Intermediate Accounting

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Prepared by Coby Harmon University of California, Santa Barbara

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Financial Accounting and Accounting Standards

Intermediate Accounting 14th Edition

Kieso, Weygandt, and Warfield
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Learning Objectives
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Identify the major financial statements and other means of financial reporting. Explain how accounting assists in the efficient use of scarce resources. Identify the objective of financial reporting. Explain the need for accounting standards. Identify the major policy-setting bodies and their role in the standardsetting process. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Describe the impact of user groups on the rule-making process. Describe some of the challenges facing financial reporting. Understand issues related to ethics and financial accounting.

Financial Accounting and Accounting Standards

Financial Statements and Financial Reporting
Accounting and capital allocation Objectives Need to develop standards

Parties Involved in Standard-Setting

Generally Accepted Accounting Principles
FASB Codification

Issues in Financial Reporting
Political environment Expectations gap Financial reporting challenges International accounting standards Ethics

Securities and Exchange Commission American Institute of CPAs Financial Accounting Standards Board Changing role of the AICPA

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Financial Statements and Financial Reporting
Essential characteristics of accounting are:
(1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested parties.

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LO 1 Identify the major financial statements and other means of financial reporting.

. GAAP 1-6 LO 1 Identify the major financial statements and other means of financial reporting.Financial Statements and Financial Reporting Economic Entity Financial Information Accounting? Identifies and Financial Statements Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures Additional Information President’s letter Prospectuses Reports filed with governmental agencies Measures and Communicates News releases Forecasts Environmental impact statements Etc.

To provide recognition of amounts not included in the totals of the financial statements. c. To present management’s responses to auditor comments. d. . b. To correct improper presentation in the financial statements.Financial Statements and Financial Reporting Review Question What is the purpose of information presented in notes to the financial statements? a. 1-7 LO 1 Identify the major financial statements and other means of financial reporting. To provide disclosure required by generally accepted accounting principles.

Efficient use of resources often determines whether a business thrives. .Financial Statements and Financial Reporting Accounting and Capital Allocation Resources are limited. Illustration 1-1 Capital Allocation Process 1-8 LO 2 Explain how accounting assists in the efficient use of scare resources.

provides an efficient and liquid market for buying and selling securities. . All of the above. which a. d. promotes productivity.Accounting and Capital Allocation Review Question An effective process of capital allocation is critical to a healthy economy. c. encourages innovation. 1-9 LO 2 Explain how accounting assists in the efficient use of scare resources. b.

.Financial Statements and Financial Reporting Objectives of Financial Reporting Provide financial information about the reporting entity that is useful to  present and potential equity investors. 1-10 LO 3 Identify the objectives of financial reporting.   lenders. and other creditors in making decisions in their capacity as capital providers.

. 1-11 LO 3 Identify the objectives of financial reporting.Objective of Financial Accounting General-Purpose Financial Statements  Provide financial reporting information to a wide variety of users.  Provide the most useful information possible at the least cost. Equity Investors and Creditors Investors are the primary user group.

ability to generate net cash inflows and 2.Objective of Financial Accounting Entity Perspective Companies viewed as separate and distinct from their owners. management’s ability to protect and enhance the capital providers’ investments. Decision-Usefulness Investors are interested in assessing the company’s 1. LO 3 Identify the objectives of financial reporting. 1-12 .

Need to Develop Standards Various users need financial information Financial Statements Balance Sheet Income Statement Statement of Stockholders’ Equity Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. 1-13 Generally Accepted Accounting Principles (GAAP) LO 4 Explain the need for accounting standards. .

American Institute of Certified Public Accountants (AICPA). 1-14 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. .  Financial Accounting Standards Board (FASB).Parties Involved in Standard Setting Three organizations:   Securities and Exchange Commission (SEC).

SEC requires public companies to adhere to GAAP.gov/ Encouraged private standard-setting body. Securities Act of 1933     1-15 Securities Act of 1934 http://www. LO 5 Identify the major policy-setting bodies and their role in the standard-setting process.Parties Involved in Standard Setting Securities and Exchange Commission (SEC)   Established by federal government. Accounting and reporting for public companies. SEC Oversight.sec. Enforcement Authority. .

Parties Involved in Standard Setting American Institute of CPAs (AICPA)   National professional organization Established the following: http://www.aicpa.org/ Committee on Accounting Procedures    Accounting Principles Board    1939 to 1959 Issued 51 Accounting Research Bulletins (ARBs) Problem-by-problem approach failed 1959 to 1973 Issued 31 Accounting Principle Board Opinions (APBOs) Wheat Committee recommendations adopted in 1973 1-16 LO 5 .

Mission to establish and improve standards of financial accounting and reporting. Exercises general oversight. Funds their activities. Financial Accounting Foundation Financial Accounting Standards Board Financial Accounting Standards Advisory Council 1-17    Selects members of the FASB.Parties Involved in Standard Setting Financial Accounting Standards Board (FASB) Wheat Committee’s recommendations resulted in creation of FASB.   Consult on major policy issues. LO 5 .

fasb.org/ 1-18 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. Broader Representation. Differences between FASB and APB include:      Smaller Membership. http://www. . Increased Independence. Full-time. Greater Autonomy. Remunerated Membership.Financial Accounting Standards Board Missions is to establish and improve standards of financial accounting and reporting.

The board conducts research and analysis and a discussion memorandum is issued. c. The board evaluates the research and public response and issues an exposure draft. Topics are identified and placed on the board’s agenda.Financial Accounting Standards Board Review The first step taken in the establishment of a typical FASB statement is a. 1-19 . b. d. LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. A public hearing on the proposed standard is held.

.Financial Accounting Standards Board Illustration 1-3 The Due Process System of the FASB 1-20 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process.

Emerging Issues Task Force Statements. Financial Accounting Concepts. .Financial Accounting Standards Board Types of Pronouncements    Standards. 1-21 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. Interpretations. and Staff Positions.

Types of Pronouncements CA1-14 (Accounting Pronouncements): Standard setting bodies have issued a number of authoritative pronouncements. (d) (f) (c) (e) (a) (b) 1-22 LO 5 . A list is provided on the left. below. with a description of these pronouncements on the right.

. PCAOB oversees the development of auditing standards. 1-23 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. AICPA and AcSEC no longer issues authoritative accounting guidance for public companies. Practice Bulletins. Statements of Position (SOP).Parties Involved in Standard Setting Changing Role of AICPA The AICPA established the Accounting Standards Executive Committee (AcSEC):    Audit and Accounting Guides.

Generally Accepted Accounting Principles Principles that have substantial authoritative support. . AICPA Accounting Research Bulletins. APB Opinions. Major sources of GAAP:    FASB Standards. and Staff Positions. Interpretations. 1-24 LO 6 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP.

.Generally Accepted Accounting Principles Illustration 1-4 GAAP Documents 1-25 LO 6 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP.

FASB Technical Bulletins. c. d. . AICPA Statement of Position. 1-26 LO 6 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. AICPA Accounting Principles Board Opinion.Generally Accepted Accounting Principles Review Which of the following accounting pronouncements is the most authoritative? a. FASB Statement of Financial Accounting Concepts. b.

1-27 LO 6 . FASB has developed the Financial Accounting Standards Board Codification Research System (CRS). All other accounting literature is considered non-authoritative.   Creates one level of GAAP. which is considered authoritative. CRS is an online real-time database that provides easy access to the Codification.Generally Accepted Accounting Principles FASB Codification  Goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic.

Generally Accepted Accounting Principles Illustration 1-5 FASB Codification Framework 1-28 LO 6 .

Issues in Financial Reporting GAAP in a Political Environment GAAP is as much a product Illustration 1-6 User Groups that Influence the Formulation of Accounting Standards of political action as they are of careful logic or empirical findings. . 1-29 LO 7 Describe the impact of user groups on the rule-making process.

.  Difficult to close in light of accounting scandals.   Sarbanes-Oxley Act (2002).Issues in Financial Reporting Expectation GAAP What the public thinks accountants should do vs. 1-30 LO 7 Describe the impact of user groups on the rule-making process. what accountants think they can do. Public Company Accounting Oversight Board (PCAOB).

. Forward-looking information. Soft assets. Timeliness 1-31 LO 8 Describe some of the challenges facing financial reporting.Issues in Financial Reporting Financial Reporting Challenges     Non-financial measurements.

S. .Issues in Financial Reporting International Accounting Standards Two sets of standards accepted for international use:   U. issued by the IASB. International Financial Reporting Standards (IFRS). 1-32 LO 8 Describe some of the challenges facing financial reporting. FASB and IASB recognize that global markets will best be served if only one set of GAAP is used. issued by the FASB. GAAP.

. Identify the term for which each acronym stands. Instructions: Presented below is a list of common accounting acronyms. (a) AICPA (b) CAP (e) FAF (f) FASAC (i) CPA (j) FASB (c) ARB (d) APB 1-33 (g) SOP (h) GAAP (k) SEC (l) IASB LO 8 Describe some of the challenges facing financial reporting.Issues in Financial Reporting CA1-9 (GAAP Terminology): With accounting and finance. and provide a brief definition of each term. it often helps to be fluent in abbreviations and acronyms.

 Doing the right thing is not always easy or obvious.Issues in Financial Reporting Ethics in the Environment of Financial Accounting In accounting.  GAAP does not always provide an answer. . 1-34 LO 9 Understand issues related to ethics and financial accounting. we frequently encounter ethical dilemmas.

S. The fact that there are differences between what is in this textbook (which is based on U. are developed by the Financial Accounting Standards Board (FASB). U. As a result.S standards.  1-35 . developed by the International Accounting Standards Board (IASB). referred to as generally accepted accounting principles (GAAP). standards) and IFRS should not be surprising because the FASB and IASB have responded to different user needs. many are examining which accounting and financial disclosure rules should be followed.RELEVANT FACTS  International standards are referred to as International Financial Reporting Standards (IFRS). Recent events in the global capital markets have underscored the importance of financial disclosure and transparency not only in the United States but in markets around the world.

Debate about international companies (non-U.S. at Satyam Computer Services (India). These problems have also occurred internationally. and Royal Ahold (the Netherlands). AIG.RELEVANT FACTS  The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U. companies should have to comply with this extra layer of regulation. exchanges.) adopting SOX-type standards centers on whether the benefits exceed the costs. There is a continuing debate as to whether non-U.S. and Lehman Brothers.S.  1-36 . The textbook mentions a number of ethics violations. for example.S. such as WorldCom. Parmalat (Italy). The concern is that the higher costs of SOX compliance are making the U. securities markets less competitive.

RELEVANT FACTS  IFRS tends to be simpler in its accounting and disclosure requirements.” This difference in approach has resulted in a debate about the merits of “principlesbased” versus “rules-based” standards.S. The SEC allows foreign companies that trade shares in U. some people say more “principles-based.” GAAP is more detailed. markets to file their IFRS financial statements without reconciliation to GAAP. some people say more “rules-based.  1-37 .

ABOUT THE NUMBERS Illustration IFRS1-1 Global Companies 1-38 .

  Standards used on most foreign exchanges.  IFRS used in over 115 countries. Standards used by foreign companies listing on U. 1-39 .S. securities exchanges.International Standard-Setting Organizations: International Accounting Standards Board (IASB)  Issues International Financial Reporting Standards (IFRS).

http://www. Dedicated to ensuring that global markets can operate in an efficient and effective basis.International Organization of Securities Commissions (IOSCO)   Does not set accounting standards.org/ 1-40 .iosco.

http://www. Standards Advisory Council.  International Accounting Standards Board (IASB).International Accounting Standards Board (IASB) Composed of four organizations—  International Accounting Standards Committee Foundation (IASCF).iasb.org   International Financial Reporting Interpretations Committee (IFRIC). 1-41 .

Illustration IFRS1-2 International Standard-Setting Structure 1-42 .

International Financial Reporting Standards. Integrated Financial Reporting Services. d. c. b. International Federation of Reporting Services.Review Question IFRS stands for: a. Independent Financial Reporting Standards. 1-43 .

d. IASB and FASB. b. SEC and FASB. 1-44 . c. IASB and IOSCO.Review Question The major key players on the international side are the: a. IOSCO and the SEC.

S.Review Question Which body from the U. FAF. b. c. 1-45 . FASC. d. SEC. FASB. side is similar to the IASB? a.

1-46 . International financial reporting interpretations.Types of Pronouncements    International Financial Reporting Standards. Framework for financial reporting.

1-47 . and 3. 2.Hierarchy of IFRS Companies first look to: 1. International Financial Reporting Standards. International Accounting Standards. Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).

Review Question IFRS is comprised of: a. 1-48 . d. b. and international accounting interpretations. International Accounting Standards. International Financial Reporting Standards. International Accounting Standards and international accounting interpretations. FASB financial reporting standards and International Accounting Standards. c. International Financial Reporting Standards and FASB financial reporting standards.

Illustration IFRS1-3 SEC Roadmap 1-49 . assuming that certain conditions are met.International Convergence The SEC appears committed to move to IFRS.

sometime in 2011. 1-50 . but there would be a transition period in which this would be accomplished.International Convergence The SEC will decide. whether to mandate the use of IFRS. It is likely that not all companies would be required immediately to change to IFRS.

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