ents of Financial State&ents IS4: " penses

E&penses$Reso!rces cons!&e( in the process of generating re)en!e (!ring a gi)enacco!nting perio(

>hese are inc!rre( in the process of creating re)en!es 5 in)ol)e (ecrease

in econo&ic ,enefits in the for& of : +!tflo/ or cons!&ption of assets or Inc!rrence of lia,ilities or A co&,ination of ,oth

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" a&ple: Cost of sales' /ages etc >he% res!lt in (ecrease in retaine( earnings an( hence +"

So' if an entit% has Re)en!es ; " penses' It has &a(e a profit an( the sa&e goes to

Increase o/ners9 e#!it% >his profit can ,e calle( Jet inco&e or Jet earnings

!t' if Re)en!es K " penses' it has &a(e a Jet $oss


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Acco!nting Con)entions

Consistency$ +nce an entit% has (eci(e( !pon a partic!lar acco!nting&etho( o!t of se)eral possi,le' it sho!l( !se the sa&e &etho( for all s!,se#!ent e)ents of sa&e

character' !nless it has fo!n( a so!n( reason to change the

&etho( An% change if necessar% nee(s to ,e !stifie(' its effect on profits

to ,e #!antifie( 5 (isclose( Facilitates co&parison o)er ti&e

Full disclosure 6%ransparency7$ Re#!ires that financial state&ents an(their notes present all infor&ation rele)ant to !sers " planator% Jotes : " planations to 7eep FS fro& ,eing &islea(ing Man(ator% isclos!re :

Acco!nting Policies !se( in preparing FS li7e Re)en!e recognitionpolic%' epreciation acco!nting' In)entor% *al!ation Significant ")ents after ,alance sheet (ate halt in constr!ction4

*ol!ntar% isclos!re : L!(g&ent >oo &!ch (isclos!re can create cl!tter an( ,e &islea(ing

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Constraints to Financial ,eportin $

Materiality$Relati)e I&portance or si e of an ite& or e)ent An ite& is &aterial /hen its o&ission or &isstate&ent is li7el% to

infl!ence the (ecision of a !ser of financial state&ents : L!(g&ent


heft' ri,e4

Cost/Benefit $

8ol(s that the ,enefits of pro)i(ing acco!nting infor&ation thatfinancial state&ent !sers /ill gain4 sho!l( e cee( the costs ofpro)i(ing it the costs that the co&panies /ill inc!r4

iffic!lt to #!antif% Costs an( enefits : L!(g&ent

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Conser!atism

hen (ealing /ith &eas!re&ent uncertainties ' if t/o esti&ates of so&ef!t!re a&o!nts are e#!all% li7el%'

there sho!l( ,e preference for the s&aller n!&,er /hen &eas!ringassets an( re)en!es 5 for the larger n!&,er for lia,ilities an( e penses


Anticipate no profits ,!t pro)i(e for all losses

See7s to pre)ent o)erstate&ent of profits

the possi,ilit% of s!ch o)erstate( profit ,eing (istri,!te( ,% /a% of(i)i(en( 8o/e)er' (eli,erate o)erstate&ent of lia,ilities=e penses an( (eli,erate

!n(erstate&ent of assets =inco&e (isco!rage(

can ,ias the financial state&ents /ith hi((en reser)es20


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"thics in financial Reporting

Fra!(!lent Financial Reporting: Intentional preparation of &islea(ingfinancial state&ents Can res!lt fro&

the (istortion of recor(s e.g.' the &anip!lation of in)entor%recor(s4'

falsifie( transactions e.g.' fictitio!s sales4' or the &isapplication of )ario!s acco!nting principles.

oosting share prices to &a i&i e the procee(s fro& stoc7 iss!e Meet or ,eat anal%sts consens!s or &anage&ent9s earnings

forecast E &eeting &ar7et e pectations +,taining loans' &a i&i ing perfor&ance ,on!s

Conse#!ences incl!(e in)estors losing their &one%' e&plo%ees losing their o,s an(

retire&ent ,enefits' the perpetrators getting penali e( /ithi&prison&ent an( fines

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Pre)enting Fra!(!lent Financial Reporting : Corporate Go!ernance

Sharehol(ers : In)ests &one% in shares of the co&pan%

oar( : >a7es &a or polic% (ecisions $oans' i)i(en(s4

elects

appointsReports res!lts

Corporate Go!ernance 6CG7 incl!(es oar(9s responsi,ilit% of &onitoring &anagerial actions an( ethics

Sarbanes 8)&ley Act of 2992 passe( in ?S after "nron' orl(co&4 to strengthen CG : Re#!ires C"+ 5 CF+ to certif% acc!rac% an( co&pleteness of Financial State&ents

I&poses hea)% cri&inal penalties on )iolation Re#!ires a s!,-co&&ittee of the oar( calle( A!(it Co&&ittee for&e( /ith

financial e perts an( in(epen(ent (irectors4 to ")al!ate &anage&ent perfor&ance' Appoint a!(itors 5 re)ie/ their /or7 "ns!re e istence of a(e#!ate internal control s%ste&s

anage&en : &p e&en s po c es' !ns a%- o- a% opera ons

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>han7 Oo!

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CFR Session 2

Documents

Transcript of CFR Session 2