1. Chapter 1Chapter 1
The Bangladeshi Financial Reporting EnvironmentThe Bangladeshi Financial Reporting Environment

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
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
• 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
Characteristics of AccountingCharacteristics of Accounting
1. Identification, measurement, and
communication of financial information
about;
2. Economic entities to;
3. Interested persons.

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
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
Financial ReportingFinancial Reporting
• Other forms of financial reporting include:
• President’s letter
• Prospectuses
• Government reporting
• News releases
• Management forecasts

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
Financial reporting aids users in the
allocation of scarce resources
(capital)
Accounting and CapitalAccounting and Capital
AllocationAllocation

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
Capital Allocation ProcessCapital Allocation Process

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
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
Sources of CapitalSources of Capital

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
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
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
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
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
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
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
• 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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