Financial Accounting and Accounting Standards

1

• Financial Accounting and Accounting Standards

2
Objectives of the Chapters

• 1. 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 the SEC in
  developing GAAP.
• 5. Introduce the accounting standard setting
  process.

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Objectives of the Chapters (contd.)

• 6. Study the relationship between the changes in
  the economic environment and the development of
  accounting standards.
• 7. Understand the economic consequence of
  accounting standards.
• 8. Understand the accounting standard compliance
  system in the U.S.

4
Objectives of the Chapters (contd.)

• 9. Discuss financial reporting reform and the
  Sarbanes and Oxley Act (the Public Company
  Accounting Reform and Investor Protection Act of
  2002)
• 10. Study the need for international accounting
  standards and the convergence of the U.S.
  accounting standards with the International
  Accounting Standards.

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Financial Reporting An Introduction and
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 business
  transactions 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 substantial authoritative
  support to be used by business entities in
  preparing external reports for users.

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Issues Related to Accounting Standards

• 1. 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 in
  developing GAAP.
• 4. The accounting standard setting process of the
  FASB.

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1934 Congress SEC Regulation S-X ASR and
FRR Staff Accounting Bulletins 1938 Accounting
Profession AICPA 1938-1959 CAP ARBs
(51) 1959-1973 APB APB Opinions (31)
1973 FASB . 1. Statement of Financial
Accounting Standards 2. Interpretations 3.
Concepts of Financial Accounting 4.
Technique Bulletins/Staff P. 5. Statements
issued by EITF
Year Authority Official Release
8
9
Pronouncements of the FASB

• 1. Statement of Financial Accounting Standards
  (SFAS)
• 2. Interpretations
• 3. Statements of EITF (Emerging Issue Task Force)
• 4. Technique Bulletins/Staff Positions
• 5. Statements of Financial Accounting Concepts

10
GAAP (General Accepted Accounting Principles)

• Accounting methods having substantial
  authoritative support and used by business
  entities in preparing financial statements.

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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, Technique Bulletins/Staff
  Positions, and Staff Acct. Bulletins of the SEC,
  Statements of EITF, etc.)

12
FASB Accounting Standards Codification (ASC)
(Source SFAS 168)

• Effective July 1, 2009, FASB Accounting Standards
  Codification became the single source of
  authoritative, nongovernmental US GAAP.
• The pronouncements of the SEC are also sources of
  authoritative GAAP for SEC registrants.
• All other non-grandfathered, non-SEC accounting
  literature NOT included in the Codification will
  be non-authoritative.

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FASB Codification (Contd.)

• The Codification does not change GAAP but only
  the way the existing accounting standards are
  organized.
• Codification Research System (CRS). is an online
  database developed by the FASB to allow users to
  access the Codification (and therefore,
  authoritative GAAP) online.
• CRS uses a numerical index system in which
  numerical numbers are used to correspond with
  topics, subtopics, sections and paragraphs.
• .

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FASB Codification (Contd.)

• Example (source p14 of textbook)
• Search GAAP for loans and trade receivables not
  held for sale subsequent to initial measurement
• Topic FASB ASC 310 (Receivable topic)
• Subtopics ASC 310-10 (for Overall subtopic of
  the Topic 310)
• Sections ASC 310-10-35 (to access the Subsequent
  Measurement Section of the subtopic 310-10)
• Paragraph ASC 310-10-35-47 (to assess the Loans
  and Trade Rece. Not Held for Sale Para.)

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The Role of the AICPA On Standard Setting

• 1939 - 1959 CAP ARBs
• 1959 - 1973 APB Opinions
• 1973 - Present 1. Issue Papers (by AcSEC)a
• 2. Statements of Position
• 3. Practice Bulletins
• 4. Auditing Standards (by the Auditing
  Standards Board)
• a. The Accounting Standards Executive Committee
  which was established within the Accounting
  Standard Division of the AICPA.

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The Accounting Standard Setting Process of the
FASB (A Due Process)

• Identify a topic and place it on the Boards
  agenda.
• Form a task force to define problems and issues
  related to the topic.
• A discussion memorandum (DM, an impartial
  discussion of issues) is drafted by the FASBs
  technical staff in consulting with a group of
  knowledge people in accounting and business
  community.

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The Accounting Standard Setting Process of the
FASB (contd.)

• A public hearing held 60 days after the release
  of DM.
• The Board evaluates the public response, prepares
  and releases an exposure draft (ED).
• The ED is exposed to the public for at least 30
  days for public comments.
• A committee studies the public commenst and
  revise the ED if necessary.
• Voted by 5 members of the Board. The passage of
  a new FASB statement requires 3 votes.

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Other Issues Related to Accounting Standards

• 1. Changes of the economic environment and the
  development of accounting standards.
• 2. The economic consequence of accounting
  standards.
• 3. The accounting standard compliance system in
  the U.S. and the interrelationship of the
  Securities and Exchange Commission (SEC) and the
  Financial 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 (Financial Reporting and
  changing prices)
• SFAS No. 52 (Foreign Currency Translation)
• SFAS No. 123 (Accounting for Stock-Based
  Compensation)

20
Economic Consequence of Accounting Standards

• Examples
• SFAS No. 106 (Employers accounting for
  post-retirement benefits other than pensions.)
• SFAS No. 115 (Accounting for certain investments
  in debt and equity securities.)

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The Accounting Standard Compliance System

• The interrelationship of the SEC and the FASB
• FASB the rule making body.
• SEC the enforcing agency.

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The Financial Reporting Reform and the Sarbanes
and Oxley Act

• The collapse of Enron, the dissolving of Arthur
  Andersen and the accounting scandals of some
  high-profile firms (WorldCom, Xerox, Global
  Crossing, etc.) severely damaged public
  confidence in the accounting profession and the
  financial reporting.
• At the demand of the public, Sarbanes and Oxley
  Act was passed to restore the public confidence
  in the credibility of the financial reports.

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The Financial Reporting Reform and the Sarbanes
and Oxley Act (Cont.)

• Key Provisions of the Act including
• Creating the Oversight board establish auditing
  standards(i.e., auditing,quality control, ethics,
  independence for the preparation of the audit
  report.
• Increasing Corporate Executive Accountability
  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)

24
The Financial Reporting Reform and the Sarbanes
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 management
  needs to document and assess the effectiveness of
  internal control. Auditors of the firm need to
  state1)whether the managements assessment is
  fair, and 2)whether the internal control of the
  firm is effective.

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The Need for International Accounting Standards

• Companies doing business in more than one nations
  found that it is hard to comply with more than
  one set of accounting standards established by
  authorities in different nations.
• In response to this problem, International
  Accounting Standards Committee (IASC) was formed
  in 1973 to develop a single set of global
  accounting standards.

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The History of International Accounting Standard
Setting (cont.)

• 41 International Accounting Standards (IAS) was
  issued by IASC.
• IASC created International Accounting Standards
  Board (IASB) in April, 2001 to be in charge of
  prescribing the standards.
• IASB endorsed 41 IAS and named its pronouncement
  as International Financial Reporting Standard
  (IFRS).

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

• To increase the international comparability and
  the quality of US accounting standards, the FASB
  has been engaged in activities to increase the
  convergence of the accounting standards.
• The FASB is working closely with the IASB toward
  the convergence of accounting standards (I.e. to
  develop a single set of standards).

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Short-Term International Convergence (source
FASB Project Updates)

• The IASB and the FASB acknowledged that
  convergence of IFRS and U.S. GAAP is a primary
  objective of both Boards.
• To achieve this objective and to improve the
  financial reporting in the US, the FASB started a
  short term project, conducted jointly with the
  IASB, to eliminate narrow differences between US
  GAAP and IFRS (or IAS) in October, 2002.

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Short-Term International Convergence (contd.)

• The following areas have been or will be
  addressed
• 1. Share-Based Payment (SFAS No. 123 (R)
  Accounting for Stock-Based Compensation. (issued
  in 12/2005) Substantially converging with IFRS
  requirements.
• Revision required the option expense to be
  recognized in the income statement.

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Short-Term International Convergence (contd.)

• 2. Inventory Costs (SFAS No. 151 Inventory Costs
  (for idle capacity and spoilage) an amendment
  of ARB No. 43, Chapter 4. Issued in 11/2004,
  converging with IFRB requirements.
• Revision The amounts of costs (I.e., idle
  facility expense, freight, handling costs,
  spoilage) are expensed.

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Short-Term International Convergence (contd.)

• 3. Asset Exchanges (SFAS No. 153 Exchanges of
  Nonmonetary Assets, issued in December 2004) an
  amendment of APB Opinion No. 29. Converging with
  IFRB requirements.
• Changes eliminating some differences in
  measurement between APB 29 and that of IAS 16 and
  IAS 38 (i.e., difference in the treatment of
  nonmonetary exchange of similar productive
  assets.)

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Short-Term International Convergence (contd.)

• 4. Accounting Changes (SFAS No. 154 Accounting
  Changes and Error Corrections, issued in May
  2005) a replacement of APB No. 20 and FASB No.
  3. Converging with the IFRS requiremenets.
• Eliminating the current period approach in
  accounting for the voluntary accounting changes.
• Result improve the comparability of
  international financial reporting by eliminating
  the differences between APB 20 and IAS 8.

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Short-Term International Convergence (contd.)

• 6. Discontinued activities
• The IASB issued IFRS 5 (Non-current Assets Held
  for Sale and discountinued Operatins) in 2004
  which substantial convergence with US GAAP on
  this topic. However, the definitions of
  discontinued Operations between two sets of
  standards remain divergent. .

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Short-Term International Convergence (contd.)

• 7. Earnings Per Share
• 8. Balance Sheet Classification
• 9. Income Taxes
• 10. Accounting for Leases (announced 7/18.06)
• For details of the above areas of short-term
  convergence project, go to
• http//www.fasb.org/project/short-term_intl_conver
  gence.shtml

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Short-Term International Convergence (contd.)

• The IASB has also addressed several issues in the
  short-term convergence project and is working on
  a few topics. For further information, go to
• http//www.iasb.org/current/iasb.asp?showPageCont
  entnoxml16_13_67_23092003.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 SEC must use U.S. GAAP.
• Foreign issuers filing reports with the SEC can
  use U.S. GAAP, the international 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 Single Global Accounting Language-
International financial reporting standards?

• The Securities and Exchange Commission (SEC)
  proposed a roadmap for the US issuers to prepare
  financial statements in accordance with IFRS
  for the purposes of their filings with the SEC.
• This roadmap, if achieved, could lead to the
  required use of IFRS by U.S. issuers in 2014.