Finance Essentials: Financial Reporting Standards, Standard Setting Bodies, and Regulatory Authorities Made Simple

Why Have Financial Reporting Standards
The general purpose of financial reporting is to provide financial information about the reporting entity to all potential stakeholders in making decisions, which involves buying, selling, or holding equity or debt and providing other forms of credit. Ultimately, it is to provide users with useful information on a company’s performance and financial position. Financial statement analysis is the use of data from financial statements to make economic decisions. The International Accounting Standards Board (“IASB”) and the Financial Accounting Standards Board (“FASB”) aims to develop a common foundation for standards that should be (i) principle based, (ii) internally consistent, and (iii) converged.

Standard Setting Bodies and Regulatory Authorities
Standard-setting bodies set standards and regulatory authorities must first recognize, and if recognized, enforce the standards. Standard setting bodies are usually independent, private, and not-for-profit organizations. It is critical, that they should be guided by well-articulated frameworks with a clearly stated objective, operate independently, consider input from stakeholders, should be in public interest, and set high quality standards. The IASB is the independent standard-setting body for IFRS (International Federal Reporting Standards), while FASB established U.S. GAAP (Generally Accepted Accounting Principles). 

Convergence of Global Financial Reporting Standards
Convergence, which is the movement to one global set of financial reporting standards, forces analysts to be aware of the changes in accounting standards. The IASB and FASB have pledged to use their best efforts to (i) make existing financial reporting standards fully compatible and practicable and (ii) coordinate their future work programs to ensure both bodies begin working towards convergence. The plan is to align their conceptual frameworks, remove selected differences, and issue joint standards where improvements are required. The SEC is working in trying to allow the adoption of IFRS, by allowing US companies to choose between U.S GAAP and IFRS, but companies outside the U.S can only file using IFRS. 

International Accounting Standards Board and International Federal Reporting Standards
Trustees of the IFRS Foundation appoint the members of the IASB. The principle of the IFRS Foundation is to develop and promote the use and adoption of a single set of high quality financial standards which ensures (a) transparency, (b) comparability, and (c) decision-useful information. Moreover, it is all while promoting convergence of national accounting standards and IFRS.  The IASB has basic processes when issuing international financial reporting standards which is, (a) an issue is identified as a priority for consideration and placed on the IASB’s agenda in consultation with the Advisory Council, (b) the IASB may publish an exposure draft for public comment where they may hold public hearings to discuss the proposed standards, and (c) IASB may issue a new revised financial reporting standard, where they may be authorized to the extent of regulatory authorities recognizing it. 

Regulatory Authorities are governmental entities that have legal authority to enforce financial reporting requirements and exert controls over entities that participate with capital markets, within their jurisdiction. The International Organization of Securities Commission members regulate more than ninety percent of the world’s financial markets. Their set of  “Objective and Principles of Securities Regulation” is recognized (and updated as required) as the international benchmark of all markets, where the they must (a) protect investors, (b) ensure that markets are fair, efficient, and transparent, and (c) reduce systematic risk. They ensure consistent application of financial standards through assisting in attaining uniform regulations internationally.

Federal Accounting Standards Board and Generally Accepted Accounting Principles
The Financial Accounting Foundation oversees and finances FASB, where they ensure the independence of the standard-setting process and appoints the members. Similar to the IASB, they share the same ambition to develop a single set of high quality financial standards to ensure transparency, comparability, and decision useful information. FASB issues new and revised standards of financial reporting and is done through thorough and independent processes that seeks input from any stakeholder of the Financial Accounting Foundation. Any outputs are in the FASB Accounting Standards “Codification”, which is the authoritative source of US GAAP principles to be applied to non-governmental entities. Although FASB is rarely overruled, the SEC does have the power to issue authoritative financial reporting guidance.

SEC and Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”)
The (U.S) Securities and Exchange Commission (“SEC”) is primarily responsible for the capital markets regulation of the U.S. The SEC ensures compliance by issuing and requiring completion of their standardized forms. Forms are filed electronically through EDGAR. 

The following are common document sources used by analysts: 

· Securities Offerings and Registration Statement reports (a) disclosures about the sale, (b) relationship of new securities to issuer’s other capital securities, (c) information provided in annual filings, (d) recent audit financial statements, and (e) risk factors
· Forms 10K (if other companies outside the US list their securities in the US the 40F are for Canadian Registrants and 20F for other non-US registrants), are forms with comprehensive information overviews on a company’s business, financial disclosures, legal proceeding, and management 
· Proxy Statements (filed with a DEF-14A form) shows information in which shareholders need for their proxy (or authorization) to vote
· Forms 10Q, similar to 10K but filed quarterly, rather than annually
· Form 144 explaining notice of proposed sales of restricted securities
· Form 3 (initial statement), Form 4 (changes), and Form 5 (annual report) reports beneficial ownership
· Form 11K which reports employee stock purchase, savings, and other similar plans.