CFA Level I Financial Reporting and Analysis (Part I)

In these two readings of this chapter, the reporting framework played an important role because it can assist in security valuation and other financial analysis. The most interesting in this chapter is that candidates able to learn on the desirable characteristics for financial reports, elements of financial statements, underlying assumptions and constraints of financial reporting. The readings as we will have a discussion later will be include of conceptual objectives of financial reporting standards, parties involved in standard-setting processes, and how the financial reporting standards are converging into one global set of rules.

 

Reading 21 Financial Statement Analysis: An Introduction

In this reading, candidates can understand more on financial statement analysis. Financial statement analysis is a process used by financial analysts to examine the financial information of a company such as annual reports, historical and projected profitability, cash flow, and risk to make a decision or recommendation whether to invest in either equity market. Investors who invest in the equity market will concern more on the company’s ability to pay a dividend, and the share prices have the potential to increase in the future.

Besides, the role of the financial position statement, comprehensive income statement, change of equity statement, and cash flows statement is discussed in this reading. Candidates must understand all of these very well because most of them are used to indicate what is the current position of a company, what is the performance for the company over a period, and as additional information regarding what are the changes in company’s current situation. Moreover, the objective of audits for financial statements, types of audit reports, the importance of adequate internal controls, and supplementary information which include with disclosure of accounting policies, methods and estimate, management’s commentary will be discussed in this reading together with some examples provided.

 

Reading 22 Financial Reporting Standards

In this reading, it will be more focuses on the objectives, importance and the framework of Financial Reporting Standards. In Malaysia, the Financial Reporting framework served as a guideline for all the registered companies to prepare their financial statements. For examples, it used to determine the types and amount of information that must be disclosed to investors and creditors to help them make informed decisions. The statements prepared by the companies must be by the approved accounting standards which have been set forth by the Malaysian Accounting Standard Board (MASB).

While for foreign companies, there will be some differences compare to local companies in Malaysia. The foreign companies which listed in the Malaysia Stock Exchange can prepare their financial reports by the internationally recognised accounting standards, which are known as International Financial Reporting Standards (IFRS). Besides, the qualitative characteristics, constraints and assumptions for preparing financial statements, and the general requirements for financial statements of IFRS also will be discussed more in this reading together with some examples provided. International Financial Reporting Standards (IFRS) is a set of accounting standard developed by an independent, non-profit organisation known as the International Accounting Standards Board’s conceptual framework (IASB). By adopting a single set of universal rules will help to simplify the accounting procedure which means that the company is allowed to use one reporting language that can be interpreted from company to company or from country to country. IFRS is also designed to maintain credibility and transparency in the financial world.

Moreover, candidates are also able to learn on the differences between the concepts of financial reporting standards under IFRS and US Generally Accepted Accounting Principles (US GAAP) reporting system. Generally Accepted Accounting Principles (GAAP) represent the accounting framework such as accounting rules, principles, standards and procedures practices followed by public traded companies in the United States as guidance to compile their financial statements. Financial Accounting Standard Board primarily sets them (FASB), a private organisation of accounting professionals, the Securities and Exchange Commission (SEC), and a US government agency. In summary, US GAAP is more focuses on rule-based, while IFRS is more focuses on general principles-based.

Last but not least, candidates are also able to learn on how to describe roles and attributes of financial reporting standard-setting bodies and regulatory authorities in establishing and enforcing the reporting standards and describe the part of Internal Organization of Security Commission. The status of global convergence of accounting standards and ongoing barriers to developing one universally accepted set of financial reporting standards, the implications for economic analysis of differing the financial reporting systems and the importance of monitoring developments in financial reporting standards also will be discussed in this reading together with some examples provided.

 

Conclusion

In conclusion, the readings in this chapter are quite essential and it may difficult for those who do not have accounting knowledge to understand especially the International Financial Reporting Standards (IFRS) versus Generally Accepted Accounting Principles (US GAAP). For the different readings that include in Financial Reporting and Analysis, we will discuss in the next coming articles which I will categorise it as Financial Reporting and Analysis (Part II).

Written by Stella Goh | 17 July 2019

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