Financial Reporting and Analysis I

Reading 20. Financial Reporting Standards

Learning Outcome Statements

h. describe implications for financial analysis of differing financial reporting systems and the importance of monitoring developments in financial reporting standards;

i. analyze company disclosures of significant accounting policies.

CFA Curriculum, 2020, Volume 3

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Subject 7. 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 three 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.

3. Company disclosures

Companies typically provide information in the footnotes to the financial statements regarding:

  • Critical and significant accounting policies, such as revenue recognition and timing of expense reporting, and
  • The impact of recently issued accounting changes. The conclusions include:

    • The standard does not apply.
    • The standard will have no material impact.
    • Management is still evaluating the impact.
    • The impact of adoption is discussed.

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