Accounting for pre-master 320110-B-6

Accounting for pre-master (320110-B-6) Tilburg University Table of Contents Lecture 1: Corporate role in governance ................................................................................. 3 Key IFRS principles .........................................................................................................................4 Lecture 2: Corporate Governance ........................................................................................... 5 Agency theory................................................................................................................................5 Lecture 3: Non-financial disclosures ....................................................................................... 9 Single vs double materiality ...........................................................................................................9 Stakeholder vs. Shareholder theory .............................................................................................. 10 Lecture 4: Non-financial disclosures II ................................................................................... 13 Regulations on climate change - SEC, ISSB, CSRD ........................................................................... 16 Accounting for carbon emission ................................................................................................... 17 E-liability system .......................................................................................................................... 18 Lecture 5: Financial Accounting Basics .................................................................................. 20

5.1. Double entry principle ........................................................................................................... 20

Financial statements .................................................................................................................... 23 Income statement (IS / P&L) .............................................................................................................................. 24 Statement of total comprehensive income (balance sheet) .............................................................................. 24 Statement of changes in shareholders’ equity................................................................................................... 24 Statement of financial position .......................................................................................................................... 25 Statement of cash flows ............................................................................................................... 26 Workshop 2 ................................................................................................................................. 28 Lecture 6: IFRS Conceptual Framework (CF) .......................................................................... 34 CH1. Objective of financial reporting ............................................................................................ 35 CH2. Qualitative characteristics of useful financial information ..................................................... 35

• Fundamental qualitative characteristics ........................................................................................................ 36
• Enhancing qualitative characteristics ............................................................................................................. 36

CH3. Financial statements & the reporting entity .......................................................................... 36 CH4. The elements of financial statements ................................................................................... 37 CH.5 Recognition and derecognition .................................................................................................................. 38 Lecture 7: Accounting discretion & fair value ........................................................................ 40 Earnings management.................................................................................................................. 40 Fair value accounting (FVA) (IFRS 13) ............................................................................................ 42 1 / 4

Fair value measurement: steps ..................................................................................................... 43 Lecture 8: Revenue recognition – IFRS 15 .............................................................................. 44 IFRS 15 Five-Step Model ............................................................................................................... 45 Lecture 9: IAS 16, IAS 38 IAS 36 (PPE, Intangibles, Impairment) ............................................. 48 IAS 16 – Property, plant & equipment (PPE) .................................................................................. 48 IAS 16 §50-62 – Depreciation ........................................................................................................ 49 IAS 38 – Intangible Assets ............................................................................................................. 50 IAS 36 – Impairment..................................................................................................................... 52 IAS 16 – Depreciation methods ..................................................................................................... 53 Lecture 10: Lease Accounting (IFRS 16) ................................................................................. 55 Lessee Accounting ........................................................................................................................ 56 Accounting by a Lessor ................................................................................................................. 61 Accounting by a lessor: Finance lease ................................................................................................................ 62 Accounting by a lessor: Operating lease ............................................................................................................ 65 Lecture 11: Provisions & Contingent liabilities – IAS 37 ......................................................... 66 Provisions .................................................................................................................................... 66 Contingent liabilities .................................................................................................................... 72 Contingent assets......................................................................................................................... 73 Lecture 12: Accounting for income taxes – IAS12 .................................................................. 74 Temporary differences (IAS12) ..................................................................................................... 75 Example: Temporary differences – accounts receivable ................................................................................... 76 Example: Temporary differences – warranty costs ............................................................................................ 78 Permanent differences ................................................................................................................. 82

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Lecture 1: Corporate role in governance

Accounting: communication of a firm’s performance for decision-making.

Types of information:

• Financial information: processed economic data used by internal and external decision-makers.

o Main channel: financial reports.

• Non-financial information: disclosures on environmental, social, and governance (ESG) factors that

affect long-term value.

Bottum-up logic: economic activity → accounting judgement → useful information → better decisions

Economic theory background:

• Firms need economic resources; capital providers need protection
• Without reporting → adverse selection (capital providers can’t evaluate firms).
• → Information asymmetry between firms and stakeholders

To function efficiently, capital providers design contracts to limit agency conflicts and moral hazard.

Agency example:

• Shareholders (principals) vs managers (agents) – each aiming to achieve their own (diverse) goals.
• Tools: performance-based pay, but it relies on reported profit, which managers influence through

accounting choices.

Corporate reporting = financial + non-financial information enabling capital allocation decisions by investors and creditors.

Annual report vs financial statements

Annual report (unregulated):

• Narrative overview + financial statements + CEO letter, strategy, developments.
• Distributed via media and websites.

Financial statements (F/S) (regulated by GAAP):

• Must be files with national authorities.
• Rules differ by country. Many developed countries prepare according to their national CAAP (e.g.

Dutch GAAP; UK GAAP; US GAAP).

Why GAAP differs across countries:

• Ownership structure
• Dispersed ownership → greater need for investor protection → stronger need for F/S
• Financing mix
• Bank financing → banks demand conservative accounting → less emphasis on public

general-purpose F/S.

• Investors also value upside potential, leading to different preferences.

*Conservative: more worried about the downside potential than the upside potential

Globalization raises the costs of GAAP diversity

• Poor accounting quality → low transparency and comparability → harder F/S analysis → limits

international capital flows

• Poor accounting quality → capital providers demand risk premium → higher cost of capital. 3 / 4

• Cross-listed firms must prepare multiple sets of F/S → higher reporting costs.

Example: Numbers are not comparable due to different GAAP systems despite currency adjustments.Ericsson (Sweden) Motorola (US) Nokia (Finland US $ equivalent $(000,000) $(000,000) $(000,000) Revenue Net income Assets

25,977

1,535

23,830

30,931

817

37,327

20,932

2,727

14,377

Accounting method Swedish GAAP US GAAP International

GAAP (IAS)

Need for international accounting standards

Single global system should be:

High quality, Understandable, Enforceable, Globally accepted, Comparable to ensure that relevant and faithful information is disclosed

→ International Financial Reporting Standards (IFRS) Development

- Pre-2001: IASC issued IAS 1-41

- Post-2001: IASB issues IFRS standards (IFRS 1-19 as of 2024)

Key IFRS principles

Double-entry principle: assets = liabilities + equity

• Every transaction must balance (total debits = total credits)

Example: purchase truck for $10,000, pay 90% cash: December 24 Dr. Property, Plant and Equipment (+NCA) Cr. Cash (-CA) Cr. Accounts payable (+CL)

10,000

9,000 1,000

Accrual-based accounting: record transactions when economic events occur, not when cash is exchanged.

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