Introduction class for accounting

1. 1-1
WELCOME TO CLASS!
Corporate Accounting & Reporting I
ACC2707
Accounting Environment and Conceptual Framework
Lecture 1 Please display your name card

2. 1-2
Agenda
 Introduction
 Review of Course Outline
 Lecture 1
 Part A: Accounting Environment
 Part B: Conceptual Framework

3. 1-3
About ME
 Shushu Jiang, PhD
 Background
 Teaching Experience
 Continuous Feedback
 Research Interests:
 ESG
 Contracting
 Credit markets

4. 1-4
Course Objectives
 Accounting: language of business
 Introduce financial reporting issues
 Understand role of financial information
 Understand perspectives of financial statement preparers and users
 Understand financial statements
 Focus on asset side of balance sheet
 Apply accounting techniques and methods for the topics covered

5. 1-5
Course Expectations
 Make me and this course useful for you
 Attend class
 Please display your name card
 https://inetapps.nus.edu.sg/ctr/Home
 Participate and ask questions in class
 Practice homework after lectures
 Seek to understand, not to memorize
 Cold calls are fair game

6. 1-6
Administrative INFO
 Email: shushu.jiang@nus.edu.sg (allow 24 hours for a
response)
 Office Hours: by appointment
 Additional office hours (before tests) will be posted on
Canvas
 Textbook:
 Intermediate Accounting: IFRS Edition (4th edition), authored
by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
(Publisher: Wiley)

7. 1-7
Free Resources
 IFRS Standards
 Free Podcasts (my personal favorites)

8. 1-8
Course Overview
Email me by
Jan 18 if you
have conflicts.
Randomly
assigned into
a group
Week Class Date Topic Deliverables (7pm,
Sunday of the week)
1 Jan 16 Accounting Environment
& Conceptual
Framework
2 Jan 23 Review of Accounting
Process & Balance Sheet
Statement
HW1
3 Jan 30 Income Statement and
Comprehensive Income
Group meeting
4 Feb 6 Revenue Recognition
Part I
HW2
5 Feb 13 Revenue Recognition
Part II
Submit Group Charter
on Canvas
6 Feb 20 Statement of Cash Flows HW3
Reading
7 Mar 5 Review and Consultation Midterm: March 7, 6-7
pm (TBD)
8 Mar 12 PPE Part I
9 Mar 19 PPE Part II and
Investment Property
HW4
10 Mar 26 Intangible Assets HW5
11 Apr 2 Agriculture
12 Apr 9 Accounting changes HW6
13 Apr 16 Other reporting and
disclosure issues
Submit Group Project on
Canvas

9. 1-9
Course Evaluation
Weight
Active participation 10%
Homework (best 5 out of 6) 10%
Midterm Test 25%
Group project 20%
Final Test 35%
Total 100%

10. 1-10
Course Policies
 Take a moment to read course policies on the course
outline
 Once you are finished, turn to someone next to you, and
say anything about course policies such as:
 What you like or don’t like
 What you expected to see or were surprised to see
 What you have questions about

11. 1-11
Lecture 1
Accounting Environment and Conceptual
Framework

12. 1-12
Accounting
 Accounting provides
useful information
about economic activity
to help:
 Produce good decisions
 Foster a prosperous
society

13. 1-13
Investment Decisions
Shareholder
Profit-oriented
Company
Creditor
Equity Debt
Interest
Dividend
Financial accounting information helps investors and creditors evaluate
amount, timing, and uncertainty of enterprise’s future cash flows

14. 1-14
Accounting ratios
 Are accounting numbers useful?
(Beaver 1996))

15. 1-15
Contracting Decisions
Financial accounting information helps the principal (investor) evaluate
and incentivize the agent (manager).

16. 1-16
Accounting in Compensation Contracts
(Urcan and Yoon 2023))

17. 1-17
Financial and Non-financial Information
 Examples:
 Netflix 10-K (Dec/2022):
https://www.sec.gov/ix?doc=/Archives/edgar/data/1065280/00010652
8023000035/nflx-20221231.htm

18. 1-18
Recall
 Recall: accounting is a common language of business
 A language needs vocabulary and grammar
 Vocabulary: elements of financial statements
 Grammar: rules guiding recognition, measurement and
disclosure
 Standard setters: what is a good business language?
 For example, flexibility to fit different industries, business
models, emerging business inventions
 A firm can choose FIFO, LIFO or average cost to report its inventory
 Managerial discretion: good or bad?
 Mandatory disclosures vs. voluntary disclosures

19. 1-19
Standard-setting organizations
 International: International Accounting Standards Board
(IASB)
 Issues International Financial Reporting Standards (IFRS).
 Standards used on most foreign exchanges.
 IFRS used in over 149 countries.
 not in the U.S.
Why do we need an international standard?

20. 1-20
Standard-setting organizations
 Singapore: Accounting and Corporate Regulatory
Authority
 Issues Singapore Financial Reporting Standards
 Substantially converged with IFRS.
 Singapore-based companies listed on the Singapore Exchange
(SGX) are required to use SFRS (or IFRS with special
permission).
 Foreign companies listed on the SGX can use SFRS, IFRS, or US
GAAP.

21. 1-21
The Conceptual Framework
 The Conceptual Framework is known as the “Accounting
Constitution”
 It provides underlying foundation for accounting standards
ISAB Conceptual Framework
Objectives of Financial Reporting
Qualitative Characteristics
Elements of Financial Statements
Recognition and Measurement
Vocabulary
Grammar

22. 1-22
Objective
 Financial information
 Informs amount, timing, and uncertainty of future cash flow
 Think about a simple model of firm valuation:
𝑉 = −𝑃 +
𝐶𝐹1
1+𝑟
+
𝐶𝐹2
1+𝑟 2+ …+
𝐶𝐹𝑛
1+𝑟 𝑛
 Quality of decision usefulness
 Fundamental characteristic (primary quality)
 Relevance and Faithful representation
 Enhancing characteristic (secondary quality)
 assessing trends and making cross-sectional apples to apples comparisons

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Qualitative Characteristics
Enhancing
Characteristics
Decision Usefulness
Fundamental
Characteristics
Relevance
Predictive
Value
Confirmatory
Value
Materiality
Faithful
Representation
Completeness Neutrality
Free from
Errors
Overriding
Objective
Comparability
(consistency)
Verifiability Timeliness Understandability
Constraints Cost Effectiveness
(benefit>cost)

24. 1-24
Relevance
 Predictive/Confirmatory Value
 Predicting or confirming cash flows
 Example: revenue, net income, daily active user
 Materiality
 Information is material whether it affects investor decision
 Professional judgment is involved

25. 1-25
Faithful Representation
 Complete: includes all necessary information
 Neutral: free from bias
 Controversial concept: conservatism (greater tendency to recognize bad
news than good news)
 Free from errors
 Disclosure on estimates
 No intentional fraud

26. 1-26
Enhancing Characteristics
 Comparability across companies
 Similar economic transactions should be recognized similarly
 Different economics transactions should be recognized
differently
 Consistency with a company over time
 Verifiability: different knowledgeable and independent
measurers would reach consensus
 Timeliness: quarterly financial statement and annual
report
 Material corporate events (M&A; Material contracts;
bankruptcy, delisting, etc.)
 Understandability: if users can comprehend it
 Annual report readability and firm performance (Li 2008)

27. 1-27
Basic Elements
 Elements:
 The building blocks with which financial statements are
constructed
Asset, liability, equity;
Investment by owner, and distribution to owner
Revenue, expense, gain, and loss
Netflix Annual Report

28. 1-28
Underlying Assumptions
Assumption Description
Economic Entity All economic events identified with a particular economic
entity
Going Concern Business entity will continue to operate indefinitely
Periodicity Life of a company is divided into time periods to provide
timely information
Monetary Unit Financial statements are measured in a particular monetary
unit (e.g., US dollar)
Accrual Basis Transactions that change a company’s financial statements are
recorded in the periods in which the events occur.

29. 1-29
Recognition, Measurement and Disclosure
Recognition
Process of admitting information
into the basic financial statements
Criteria
1. Definition
2. Measurability
3. Relevance
4. Reliability
Measurement
Process of associating numerical
amounts with the elements
Measurement Attributes
1. Historical cost
2. Net realizable value
3. Current cost
4. Present value of future cash
flows
5. Fair value
Disclosure
Process of including additional
supplemental information
Examples
1. Notes to financial statements
2. Supplemental financial
statements

30. 1-30
Wrap-up
Information
Environment
Conceptual
Framework
What is (financial) accounting?
• A common language of
business that facilitates
resources allocation in capital
market
• Facilitates investment and
contracting decisions
Accounting standards
• IFRS and SFRS
What is the conceptual
framework
• Objectives
• Characteristics
• Elements
• Recognition and measurement

31. 1-31
Coming up
 Next session:
 Review of Accounting Process
 Balance Sheet Statement