Cases for discussion
You are required to propose analytical and logical solution to the problems/issues highlighted in the
below cases.
1. The Challenges Facing Financial Reporting
Much is right about international financial reporting. One reason for this success is that financial statements and related disclosures capture and organize financial information in a useful and reliable
fashion. However, much still needs to be done. Here are some of the major challenges.
Wan Azmi, a new staff accountant, is confused because of the complexities involving accounting standard setting. Specifically, he is confused by financial reporting challenges. Wan decides that he
must review the environment in which accounting standards are set and implemented, if he is to increase his understanding of the financial reporting challenges.
Wan recalls that during his accounting education there was a chapter or two regarding the environment of financial accounting and the development of IFRS. However, he remembers that his
instructor placed little emphasis on these chapters.
Instructions
(a) Help Wan by identifying the challenges facing financial reporting.
Answer :
• Nonfinancial measurements.
• Forward-looking information.
• Soft assets.
• Timeliness.
• Understandability.
(b) Wan asks for guidance regarding the challenges facing financial reporting. Please assist him by describing why the challenges facing financial reporting are happened.
Answer :
• Financial reports failed to provide some key performance measures widely used by management, such as customer satisfaction indexes, backlog information, reject rates on goods purchased, as well as the results of companies’ sustainability efforts.
• Financial reports failed to provide forward-looking information needed by present and potential investors and creditors. One individual noted that financial statements in 2017 should have started with the phrase, “Once upon a time,” to signify their use of historical cost and accumulation of past events.
• Financial reports focused on hard assets (inventory, plant assets) but failed to provide much information about a company’s soft assets (intangibles). The best assets are often intangible. Consider Microsoft’s know-how and market
dominance, Wal-Mart’s expertise in supply chain management, and Procter &
Gamble’s brand image.
• Companies only prepared financial statements quarterly and provided audited financials annually. Little to no real-time financial statement information was available.
• Investors and market regulators were raising concerns about the complexity and lack of understandability of financial reports.
2. Accounting, Analysis, and Principles
The founders of Atlas Company, Finn Elo and Vender Hakala, are about to realize their dream of taking their company public. They are trying to better understand the various legal and
accounting
issues they will face as a public company.
Accounting
(a) What are some of the reporting requirements that their company will have to comply with when
they offer securities to investors and creditors?
Answer :
• Financial Statement.
(1) The Balance Sheet = Assets, Liabilities, Equity
(2) The Income Statement = Revenue, Expenses, Profit And Loss (3) The Statement Of Cash Flows = Operating, Investing, Financing
(4) The Statement Of Owners’ Or Stockholders’ Equity = Shares, Devidend, Notes To Financial Statement, Amendments In Account
• Annual Reports.
(1) Financial Statements (2) CEO Comments
• Management Discussion And Analysis (MDA).
(1) Financial Reports
(2) Comments From Managers About Current Trends
• Regulatory Compliance.
(1) Financial Reports
(2) Independent Auditor Opinion And Comments About Financial Reports
• Sustainability Reports.
(1) Economic (2) Social (3) Governance
(b) Identify the two entities that are primarily responsible for establishing IFRS, which will be applied
when preparing their financial statements. Explain the relationship of these two organizations to one
another.
Answer :
1. IASB. International Accounting Standards Board. Its mission is to develop, in the public interest, a single set of highquality and understandable IFRS for general-purpose financial statements.
2. IOSCO International Organization of Securities Commissions. does not set accounting standards. Instead, this organization is dedicated to ensuring that the global markets can operate in an efficient and effective basis
Analysis
(a) What is decision-usefulness?
Answer :
Investors are interested in financial reporting because it provides information that is useful for making decisions (referred to as the decision-usefulness approach). As indicated earlier, when making these decisions, investors are interested in assessing (1) the company’s ability to generate net cash inflows and (2) management’s ability to protect and enhance the capital providers’ investments.
(b) Briefly describe how the financial statements that Oslo prepares for its investors and creditors will contribute to decision-usefulness.
Answer :
Financial reporting should therefore help investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. In order for investors to make these assessments, the economic resources of an enterprise, the claims to those resources, and the changes in them must be understood. Financial statements and related explanations should be a primary source for determining this
information.
Principles
Oslo will prepare its statements in conformity with IFRS. Finn and Vender have heard about an IFRS hierarchy. Briefly explain this hierarchy and advise them on how the hierarchy affects the application
of IFRS.
Answer :
The following hierarchy is used to determine what recognition, valuation, and disclosure requirements should be used. Companies first look to:
1. International Financial Reporting Standards 2. International Accounting Standards
3. Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).
In the absence of a standard or an interpretation, the following sources in descending order are used:
(1) the requirements and guidance in standards and interpretations dealing with similar and related issues
(2) the Framework for financial reporting
(3) most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting IFRS Insights 33 standards, other accounting literature, and accepted industry practices, to the extent they do not conflict with the above.
Name : Aisyah Nuralam NIM : 29123362
