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Ppt01 1

  1. 1. Chapter 1Chapter 1 The Bangladeshi Financial Reporting EnvironmentThe Bangladeshi Financial Reporting Environment
  2. 2. 2 The Bangladeshi FinancialThe Bangladeshi Financial Reporting EnvironmentReporting Environment Role ofRole of FinancialFinancial ReportingReporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective ofObjective of FinancialFinancial ReportingReporting •Management bias •Users’ needs StandardStandard SettingSetting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAPGAAP • GAAP hierarchy •Professional judgement • Role of ethics ChallengesChallenges Facing FinancialFacing Financial ReportingReporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability
  3. 3. 3 The Bangladeshi FinancialThe Bangladeshi Financial Reporting EnvironmentReporting Environment Role ofRole of FinancialFinancial ReportingReporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective ofObjective of FinancialFinancial ReportingReporting •Management bias •Users’ needs StandardStandard SettingSetting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAPGAAP • GAAP hierarchy •Professional judgement • Role of ethics ChallengesChallenges Facing FinancialFacing Financial ReportingReporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability
  4. 4. 4 • Accounting identifies, measures, analyses, and communicates financial information to various users (decision makers) • Accounting has two broad classifications: 1. Financial accounting 2. Managerial accounting • Accounting theory and practice have evolved and will continue to evolve to meet changing demands and influences Characteristics of AccountingCharacteristics of Accounting
  5. 5. 5 Characteristics of AccountingCharacteristics of Accounting 1. Identification, measurement, and communication of financial information about; 2. Economic entities to; 3. Interested persons.
  6. 6. 6 Financial ReportingFinancial Reporting • Financial accounting provides historical information • Financial reporting is used by both internal and external users • External users include such decision makers as investors, creditors, unions, and government agencies • Managerial accounting provides both historical and forecast information • Managerial reporting information is used by management (internal users only)
  7. 7. 7 Financial Statements and OtherFinancial Statements and Other Means of Financial ReportingMeans of Financial Reporting • Major financial statements include: • Balance Sheet • Income Statement • Statement of Cash Flows • Statement of Shareholders’ (Owners’) Equity + Note Disclosures
  8. 8. 8 Financial ReportingFinancial Reporting • Other forms of financial reporting include: • President’s letter • Prospectuses • Government reporting • News releases • Management forecasts
  9. 9. 9 Flow of Information through theFlow of Information through the Financial StatementsFinancial Statements IncomeIncome StatementStatement Statement ofStatement of EquityEquity BalanceBalance SheetSheet Statement ofStatement of Cash FlowsCash Flows Reports NetReports Net IncomeIncome EndingEnding balancebalance reportedreported Change in cash asChange in cash as reported displays thereported displays the change in cashchange in cash positionposition
  10. 10. 10 Financial reporting aids users in the allocation of scarce resources (capital) Accounting and CapitalAccounting and Capital AllocationAllocation
  11. 11. 11 Accounting and CapitalAccounting and Capital AllocationAllocation • The accounting profession has the responsibility of measuring a company’s performance accurately, fairly, and on a timely basis • These measurements enable investors and creditors to compare the income and assets employed by companies • Investors can then assess the relative risks and returns associated with companies
  12. 12. 12 Capital Allocation ProcessCapital Allocation Process
  13. 13. 13 Financial Reporting aids Users (present and potential) Capital Allocation decisions Financial statements and other forms of financial reporting Users include: investors, creditors, unions, government agencies, and other Involves determining how funds are allocated among competing interests Accounting and CapitalAccounting and Capital AllocationAllocation
  14. 14. 14 Accounting and CapitalAccounting and Capital AllocationAllocation • In Canada, the primary exchange mechanisms for allocating resources are: – Debt and equity markets (e.g. TSX) – Financial institutions (e.g. banks)
  15. 15. 15 Sources of CapitalSources of Capital
  16. 16. 16 Accounting and CapitalAccounting and Capital AllocationAllocation • An effective process of capital allocation is critical to a healthy economy • Unreliable information leads to poor capital allocation • Credit rating agencies use accounting to rate companies’ financial stability • This gives investors and creditors additional independent information
  17. 17. 17 Stakeholders in Financial ReportingStakeholders in Financial Reporting • Stakeholders: parties who have something at risk (stake) in the financial reporting environment • Key stakeholders include traditional users of financial information
  18. 18. 18 Stakeholders in FinancialStakeholders in Financial ReportingReporting • Broader definition of users is: anyone who prepares, relies on, reviews, audits, or monitors financial information • Includes both internal and external parties • Key stakeholders include: – investors, creditors, auditors, regulators, analysts, management, standard setters, and others
  19. 19. 19 Stakeholders in FinancialStakeholders in Financial AccountingAccounting • Investors and creditors rely on the financial statements to make decisions • Standard setters set Generally Accepted Accounting Principles (GAAP) for direction on accounting • GAAP is used to help reduce management bias and to ensure the information is useful to users
  20. 20. 20 What is at Stake for EachWhat is at Stake for Each StakeholderStakeholder Stakeholder • Investors & creditors • Management • Securities commissions and stock exchanges What is at Stake? • Investment / loan • Job, bonus, reputation, salary increase, access to capital markets by company • Reputation, effective and efficient capital marketplace
  21. 21. 21 What is at Stake for EachWhat is at Stake for Each StakeholderStakeholder Stakeholder • Analysts & credit rating agencies • Auditors • Standard setters What is at Stake? • Reputation and profits • Reputation and profits (companies are their clients) • Reputation
  22. 22. 22 The Canadian FinancialThe Canadian Financial Reporting EnvironmentReporting Environment Role ofRole of FinancialFinancial ReportingReporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective ofObjective of FinancialFinancial ReportingReporting •Management bias •Users’ needs StandardStandard SettingSetting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAPGAAP • GAAP hierarchy •Professional judgement • Role of ethics ChallengesChallenges Facing FinancialFacing Financial ReportingReporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability
  23. 23. 23 • The overall objective of financial reporting is to provide information that is: 1. useful to users, and 2. decision relevant • Financial statements should provide information about: 1. the entity’s economic resources and claims to those resources, and 2. changes in those resources and claims • Resource allocation decisions are assumed to include assessment of management stewardship (i.e. management role in maximizing shareholder value) Objective of Financial ReportingObjective of Financial Reporting
  24. 24. 24 Objectives of FinancialObjectives of Financial ReportingReporting Yes Was income earned to generate future cash? Able to meet obligations and pay a return on investment Resource Allocation DecisionsResource Allocation Decisions Assess Management StewardshipAssess Management Stewardship YesDid management’s decisions on resource acquisition and allocation increase shareholder wealth? Investor and creditor confidence continues Capital continues to be available
  25. 25. 25 Management BiasManagement Bias • Preparation of the financial statements are the responsibility of internal management • May lead to preparing statements that report the enterprise in its best light • Motives include: – to reflect positive management stewardship (job, compensation) – meet financial analysts’ expectations, resulting in a positive reaction in the capital markets • What safeguards are in place to protect financial users from management bias?
  26. 26. 26 Understanding User Needs in theUnderstanding User Needs in the Financial Reporting ProcessFinancial Reporting Process ManagementManagement UsersUsers FinancialFinancial StatementsStatements Prepare the reports Use the reports for investment/lending decisions Use the reports to acquire capital Aggressive financial reporting has a direct impact on the user’s decision-making process
  27. 27. 27 The Canadian FinancialThe Canadian Financial Reporting EnvironmentReporting Environment Role ofRole of FinancialFinancial ReportingReporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective ofObjective of FinancialFinancial ReportingReporting •Management bias •Users’ needs StandardStandard SettingSetting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAPGAAP • GAAP hierarchy •Professional judgement • Role of ethics ChallengesChallenges Facing FinancialFacing Financial ReportingReporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability
  28. 28. 28 The Need to DevelopThe Need to Develop StandardsStandards • Standards are set to aid preparers and users of financial statements • They allow the preparers of the financial statements to present fairly the operations of the company • A single set of financial statements is prepared to meet the majority of the users’ needs • Standards are not rules, regulations, or laws • Standards are intended to be generally accepted and universally practised
  29. 29. 29 TheThe Standard Setting Process inStandard Setting Process in Canada – Parties InvolvedCanada – Parties Involved • Canadian Accounting Standards Board (AcSB) – Primarily responsible for setting GAAP in Canada • From 2011, this will be limited to standards for private enterprises, not-for-profit entities, and pension plans only (standards for publicly accountable entities will be set by the International Accounting Standards Board) – Two underlying premises for development of standards • Be responsive to the needs and viewpoints of the entire economic community • Operate in full public view through due process
  30. 30. 30 TheThe Standard Setting Process inStandard Setting Process in Canada – Parties InvolvedCanada – Parties Involved • International Accounting Standards Board (IASB) – Major international standard setting body – Mission “to develop, in the public interest, a single set of high quality, understandable and international reporting standards (IFRSs) for general purpose financial statements”
  31. 31. 31 TheThe Standard Setting ProcessStandard Setting Process in Canada — Parties Involvedin Canada — Parties Involved • Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) – FASB is the major standard setting body in the U.S. – SEC has the final authority over accounting standards in the U.S • Provincial Securities Commission (e.g. Ontario Securities Commission) – To oversee and monitor capital marketplace – Ensure strict adherence to securities law/legislation
  32. 32. 32 The Canadian FinancialThe Canadian Financial Reporting EnvironmentReporting Environment Role ofRole of FinancialFinancial ReportingReporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective ofObjective of FinancialFinancial ReportingReporting •Management bias •Users’ needs StandardStandard SettingSetting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAPGAAP • GAAP hierarchy •Professional judgement • Role of ethics ChallengesChallenges Facing FinancialFacing Financial ReportingReporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability
  33. 33. 33 Generally Accepted AccountingGenerally Accepted Accounting Principles (GAAP)Principles (GAAP) • For private companies, pension plans, and not-for- profit entities, GAAP consists of : – Primary sources • CICA Handbook Sections 1400 to 3870 • Accounting guidelines – Other sources • Background documents and implementation guidance issued by AcSB • Pronouncements in other jurisdictions • Research studies, accounting textbooks, journals, etc. Must be consistent with primary sources and in accordance with the conceptual framework (i.e. CICA Handbook Section 1000)
  34. 34. 34 Generally Accepted AccountingGenerally Accepted Accounting Principles (GAAP)Principles (GAAP) • For public companies (reporting under IFRS), GAAP includes: – IFRS – International Accounting Standards (IAS) – Interpretations (IFRIC or SIC) – If above sources do not specifically apply, other sources may be considered: • Pronouncements of other standard-setting bodies • Other accounting literature • Accepted industry practices
  35. 35. 35 Professional JudgementProfessional Judgement • There cannot be a rule for every situation • Standards in Canada are based primarily on principles rather than specific rules • Therefore, must use professional judgement • The United States uses a rules-based approach
  36. 36. 36 Role of EthicsRole of Ethics • Ethical dilemmas are common in accounting and other areas of business • It is not always easy to do the right thing or make the right decision • Ethical decisions often go beyond applying GAAP or rules of the profession
  37. 37. 37 The Bangladeshi FinancialThe Bangladeshi Financial Reporting EnvironmentReporting Environment Role ofRole of FinancialFinancial ReportingReporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective ofObjective of FinancialFinancial ReportingReporting •Management bias •Users’ needs StandardStandard SettingSetting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAPGAAP • GAAP hierarchy •Professional judgement • Role of ethics ChallengesChallenges Facing FinancialFacing Financial ReportingReporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability
  38. 38. 38 Sarbanes-Oxley Act (SOX)Sarbanes-Oxley Act (SOX) • The Sarbanes-Oxley Act (SOX) was enacted in 2002 (in the United States) • Some of the legislation’s key provisions: – Public Company Accounting Oversight Board (PCAOB) – Independence rules – Bonus/profit forfeiture – CEO/CFO certification – Management report on effectiveness of internal controls over financial reporting – Independent audit committees – Codes of ethics
  39. 39. 39 Canadian ResponseCanadian Response • The Canadian Public Accountability Board (CPAB) • Additional rules issued by Canadian Securities Administrators (CSA) including: – Management responsibility for appropriateness and fairness of financial statements – Independent audit committees – Increased disclosures
  40. 40. 40 Challenges Facing AccountingChallenges Facing Accounting Globalization Technology New economy Accountability Need for international harmonization of standards Ability to produce and access timely information A move from the traditional ‘resource-based’ to a ‘knowledge-based’ economy Driven by more sophisticated and varied investors
  41. 41. 41 Copyright © 2010 John Wiley & Sons Canada, Ltd.Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation ofAll rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyrightthis work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is(The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should beunlawful. Requests for further information should be addressed to the Permissions Department, Johnaddressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may makeWiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and notback-up copies for his or her own use only and not for distribution or resale. The author and thefor distribution or resale. The author and the publisher assume no responsibility for errors,publisher assume no responsibility for errors, omissions, or damages caused by the use of theseomissions, or damages caused by the use of these programs or from the use of the informationprograms or from the use of the information contained herein.contained herein. COPYRIGHTCOPYRIGHT

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