Article: Framework for financial reporting – chapter 1 - Grewal
• IFRS principles-based, rather than rules-based = more judgment
• FV for plant, property & equipment vs. historical cost
• Loose definitions of ‘market’ and ‘economic’ value
• Different applications of fair value measurement = less reliable, comparable f/s
Notes in class
Recognition and measurement
Property plant and equipment: Amortized historical cost, fair value
Investment properties: amortized historical cost and fair value
Liabilities: different measurement
International standards and US working on common conceptual framework:
-objective of financial reporting
- Qualitative characteristics of useful information
- - measurement
Traditionally historical cost based -> market based
Measurement theories: All these four… continually re-measuring
1) Exit values – machine on BS reported at the amount it could be sold for
2) Entry value – what would it cost to replace machine (most economic)
3) Deprival value – economic loss if deprived of asset
4) Reproduction cost – current cost of existing
Historical cost – doesn’t re-measure; consider impairment
When to recognized changes?
Use entry or exit?
Impact on income?
Proposed new approach:
Business creates economic value by inputs =>outputs, This, it reasons, leads to the conclusion that
market values for inputs and outputs should be expected to play a critical role in financial reporting
measurement theory. Article discussion: Good Judgments – Chapter 2 Grewal
• Recall discussion of Enron, WorldCom, Nortel – where were the auditors??
• Possible that management mislead auditors intentionally
• Role of judgment in auditing and professional skepticism
• Unconscious bias can negatively influence judgments
“It turns out that making good judgments is much more difficult than initially realized.”
People have natural bias based on:
• First impressions
• Taking the easy route: we unconsciously default to easy judgments.
• Believing what we are told: if first impressions are positive, people are unconsciously inclined to
believe what they are subsequently told.
• Believing what we want to: we unconsciously discount evidence that contradicts our
beliefs. Once you make a decision/opinion, hard to change your mind
• Fight or flight instinct
Safeguards: (for use in a team of auditors)
using formal decision-making frameworks that result in questioning management’s judgments;
engaging external experts where necessary; and
Becoming aware of and uncovering bias in auditor judgment at every level in the team
The following 10-step process should help an auditor working on a micro-entity audit reduce bias in
making significant judgments:
- Clearly state the issue.
- Document which stakeholders will be affected by the judgment.
- Determine the possible outcomes and whether they differ for various stakeholders.
- Evaluate the process management has gone through to develop the issue, what evidence it has
provided, and what you have done to verify it.
- Obtain evidence from other sources and evaluate its quality.
- Determine whether consultation with some-one else is necessary
- State and document your conclusion and the impact on your audit.
- Document why you believe your conclusion to be correct.
- Evaluate the cumulative effect of management’s judgments for evidence of bias.
- Consider revisiting your judgment in next year’s audit. How well did you do? Article: The moral law within corporations – Chapter 3&4 Grewal
• Introduction: case of bribery
• Unfortunately, this is a recent case and is not unusual
• Is there such thing as corporate conscience?
• Who says “no”? “yes”?
• Who is cited as having elevated responsibility for ethics in corporations? Why?
• Some examples of questionable corporate conduct mentioned
• Grey area: when it is not clear whether conduct is right or wrong
• What is the main reason for being more than “profit-minded”?
Donna – In class notes
There is a bribery of foreign officials in order to win a foreign oil contract
This incident is not the only one out there
These issues raise a concern about corporate conscious
Range of opinions: free-market economists= maximize shareholder value. Other side, beyond
meeting the regulatory requirements: we should report all these issues social and economic
issues because it does affect profit.
Grey issues: Is it right or is it wrong?
Giant clothing chain outsources jobs to a local sweatshop: is this bad? They’re being
paid more than they would’ve been before because they would’ve been unemployed
Is it moral to make money by running casinos where some visitors are gambling addicts
Coca cola supports WWF but fighting against plastic bottles
Role that professional accountants play in this: a professional in the company
Young CA’s have to realize that reputation takes a long time to build but easily destroyed.
Highlights role of the CFO in terms of the place of the corporate conscious
Elton notes that CEOs must be able to depend on CFOs for “fearless advice” because it is
practically impossible for the top officer to impose his or her leadership on all parts of far-flung
companies. Drawing on a nautical analogy, Elton says the CFO’s role, “above all else, is knowing