IFRS (International Financial Reporting Standards)
US GAAP (Generally Accepted Accounting Principles)
International Organisation of Securities Commissions
IOSCO’s comprehensive set of Objectives and Principles of Securities Regulation is updated as required and is recognised as an international benchmark for all markets. The principles of securities regulation are based upon three core objectives:
- protecting investors;
- ensuring that markets are fair, efficient, and transparent; and
- reducing systemic risk.
IOSCO’s principles are grouped into 10 categories, including principles for regulators, for enforcement, for auditing, and for issuers, among others. Within the category “Principles for Issuers,” two principles relate directly to financial reporting:
- There should be full, accurate, and timely disclosure of financial results, risk, and other information that is material to investors’ decisions.
- Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.
US Securities and Exchange Commission
The US SEC has primary responsibility for securities and capital markets regulation in the United States and is an ordinary member of IOSCO. Any company issuing securities within the United States (e.g., on the New York Stock Exchange or NASDAQ), or otherwise involved in US capital markets, is subject to the rules and regulations of the SEC.
Capital Markets Regulation in Europe
The endorsement process by which newly issued IFRS are adopted by the EU reflects the balance between the individual member state’s autonomy and the need for cooperation and convergence. When the IASB issues a new standard, the European Financial Reporting Advisory Group advises the European Commission on the standard, and the Standards Advice Review Group provides the Commission with an opinion about that advice. Based on the input from these two entities, the Commission prepares a draft endorsement regulation. The Accounting Regulatory Committee votes on the proposal; and if the vote is favourable, the proposal proceeds to the European Parliament and the Council of the European Union for approval.
Financial Notes and Supplementary Schedules
For many companies, the financial notes and supplemental schedules provide explanatory information about every line item (or almost every line item) on the balance sheet and income statement. In addition, note disclosures include information about the following (this is not an exhaustive list):
- segment reporting;
- business acquisitions and disposals;
- contractual obligations, including both on- and off-balance sheet debt;
- financial instruments and risks arising from financial instruments;
- legal proceedings;
- related-party transactions; and
- subsequent events (i.e., events that occur after the balance sheet date).
Business and Geographic Segment Reporting
For each reportable segment, the following should also be disclosed in the notes to financial statements:
- revenue, distinguishing between revenue to external customers and revenue from other segments;
- a measure of profit or loss;
- a measure of assets and liabilities (if these amounts are regularly reviewed by the company’s chief decision-making officer);
- interest revenue and interest expense;
- cost of property, plant, and equipment, and intangible assets acquired;
- depreciation and amortisation expense;
- other non-cash expenses;
- income tax expense or income; and
- share of the net profit or loss of an investment accounted for under the equity method.
Management Commentary or Management’s Discussion and Analysis
International Accounting Standards Board (IASB) issued an IFRS Practice Statement “Management Commentary” includes a framework for the preparation and presentation of management commentary. The framework provides guidance rather than sets forth requirements in a standard. The framework identifies five content elements of a “decision-useful management commentary”:
(1) the nature of the business;
(2) management’s objectives and strategies;
(3) the company’s significant resources, risks, and relationships;
(4) results of operations; and (5) critical performance measures.
Auditor’s Reports
Financial statements presented in companies’ annual reports are generally required to be audited by an independent accounting firm in accordance with specified auditing standards. The independent auditor then provides a written opinion on the financial statements. This opinion is referred to as the audit report. Audit reports may vary in different jurisdictions, but the minimum components, including a specific statement of the auditor’s opinion, are similar. Audits of financial statements may be required by contractual arrangement, law, or regulation.
International standards on auditing (ISAs) have been developed by the International Auditing and Assurance Standards Board (IAASB).
Audits are designed and conducted using sampling techniques, and financial statement line items may be based on estimates and assumptions. This means that the auditors cannot express an opinion that provides absolute assurance about the accuracy or precision of the financial statements. Instead, the independent audit report provides reasonable assurance that the financial statements are fairly presented, meaning that there is a high probability that the audited financial statements are free from materialerror, fraud, or illegal acts that have a direct effect on the financial statements.
The independent audit report expresses the auditor’s opinion on the fairness of the audited financial statements, and specifies which financial statements were audited, the reporting entity, and the date. An unqualified audit opinion states that the financial statements give a “true and fair view” (international) or are “fairly presented” (international and United States) in accordance with applicable accounting standards. This is also referred to as an “unmodified” or a “clean” opinion and is the one that analysts would like to see in a financial report. There are several other types of modified opinions. A qualified audit opinion is one in which there is some scope limitation or exception to accounting standards. Exceptions are described in the audit report with additional explanatory paragraphs so that the analyst can determine the importance of the exception. An adverse audit opinion is issued when an auditor determines that the financial statements materially depart from accounting standards and are not fairly presented. Finally, a disclaimer of opinion occurs when, for some reason, such as a scope limitation, the auditors are unable to issue an opinion.
