FINS3626 Lecture Notes - Lecture 3: Major Appliance, Write-Off, Financial Statement
Document Summary
Topic 3: role of financial reporting and international corporate governance. What is the role of financial reporting in corporate governance. Corporate governance is viewed as a set of contracts that help align managers" interests with those of shareholders. Financial reporting resolves agency conflicts among a firm"s managers, directors and capital providers (aka shareholders) by reducing information asymmetry between management and shareholders. Accounting numbers involve a considerable amount of judgement and estimation on the part of management. For example, intangible assets cannot be reliably measured. Another example is revenue recognition: unearned revenue (potential future services to be provided) recorded as current revenue. Unearned revenue should be a liability because it is something that is owed. The future service is owed and until it is performed, revenue for it cannot be recognised. Financial reporting can ensure that accounting manipulation is prevented by requiring the company to disclose any material changes to estimates and judgements made in financial estimates, accounting policies and practices.
