AA Global Academy

Understanding Company Accounts and Reports

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TABLE OF CONTENTSTASK 11

1.1 The Conceptual Framework for Financial Reporting published by the IFRS Foundation sets out several desirable qualitative characteristics of financial reports. Do you agree with these objectives and views? Why or why not? TASK 2 5

2.1 Generally accepted accounting principles in China have led to certain differences with the desirable qualitative characteristics of financial reports as set out in the IFRS Conceptual Framework for Financial Reporting. Outline the reasons for these differences.2.2 Identify the significance of the reporting differences with respect to the following: (A) the IFRS, (B) Chinas regulator, and (C) Chinese companies.2.3 Discuss the likely response from China toward existing and future pronouncements issued by the IFRS, such as IFRS discussion papers and IFRS reporting standards.References14

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TASK # 1:The Conceptual Framework for Financial Reporting published by the IFRS Foundation sets out several desirable qualitative characteristics of financial reports. Do you agree with these objectives and views? Why or why not?Yes agreed with these objectives because the purpose of common principle of financial reporting is to endow with financial knowledge about the reporting body that is constructive to presented and probable financiers, lenders and other debt holders in creation of decisions concerning on condition that capital to the body. Such decisions engross trade, promotion or investment impartiality and debt instruments, and given that or reconciling loans and other outline of acknowledgment. Allen, A. and Ramanna, K., 2013The pronouncement by accessible and plausible creditors and other debt holders about stipulation or reconciling loans and other diversity of debt consist on principles and interest disbursement or extra earnings which they foresee. Supporter, debtors and other debt holders prospects about revenue consisted on their measurement of the quantity, instance and indecision of future total cash inflows to the individual. Accordingly, accessible and impending financier and other debt holder require knowledge to facilitate them to evaluate the prediction for coming total cash flows to an organization. Andr, P., Dionysiou, D. and Tsalavoutas, I., 2012Information about the environment and total of documenting corporations economic possessions and emphasize can assist consumer to recognize the reporting entitys monetary potency and limitations. That information can help users to assess the reporting entitys liquidity and solvency, its needs for additional financing and how successful it is likely to be in obtaining that financing. Information about priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity. Allen, A. and Ramanna, K., 2013 Diverse kinds of economic possessions influence a users evaluation of the exposure entitys prospects for potential cash entering ways in organization in a different way. Some potential currency in ways results unswervingly from presented economic possessions, such as money recovery from market. Andr, P., Dionysiou, D. and Tsalavoutas, I., 2012Its objective is result from using numerous possessions in amalgamation to fabricate and market commodities or offerings to consumers. Even though cash flows are not acknowledged with personage financially viable possessions (or alleges) consumers of financial statements and documentations require to be acquainted with the nature and quantity of the property accessible for utilize in documentation entity operations. Accretion accounting illustrates the belongings of transactions and other proceedings and conditions a reporting entitys profitable possessions and alleges in the epoch in which those property crop up, yet if the consequential cash proceeds and expenditure take place in a diverse phase. Allen, A. and Ramanna, K., 2013It is significant for the reason that statistics about a documenting bodys financial funds, asserts and transformation in its economic possessions and allegations throughout a phase endow with a improved base for evaluating the organizations precedent along with the prospect working than knowledge exclusively about currency revenue and expenses throughout that phase. Ewert, R., and A. Wagenhofer. 2005Information regarding an exposure bodys financial works for the duration of a phase, imitate by transforming in its profitable possessions and allegations additional than by acquiring supplementary resources straightly from financiers and lenders, is constructive in evaluation the history and prospect capability to engender total cash in ways. That information specifies the degree to which the documenting body has augmented its obtainable monetary possessions, and therefore its aptitude for producing total cash entering throughout its process moderately than by acquiring supplementary resources straightly from financiers and lenders.Information about a documenting body economic work throughout a phase may in addition specify the degree to which proceedings such as transformation in marketplace cost or capital cost have augmented or decreased the entitys economic resources and allegation, by this means disturbing the entitys capability to produce total money earned by the company. Holthausen, R. W. 2003Information regarding documenting cash earned by the organization within a phase also facilitates consumer to evaluate the organizational capability to produce prospect money earned. It specifies in what way the documenting bodies acquire and splurge money, counting information concerning its lending process and reimbursement of debit, money payment or other money disbursement to financier including features that may influence the organizations fast convert asset into cash or bankruptcy. Ewert, R., and A. Wagenhofer. 2005 Statistics and numerics regarding money s revenue and expense facilitates consumers to comprehend the maneuver tasks, calculate its economics and endow tasks evaluate its money conversion process and construe other relevant knowledge regarding monetary generation statements and tasks. The QC of constructive monetary information categorize the kind of information which are probable to be nearly all practical to the accessible and probable investors, debt holders and investors for constructing the decisions concerning the documenting bodies on the base of information in its economic statement. Holthausen, R. W. 2003Financial reports provide information about the reporting entitys economic resources, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims. According to Hothouse, R. W. 2003 quantities of economic reports also contains illuminating substance about managements prospect and approach for the reporting body, and additional kind of futuristic information.QC of constructive economic information is appropriate to monetary information make available in monetary operational statements, along with it to monetary statistics endow with in further ways. Outlay, which is a persistent limitation on the documenting bodys capability to endow with constructive financial information, concerned correspondingly. Fields, T.D., Lys, T.Z. and Vincent, L., 2001TASK # 2:2.1 Generally accepted accounting principles in China have led to certain differences with the desirable qualitative characteristics of financial reports as set out in the IFRS Conceptual Framework for Financial Reporting. Outline the reasons for these differences.From the point of FASB, 2010, Qualitative description of economic information is conversed in the theoretical scaffold of the standard-setter; to that kind of task they are vital and centralized. On the other hand, QCs are also imperative in the perspective of the preference and transform of accounting procedures by firms. Empirically the utilization of it by directors along with all staff of firms is on which we deem that no confirmation has formerly been accessible. The preeminent setting for this is strategy transform in the situation of exposure under IFRS, because it permits additional policy preference than GAAP, and it entail discovery and rationalization of policy transform that have a substance effect. The mainly recurrently declared QC is comparability, predominantly industry comparison. Other imperative characteristics are significance, dependable demonstration; comprehend ability and lucidity (not honestly declared in the Framework). Another vital reason was near the beginning adoption of adjustments to accounting principles. We stumble on that these are referred to more frequently for dimension changes and by outsized firms. Our results illustrate no significance of the ordinary/code officially permitted dichotomy but a momentous alliance flanked by exploits of QCs and a gauge of a countrys precision. There is a universal credence in the financial commune and in strategy consultation that principles-based ideology, if functional appropriately, perk up the eminence of accounting information by concentrating on financially viable substance of communication over outline, daunting financial configuration and same accounting conduct for divergent transactions. Fields, T.D., Lys, T.Z. and Vincent, L., 2001Dependable with other research, it is expected superior prominence on the exploit of proficient verdict to improve significance and steadfastness of accounting statistics. The benchmark also endow with comprehensive performance supervision which promotes the suspected frame of mind, accentuate form over cost-effective matter, and avert managers from implementing suitable specialized decision in the preference of accounting principles. FASB, 2010 As such, this measure frequently grades in the replacement of functioning charters for investment charters depending on directors intention. In adding, rules-based principles be inclined to be superseded speedily in the existing vigorously changing business world. It is note down that rules-based structure trade off profitable matter of communication for the structure and comfort comparability and reliability of accounting statistics across firms and eventually. John, P., M. Pincus, and S. O. Rego. 2003. They squabble that a regulations based system persuades managers to connect in financial formation and scandals under the pretext of conforming to the rules. Because regulations serve up as the explanation and validation along with the auditors aptitude to thwart financial disgraces is settled.Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources. EFRAG, 2013bFinancial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both. Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entitys financial report. . FASB, 2010Consequently, the Board cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation, Faithful representation does not mean accurate in all respects. Free from error means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. In this context, free from error does not mean perfectly accurate in all respects. EFRAG, 2013b For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate.However, a representation of that estimate can be faithful if the amount is described clearly and accurately as being an estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate. Fields, T.D., Lys, T.Z. and Vincent, L., 20012. Identify the significance of the reporting differences with respect to the following: (A) the IFRS, (B) Chinas regulator, and (C) Chinese companiesThroughout the epoch subsequent the communalist rebellion, China illustrated its accounting regulations from the Soviet sculpt. The Soviet replica was insignificantly acknowledged as communalist accounting. When China instigates to unbolt up to the exterior world during the era of late 70s discussion proceeded as to compare Western accounting put into practice were merely a resources of recording financially viable particulars or were as an alternative a capitalist contrivance of class subjugation. The impression that accounting observation is merely endorsed scientific management prevail the squabble, and China set out on a conduit to exploit Western standards to prop up the modification and aperture up of this country. Ewert, R., and A. Wagenhofer. 2005Chinas foremost contemporary accounting principles were issued in 90s duration, and in excess of the subsequently two decades have been recurrently transformed to improve conventional to intercontinental principles. Authorities of accounting bodies such as IASB contracted with Chinese controllers that confirmed that Chinese bookkeeping principles had congregate with IFRS, excluding on some basic clause, these were basically determined in the impending time. Some industrial bodies such as CASBE are currently abundantly congregate with IFRS. Appreciably, China has not espoused IFRS, but to a certain extent nearby are no bookkeeping handlings permitted under IFRS. EFRAG, 2013a.China may be a excellent representation for the US to obey the rules its principles to IFRS. China did not dispose of its accounting principles, as an alternative it accepted as traditional standards by eradicating some points that escort to accounting conduct not satisfactory under IFRS. Barth, M.E. and Schipper, K., 2008. In one state of affairs commerce with associated party communication between position holding endeavors, it persuaded to regulate IFRS to obey the rules according to the Chinese regulations. It, nevertheless, has preserve regulatory regulations for assured accounting conduct that narrow the prospects obtainable under IFRS, yet still succumb a result suitable under International principles. Ewert, R., and A. Wagenhofer. 2005From the statistics of Barth, M.E. and Schipper, K., 2008 Companies programmed in china big cities characteristically exploit either IFRS or HKFRS. Hong Kong principles are indistinguishable to International reporting principles apart from few insignificant conversion regulations that were curtly in consequence when these cities congregated confined principles with IFRS. Many Chinese companies have programmed in previous mentioned city, by means of numerous loom. Mainland companies unswervingly registered shares are called HK-shares. EFRAG, 2013a. Circumstances proscribed mainland companies that list in Hong Kong with an offshore investment company are described Red Chips. Chinese companies that encompass are principally secretive relatively than state. Their possession directory throughout offshore article and are occasionally said to be P Chips. Ball, R., 2006.HK accounting principles setter attained conformity with mainland principles makers that other bodies had adequately congregate with it, by means of settlement for two since determined subject, they could be acknowledged in HK cities. A curriculum was urbanized which flanked by Main city of counties and main land controllers to permit definite mainland Chinese companies catalog to show financial announcement that were assessed by an accepted other companies organization such as mainland.Succeeding to this conformity China H carve up corporations now exploit cost accounting rules assessed by their audit organization to informed in Hong Kong. Lots of these organizations are also programmed to center on Chinas stock market, wherever they utilize the equivalent financial proclamation. Some companies prolong to endow with financial statements organized under Hong Kong financial principles or International report principles to the Hong Kong Stock Exchange, while put forwarding cost accounting rules and policies financial statements to main exchanges. In a quantity of situations, companies have preferred diverse accounting techniques for financial statements arranged in IFRS compared to Cost accounting principles, sporadically leading to ample dissimilarities in reported consequences flanked by the two sets of account.Almost many Chinese organizations have scheduled on the NYS market and on NASDAQ. Many more came up to the US during a invalidate amalgamation with a US shell corporation and trade delicately, if at all, on flexible markets called over the counter. Ball, R., 2006.There is rejection of exchange prerequisite for Chinese corporation to exploit US GAAP, and the assessment to do so materialize to be supported on discernment that investors favor declaration arranged under these main beliefs. The verdict to utilize generally accepted rules frequently works adjacent to the company. Many US scheduled Chinese corporations divulge that they have a substance limitation in financial pedals related to a be short of of competent accountants specialist in these principles. China has a solemn scarcity of CPAs, and a small number of CFOs and organizer have experience related to these rules and policies. Where organizations obtain the opportunity to file financial report arranged under reporting standards, they have a large amount enhanced squabble that they do not have a substance limitation in accounting proficiency. Since Cost accounting rules have congregated with international financial standards, a Chinese experience person about these rules has a good quality argument that he/she has knowledge in practicing and implementing the IFRS financial statements. EFRAG, 2013a.3. Discuss the likely response from China toward existing and future pronouncements issued by the IFRS, such as IFRS discussion papers and IFRS reporting standards.As solitary of two extraordinary Administrative districts of China HK city has its individual officially permitted structure, counting its own permissible structure for budding accounting principles. The HK is the merely body authorised by regulation to broadcast financial reporting, assessment and moral principles for specialized accountants in HK pursuant to segment of the specialized Accountants of regulation. HK Reporting principles have been completely congregated with global Reporting values for yearly reporting phase commenced in 2005. EFRAG, 2013a.KH standards restrain phrasing indistinguishable to the correspondent International reporting principles apart from that the intermediary provisions in little standards that were congregate primarily with consequence from early 2005 were transformed to endow with the evolution from the desires in the preceding HK accepted principles. Since all HK reporting principles concerned have the equivalent IFRS effectual dates and intermediary requirements. Familial organizations whose securities deal in a community market are essential to use HK Financial Reporting principles, which are matching to IFRS, with the subsequent exemption: A corporation that is domiciled in HK but that is included external of KH is legalized to use either both principles. John, P., M. Pincus, and S. O. Rego. 2003 Companies whose protections do not deal in a public marketplace are legitimate to use HKFRS or, if they are included exterior boundaries of HK, to exploit IFRS. An SME in HK also has the opportunity to espouse the HK reporting standards for confidential Entities, which is almost indistinguishable to the reporting principles for SMEs. Furthermore, a HK included company that is not a holding corporation or a contributory in itself has the selection to exercise the HK SMEs body Financial Reporting structure and Financial Reporting Standard. Ball, R., 2006Allen, A. and Ramanna, K., 2013. Towards an understanding of the role of standard setters in standard setting. Journal of Accounting and Economics, 55 (1), 6690.Andr, P., Dionysiou, D. and Tsalavoutas, I., 2012. Mandatory adoption of IFRS by EU listed firms and comparability: determinants and analysts forecasts. ESSEC and University of Stirling, Working Paper.Ball, R., 2006. International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and Business Research, International Accounting Policy Forum, 36 (Supplement), 527.Barth, M.E. and Schipper, K., 2008. Financial reporting transparency. Journal of Accounting, Auditing & Finance, 23 (2), 173190.Klein, A. 2002. Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics 33 (3):375-400.Holthausen, R. W. 2003. Testing the relative power of accounting standards versus incentives and other institutional features to influence the outcome of financial reporting in an international setting. Journal of Accounting and Economics 36 (1- 3):271-283. John, P., M. Pincus, and S. O. Rego. 2003. Earnings management: New evidence based on deferred tax expense. The Accounting Review 78 (2):491.Ewert, R., and A. Wagenhofer. 2005. Economic Effects of Tightening Accounting Standards to Restrict Earnings Management. The Accounting Review 80 (4):1101.EFRAG, 2013a. Getting a better framework: reliability of financial information. Brussels: European Financial Reporting Advisory Group (and published by national standardsetters). EFRAG, 2013b. Getting a better framework: prudence. Brussels: European Financial Reporting Advisory Group (and published by national standard-setters). FASB, 2010. Statement of financial accounting concepts no. 8: conceptual framework for financial reporting. Norwalk, CT: Financial Accounting Standards Board. Fields, T.D., Lys, T.Z. and Vincent, L., 2001. Empirical research on accounting choice. Journal of Accounting and Economics, 31 (13), 255307