MOS 1023 Chapter 3 Notes.docx

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Western University
Management and Organizational Studies
Management and Organizational Studies 1023A/B
Maria Ferraro

Custom Select IFRS: Introduction and Reporting Basics International Accounting Standards Board’s (IASB) mandate: developing, in the public interest a singe set of high quality, understandable, and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements  Works with national accounting standard setter to move toward global convergence  Nearly 100 countries have converged (require or allow) or are on the path to convergence International Organization of Securities Commissions (IOSCO) is also working with the IASB in this regard  Their objective is to join together regulators, such as the Ontario Securities Commission (OSC), the Securities and Exchange Commission (SEC) and other to promote cooperation and high standards of regulation in order to maintain “just, efficient, and sound markets” on a global basis. Political and Regulatory Issues GAAP enforcement is an issue (enforcement is carried out on country to country basis)  In US: SEC is main regulatory body  In Canada: regulation takes place at provincial level (OSC, BC Securities Commission and others), since Canada does not have a national regulator  Even where IFRS is required, it may be required only for consolidated financial statements and for public companies (smaller to mid size private companies may not benefit, so a simplified set of standards is being established) Principles or Rules? IFRS are referred to as being principles based (more loosely framed) allowing professional judgment to be applied  More flexible accounting to deal with unique economic and business circumstances (some say this introduces bias) GAAP model is more rules based (provides a rule for every situation)  Tightens up accounting, but this will become huge as there will be rule for every situation CEO’s of the Big 6 accounting firms concluded the key elements of a principles based standard were 1) Faithfully representing economic reality 2) Responsive to users needs for clarity and transparency 3) Consistent with a clear conceptual framework 4) Based on appropriately defined scope that addresses a broad area of accounting 5) Written in clear, concise, plain language 6) Allowing for the use of reasonable judgment Conceptual Framework for the Preparation and Presentation of Financial Statements The role of conceptual framework  Assisting the IASC in the development of future International Accounting Standards and in its review of existing International Accounting Standards  Assist in harmonization of regulations, accounting standards  Assist national standard setting bodies in developing national standards  And more (full list on page 226) Formal Status of Conceptual Framework  Not an international standard in and of itself  If it comes into conflict with a specific standard, the standard would override framework  If no standard, framework should govern the accounting  Applied to financial statements of public and private entities, where users rely on statements as major source of information for decision making Users and Objectives  Users: present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public (anyone who uses general purpose financial statements to make decisions)  Over all objective: to produce financial statements that present fairly the results of operations and the financial position ( a “true and fair view” of the company and its financial position). o In short: to provide useful information to users when making economic decisions (including decisions about management stewardship/performance) Qualitative Characteristics of Useful Information  Understandability: a common set of standard will decrease confusion internationally when comparing statements o Framework assumes that user have a reasonable knowledge of business and economic activities as well as accounting, and a willingness to study the information’s with reasonable diligence  Relevance: information must be useful to use in making the decision. Relevant Information must have o Predictive Value: be able to predict the company’s future profits and cash flows o Confirmatory Value: users must be able to confirm to reject assumptions with the information on the statement o Material is useful if its omission
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