01 Structure of Financial Accounting

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Intermediate

Financial Accounting I

Financial Accounting andAccounting Standards


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Environment and Theoretical Structure of Financial Accounting 2

Objectives of the Chapters1. Understand the need to develop

accounting standards.2. Study the development of accounting

standards from a historical perspective.3. The GAAP and the FASB Accounting

Standards Codification.

4. Study the role of the AICPA and theSEC in developing GAAP.

5. Introduce the accounting standard

setting process.


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Objectives of the Chapters (contd.)

6. Study the relationship between thechanges in the economic environmentand the development of accountingstandards.

7. Understand the economicconsequence of accounting

standards.8. Understand the accounting standardcompliance system in the U.S.


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Objectives of the Chapters (contd.)

9. Discuss financial reporting reform andthe Sarbanes and Oxley Act (t he PublicCompany Accounting Reform and Investor

Protection Act of 2002 )10. Study the need for international

accounting standards and theconvergence of the U.S. accountingstandards with the InternationalAccounting Standards.


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F inancial Reporting: An Introductionand Historical Development 1. What is accounting for?2. How do we communicate financial

information?

Tools: Four financial statements.3. How do we prepare financial statements?

Identify, measure and record businesstransactions for business entities.Journal entries, posting to ledger accounts,work sheet (including adjustments),F/S,

4. Why do we need accounting standards?


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Accounting Standards

Accounting methods with substantialauthoritative support to be used by

business entities in preparing externalreports for users.


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Issues Related to AccountingStandards1. Who are the authorities to set these

standards (Generally Accepted

Accounting Principles, GAAP)?2. What are these standards?

3. The role of the AICPA and the SEC indeveloping GAAP.

4. The accounting standard settingprocess of the FASB.


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1934 CongressSEC Regulation S-X

ASR and FRRStaff Accounting Bulletins

1938 Accounting ProfessionAICPA

1938-1959 CAP ARBs (51)1959-1973 APB APB Opinions (31)1973 FASB . 1. Statement of Financial

Accounting Standards

2. Interpretations3. Concepts of FinancialAccounting

4. Technique Bulletins/Staff P.

5. Statements issued by EITF

Year Authority Official Release

8


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P ronouncements of theF ASB

1. Statement of Financial AccountingStandards (SFAS)

2. Interpretations3. Statements of EITF (Emerging Issue

Task Force)4. Technique Bulletins/Staff Positions5. Statements of Financial Accounting

Concepts


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GAAP ( General Accepted AccountingP rinciples)

Accounting methods having substantialauthoritative support and used by

business entities in preparing financialstatements.


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GAAP (contd.)Including:1. FASB statements (1973 - Present)2. FASB Interpretations ( 1973 - Present)

3. APB Opinions (1959 - 1973)4. APB Interpretations (1959 - 1973)5. CAP ARBs (1938 - 1959)6. Other Authoritative Pronouncements (i.e.,

ASR & FRR of the SEC, TechniqueBulletins/Staff Positions, and Staff Acct.Bulletins of the SEC, Statements of EITF, etc.)


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F ASB Accounting Standards

Codification (ASC) ( Source: S F

AS 168)Effective July 1, 2009, FASB AccountingStandards Codification became thesingle source of authoritative,nongovernmental US GAAP.The pronouncements of the SEC arealso sources of authoritative GAAP for

SEC registrants .All other non-grandfathered, non-SECaccounting literature NOT included in theCodification will be non-authoritative.


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F ASB Codification (Contd.)The Codification does not change GAAPbut only the way the existing accountingstandards are organized.

Codification Research System ( CRS ). isan online database developed by the FASBto allow users to access the Codification(and therefore, authoritative GAAP) online.

CRS uses a numerical index system inwhich numerical numbers are used tocorrespond with topics, subtopics, sectionsand paragraphs.


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F ASB Codification (Contd.)Example (source: p14 of textbook)Search GAAP for loans and trade receivablesnot held for sale subsequent to initial

measurement:Topic: FASB ASC 310 ( Receivable topic)Subtopics: ASC 310-10 (for Overall subtopicof the Topic 310)

Sections: ASC 310-10-35 (to access theSubsequent Measurement Section of thesubtopic 310-10)Paragraph: ASC 310-10-35-47 (to assess the

Loans and Trade Rece. Not Held for SalePara.


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T he Role of the AIC P A On Standard Setting

1939 - 1959 CAP ARBs1959 - 1973 APB Opinions1973 - Present 1. Issue Papers (by AcSEC) a

2. Statements of Position3. Practice Bulletins4. Auditing Standards (by theAuditing Standards Board)

a. The Accounting Standards Executive Committee which wasestablished within the Accounting Standard Division of theAICPA.


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T he Accounting Standard SettingP rocessof theF ASB (A DueP rocess)

Identify a topic and place it on the Boardsagenda.

Form a task force to define problems andissues related to the topic.

A discussion memorandum (DM, an

impartial discussion of issues) is draftedby the FASBs technical staff in consultingwith a group of knowledge people inaccounting and business community.


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T he Accounting Standard SettingP rocessof theF ASB (contd.)

A public hearing held 60 days after the releaseof DM.The Board evaluates the public response,prepares and releases an exposure draft (ED).The ED is exposed to the public for at least30 days for public comments.A committee studies the public commenst andrevise the ED if necessary.Voted by 5 members of the Board. Thepassage of a new FASB statement requires 3votes.


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Other Issues Related to AccountingStandards1. Changes of the economic environment

and the development of accountingstandards.

2. The economic consequence of accountingstandards.

3. The accounting standard compliance

system in the U.S. and theinterrelationship of the Securities andExchange Commission (SEC) and theFinancial Accounting Standards Board

(FASB).


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Changes of the Economic Environment and the Development of Accounting Standards.

Example:SFAS No. 13 (Accounting for Leases)

SFAS No. 33 and 89 (FinancialReporting and changing prices)SFAS No. 52 (Foreign Currency

Translation)SFAS No. 123 (Accounting for Stock-Based Compensation)


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Economic Consequence of AccountingStandardsExamples:

SFAS No. 106 (Employersaccounting for post-retirementbenefits other than pensions.)

SFAS No. 115 (Accounting for certain investments in debt andequity securities.)


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T he Accounting Standard ComplianceSystem

The interrelationship of the SEC andthe FASB:

FASB: the rule making body.SEC: the enforcing agency.


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T he F inancial Reporting Reform and theSarbanes and Oxley Act

The collapse of Enron, the dissolving of Arthur Andersen and the accountingscandals of some high-profile firms(WorldCom, Xerox, Global Crossing, etc.)severely damaged public confidence in theaccounting profession and the financialreporting.

At the demand of the public, Sarbanes andOxley Act was passed to restore the publicconfidence in the credibility of the financialreports.


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T he F inancial Reporting Reform and theSarbanes and Oxley Act (Cont.)

K ey Provisions of the Act including:

Creating the Oversight board: establishauditing standards (i.e., auditing,quality control,

ethics, independence for the preparation of theaudit report.

Increasing Corporate ExecutiveAccountability: they must personally certify both

the financial statements and disclosures)Prohibition of Non-Audit Services ( I.e.,bookkeeping, internal audit, appraisal, and other consulting services)


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T he F inancial Reporting Reform and theSarbanes and Oxley Act (Cont.)

Retention of work Papers for 5 years.

Auditor Rotation.

Conflict of Interest.Hiring of Auditor: by the audit committee of the board of directors,not the management.

Evaluation of Internal Control: the managementneeds to document and assess the effectiveness of internalcontrol. Auditors of the firm need to state:1)whether themanagements assessment is fair, and 2)whether theinternal control of the firm is effective.


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T he Need for International AccountingStandards

Companies doing business in morethan one nations found that it is hard tocomply with more than one set of accounting standards established byauthorities in different nations.

In response to this problem,International Accounting StandardsCommittee (IASC) was formed in 1973to develop a single set of global

accounting standards.


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T he History of International AccountingStandard Setting (cont.)

41 International Accounting Standards(IAS) was issued by IASC.

IASC created International AccountingStandards Board (IASB) in April, 2001to be in charge of prescribing thestandards.

IASB endorsed 41 IAS and named itspronouncement as InternationalFinancial Reporting Standard (IFRS).


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Convergence of the U.S. Accounting Standards and the International Accounting Standards

To increase the internationalcomparability and the quality of USaccounting standards, the FASB has

been engaged in activities to increasethe convergence of the accountingstandards.

The FASB is working closely with theIASB toward the convergence of accounting standards (I.e. to develop asingle set of standards).


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Short-T erm International Convergence(source: F ASBP roject Updates)

The IASB and the FASB acknowledgedthat convergence of IFRS and U.S. GAAPis a primary objective of both Boards.

To achieve this objective and to improvethe financial reporting in the US, theFASB started a short term project,

conducted jointly with the IASB, toeliminate narrow differences between USGAAP and IFRS (or IAS) in October,2002.


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Short-T erm International Convergence (contd.)

The following areas have been or willbe addressed:

1. Share-Based Payment (SFAS No.123 (R): Accounting for Stock-BasedCompensation. (issued in 12/2005)Substantially converging with IFRSrequirements.

Revision: required the option expenseto be recognized in the incomestatement.


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2. Inventory Costs (SFAS No. 151:Inventory Costs (for idle capacity andspoilage) : an amendment of ARB No. 43,

Chapter 4. Issued in 11/2004, convergingwith IFRB requirements.

Revision: The amounts of costs (I.e.,

idle facility expense, freight, handlingcosts, spoilage) are expensed.


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3. Asset Exchanges (SFAS No. 153:Exchanges of Nonmonetary Assets, issued inDecember 2004 ): an amendment of APB

Opinion No. 29. Converging with IFRBrequirements.

Changes: eliminating some differences in

measurement between APB 29 and thatof IAS 16 and IAS 38 (i.e., difference inthe treatment of nonmonetary exchangeof similar productive assets.)


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4. Accounting Changes (SFAS No. 154:Accounting Changes and Error Corrections,issued in May 2005): a replacement of APBNo. 20 and FASB No. 3. Converging with theIFRS requiremenets.Eliminating the current period approach inaccounting for the voluntary accounting

changes.Result: improve the comparability of international financial reporting byeliminating the differences between APB 20and IAS 8.


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6. Discontinued activities:

The IASB issued IFRS 5 ( Non-current AssetsHeld for Sale and discountinued Operatins) in2004 which substantial convergence with USGAAP on this topic. However, the definitionsof discontinued Operations between two sets

of standards remain divergent. .


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7. Earnings Per Share

8. Balance Sheet Classification

9. Income Taxes10. Accounting for Leases (announced

7/18.0 6)

For details of the above areas of short-termconvergence project, go to:

http: //www.fasb.org /project /short-term_intl_convergence.shtml


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The IASB has also addressedseveral issues in the short-termconvergence project and is working

on a few topics. For further information, go to:

http: //www.iasb.org /current /iasb.asp?showPage Content=no&xml=1 6_1 3_67 _23 09 200 3.htm


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Current Compliances

Since there is no single set of high-quality accounting standards,domestic (U.S. ) firms filing reports with

the S EC must use U.S. GAAP.Foreign issuers filing reports with the

S EC can use U.S. GAAP, theinternational standards or the GAAP of its home country.If foreign firms chose not to use U.S.GAAP, they must file reports with

reconciliation to U.S. GAAP.


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A SingleG lobal Accounting Language- International financial reporting standards?

The Securities and Exchange Commission(SEC) proposed a roadmap for the USissuers to prepare financial statements in

accordance with IFRS for the purposesof their filings with the SEC.This roadmap, if achieved, could lead tothe required use of IFRS by U.S. issuers in2014.

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01 Structure of Financial Accounting

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