Chapter 1: Financial Accounting and Accounting Standards

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Chapter 1 Financial Accountingand Accounting
Standards
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Introduction

• Investor uncertainty increased cost of capital
• Pressure on accounting profession
• Measure performance to provide investors info
• Accurately fairly on timely basis
• Post Enron
• Additional work for public companies
• Pressure on private companies to be SOX-like

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Financial Statements Financial Reporting

• Financial accounting
• To prepare financial reports
• Internal external users
• Managerial accounting
• Financial info to plan, evaluate, control
  operations
• Management use
• Financial statements
• BS, IS, SCF, SSE
• Financial reporting
• Not formal FS
• This course BFS disclosures

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Characteristics of Financial Accounting

• Accounting identifies, measures and communicates
  financial information
• Economic entities
• Information is for
• Decision making (allocate scarce resources)
• Investors
• Creditors
• Unions
• Governmental agencies

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Objectives of Financial Reporting by Business
Enterprises

• Statement of Financial Accounting Concepts No. 1.
• Information provided must be useful in
• Investment credit decisions
• Assessing cash flow prospects
• Accrual accounting is best indicator of cash flow
• Information must be about enterprise
• Resources
• Claims to those resources
• Changes therein

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Generally Accepted Accounting Principles (GAAP)

• Standards vs. rules
• Standards
• Broad accounting principles ensure fair
  presentation
• Require judgment
• Rules
• Check list mentality little judgment required
• CYA
• Yesterday today
• Shift to rules based
• Derivatives
• Variable interest entities
• Goodwill asset impairment

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Generally Accepted Accounting Principles (GAAP)

• Standards principles
• GAAP present financial operations
• Fairly
• Clearly
• Completely
• GAAP authoritative pronouncements
• Issued by standard setting bodies
• Hierarchy of GAAP Illustration 1-4 (pg. 13)
• Formerly established by ASB Now to be FASB
• FASB vs. GASB

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House of GAAP
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The Standard Setting Process Parties Involved

• Securities Exchange Commission (SEC)
• Public companies/investments only
• Relies on AICPA FASB to develop enforce
• American Institute of CPAs (AICPA)
• Financial Accounting Standards Board (FASB)
• Committee on Accounting Procedure
• Accounting Principles Board
• Wheat Committee recommendation
• Answers only to FAF
• Governmental Accounting Standards Board (GASB)

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FASBDue Process

• Project formation
• FASB staff
• Task force groups
• FASAC
• SEC
• Others
• Political process
• Economic consequences interest in standard
  setting
• Potential impacts on stock prices economy
• National international

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FASBDue Process

• Allows interested persons time to make their
  views known to the Board
• SEC
• Congress et al
• 2004 Congress GAO
• AICPA
• State societies
• CPAs
• FS analysts
• Special interest groups
• Professional
• Citizen

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FASBDue Process
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FASBDue Process
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Major Types of FASB Pronouncements

• Standards and Interpretations
• Interpretations modify/extend standards
• Financial Accounting Concepts
• Fundamental objectives concepts for future
  standards
• NOT GAAP
• Technical Bulletins
• Timely guidance for implementation/application
• Not expected to cause major change,
  implementation cost low, guidance does not
  conflict
• Emerging Issues Task Force Statements
• New/unusual transactions having potential to
  create different practices
• Staff positions

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Organizational Structure for Setting Standards
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Challenges Facing Financial Accounting

• Non-financial measurements need to be developed
  reported
• More information regarding soft assets
  (intangibles)
• Forward-looking information, in addition to
  historical information
• Real-time basis statements
• Practitioner user reluctance to embrace

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The Expectations Gap

• An expectations gap exists between
• Publics perception of professions
  accountability
• Professions perception of its accountability to
  the public
• Corrective steps include
• SEC Practice sections
• Passage of Sarbanes-Oxley Act (2002)
• PCAOB as accounting oversight board
• Auditing
• Quality control
• Independence standards rules
• Public Oversight Board (old)

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International Accounting Standards

• International Accounting Standards Committee
  (IASC)
• Formed in 1973
• Narrow divergence in international financial
  reporting
• Many similarities between U.S. and International
  accounting standards
• Concern - international standards may not be as
  rigorous as U.S. standards
• Move to make consistent where appropriate
• International Accounting Standards Board (IASB)
• Single set, high quality global standards

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Accounting Ethics

• Issues challenges
• Maximize bottom line
• Beat competition
• Stress ST results
• Technical competence no substitute for judgment
• Organizational tone
• Bend rules
• Play the game
• Ignore it
• Other pressures
• Time
• Job
• Client
• Personal
• Peer

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Group Activities Presentations

• Group 1 C1-3
• Group 2 C1-8
• Group 3 C1-9
• Group 4 C1-13
• Group 5 C1-15
• Group 6 C1-17
• Group 7 C1-18