- CFA Exams
- 2025 Level I
- Topic 4. Financial Statement Analysis
- Learning Module 1. Introduction to Financial Statement Analysis
- Subject 4. Comparison of IFRS with Alternative Financial Reporting Systems
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Subject 4. Comparison of IFRS with Alternative Financial Reporting Systems PDF Download
Effective financial reporting frameworks share three characteristics:
A significant number of the world's listed companies report under either IFRS or U.S. GAAP.
Barriers to a Single Coherent Framework
Effective standards can have conflicting approaches on valuation, the bases for standard setting, and resolution of conflicts between balance sheet and income statement focuses.
- Valuation. Some valuation approaches (non-historical-cost approaches) may require considerable judgment.
- Standard-setting approach.
- Principles-based accounting provides a conceptual basis for accountants to follow instead of a list of detailed rules. One starts with laying out the key objectives of good reporting in the subject area and then provides guidance explaining the objective and relating it to some common examples. While rules are sometimes unavoidable, the intent is not to try to provide specific guidance or rules for every possible situation. Rather, if in doubt, the reader is directed back to the principles.
- Rules-based approaches are characterized by a list of specific rules, numerical tests for classifying certain transactions, exceptions, and alternative treatments.
- IASB attempts to follow a principles-based approach to standard-setting, as such accounting standards are grounded in the IASB framework. The FASB is now adopting an objectives-oriented approach to U.S. standard-setting.
- Measurement. Financial reporting standards can be established taking an asset/liability approach or a revenue/expense approach.
- The asset/liability approach requires a definition of what constitutes an asset and what constitutes a liability. For example, it links profit to changes in assets and liabilities.
- The revenue/expense approach focuses more on the income statement. It relies on concepts such as the matching principle to determine profit.
Although these two standards are moving toward convergence, there are still significant differences in the framework and individual standards. Frequently, companies provide reconciliations and disclosures regarding the significant differences between reporting bases. These reconciliations can be reviewed to identify significant items that could affect security valuation.
Monitoring Developments in Financial Reporting Standards
Reporting standards evolve rapidly. Analysts should monitor ongoing developments in financial reporting from an end-user's perspective and assess how these developments will affect financial reports.
There are two areas that require special attention:
1. New products or types of transactions
There may be no explicit guidance in the financial reporting standards to report a new type of transaction or new product. For example, the creation of new financial products has outpaced the establishment of relevant accounting standards. An analyst should identify such items and gain an understanding of their business purposes. The analyst can then evaluate the potential effect of such items on financial statements (e.g., cash flow implications).
2. Evolving standards and the role of CFA Institute
Analysts can improve their investment decision-making by keeping current on financial reporting standards; various web-based sources provide the means to do so. In addition, analysts can contribute to improving financial reporting by sharing their end-users' perspectives with standard-setting bodies, which typically invite comments concerning proposed changes.
User Contributed Comments 21
User | Comment |
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yxten1 | what is the difference between current costs of liabilities and settlement value of liabilities? by definition provided, they sound the same to me..Anybody care to explain? |
JimM | I think it has to do with time and the phrase "normal course of business" in the settlement definition. Current cost is if it is paid off today. This might include a penalty for early payment, if the terms of the liability include such. Settlement cost is if it is paid off as normal. If there was an early payment penalty, it would not be included in this. |
Drzewes | That's a nice thing - u pay hundreds of bucks for Schweser notes and still there's no valuation basis theory there, while a review tool (AN) has got it alright. |
Drzewes | Great conclusion JimM |
nneks | JimM is right xcept on the point of penalties...Current cost of liabilities refers to paying today...ONLY. And the settlement value is the cash or cash equiv. EXPECTED to be paid to settle all accounts(liabilities) |
endlessfin1te | Effective financial framework: Transparent Consistent Comprehensive |
zeiad | effective financial framework = transparent +consistent+comperhensive |
jpducros | This details are pretty tough to remember. Any hint to do so ? |
Mgtw | Current value = settle NOW = early penalties Settlement value = settle when due = no early penalties |
YOUCANDOIT | Key Words: reconcilations and disclosures Different reporting systems affect security valuation. |
ybavly | Thanks YOUCANDOIT! |
robbiecow | I like the following: An Effective Framework is "Clear To C" Comprehensive Transparent Consistent |
ankurwa10 | Train (Transparency) crossing (Comprehensive) Connecticut (Consistency) |
leon121 | How about: Trains Come Consistently |
sahilb7 | Hahaha! Good one leon121! |
jamcarr27 | any difference between objectives-oriented and principles-based? Or are they the same thing? |
spmadoff | The two qualitative characteristics of financial statements are: (1) Relevance and (2) Faithful Representation. Not Reliable |
nmech1984 | You did it YOUCANDOIT |
mali97 | can someone explain diff between NRV and Fair Value ? they seem the same by definition in the curriculum |
D3Er | Reconciliation disclosures are no longer generally available |
Patrick316 | a combination of principles and rules (sometimes referred to as “objectives oriented”). jamcarr27 |
You have a wonderful website and definitely should take some credit for your members' outstanding grades.
Colin Sampaleanu
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