Intermediate Accounting

Seventeenth Edition

Kieso; Weygandt; Warfield

Chapter 1

Financial Accounting and

Accounting Standards
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Learning Objectives
After studying this chapter, you should be able to:
1. Describe the financial reporting environment.
2. Identify the major policy-setting bodies and their role
in the standard-setting process.
3. Explain the meaning of generally accepted accounting
principles (GAAP) and the role of the Codification for
GAAP.
4. Describe major challenges in the financial reporting
environment.
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Preview of Chapter 1
Financial Accounting and Accounting Standards
Financial Reporting Environment
• Objective of financial reporting
• Need to develop standards
• Accounting and capital allocation
Parties Involved in Standard-Setting
• Securities and Exchange Commission
• American Institute of CPAs (AICPA)
• Financial Accounting Standards Board (FASB)

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Preview of Chapter 1
Financial Accounting and Accounting Standards
Generally Accepted Accounting Principles
• FASB Codification
Major Challenges in Financial Reporting
• Political environment
• Expectations gap
• Financial reporting issues
• International accounting standards
• Ethics

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Learning Objective 1
Describe the Financial Reporting
Environment

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Financial Reporting Environment
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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Financial Reporting Environment (1 of 2)

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Financial Reporting Environment
Accounting and Capital Allocation
Resources are limited. Efficient use of resources often
determines whether a business thrives.

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Financial Reporting Environment
Objective of Financial Reporting
Provide financial information about the reporting entity
that is useful to
• present and potential equity investors,
• lenders, and
• other creditors in making decisions about providing
resources to the entity.

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Objective of Financial Accounting (1 of 2)
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
• Primary users for general-purpose financial statements

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

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The Need to Develop Standards

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Learning Objective 2
Identify the Major Policy-Setting Bodies and
Their Role in the Standard-Setting Process

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Parties Involved in Standard Setting
Three organizations:
• Securities and Exchange Commission (SEC)
• American Institute of Certified Public Accountants
(AICPA)
• Financial Accounting Standards Board (FASB)

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Parties Involved in Standard Setting
Securities and Exchange Commission (SEC)
• Established by the federal government
• Securities Exchange Act of 1934
• Accounting and reporting for public companies
• Encouraged private standard-setting body
• SEC requires public companies to adhere to GAAP
• SEC Oversight
• Enforcement Authority

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Parties Involved in Standard Setting
American Institute of Certified Public
Accountants (AICPA)
• National professional organization
• Established the following:
Committee on Accounting Procedures
• 1939 to 1959
• Issued 51 Accounting Research Bulletins (ARBs)
• Problem-by-problem approach failed

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Parties Involved in Standard Setting
American Institute of Certified Public Accountants
(AICPA)
• National professional organization
• Established the following:
Accounting Principles Board (APB)
• 1959 to 1973
• Issued 31 Accounting Principle Board Opinions (APBOs)
• Wheat Committee recommendations adopted in 1973

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Parties Involved in Standard Setting
Financial Accounting Standards Board (FASB)
Wheat Committee’s recommendations resulted in FASB.
Differences between FASB and APB include:
• Smaller membership
• Full-time, remunerated membership
• Greater autonomy
• Increased independence
• Broader representation

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Financial Accounting Standards Board
(1 of 3)

Organizational Structure for Setting Accounting

Standards

Financial Accounting Foundation

Purpose: To select members of the FASB and their
Advisory Councils, fund their activities, and exercise
general oversight.

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Financial Accounting Standards Board
(2 of 3)

Organizational Structure for Setting Accounting Standards

Financial Accounting Staff and Task Forces
Standards Board (FASB)
Purpose: To assist Board on
Purpose: To establish and
reporting issues by
improve standards of financial
performing research,
accounting and reporting for
analysis, and writing
the guidance and education of functions.
the public, including issuers,
auditors, and users of financial
information.
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Financial Accounting Standards Board
(3 of 3)

Organizational Structure for Setting Accounting Standards

Financial Accounting Standards Advisory Council (FASAC)

Purpose: To consult on major policy issues, technical
issues, project priorities, and selection and organization of
task forces.

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Financial Accounting Standards Board
Due Process

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Financial Accounting Standards Board
Types of Pronouncements

Accounting Standards Updates Financial Accounting

Concepts

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Learning Objective 3
Explain the Meaning of Generally Accepted
Accounting Principles (GAAP) and the Role
of the Codification for GAAP

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Generally Accepted Accounting
Principles
Principles that have substantial authoritative support.
Major sources of GAAP:
• FASB Standards, Interpretations, and Staff Positions
• APB Opinions
• AICPA Research Bulletins

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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
• Creates one level of GAAP, which is considered
authoritative
• All other accounting literature is considered non-
authoritative
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Generally Accepted Accounting
Principles (1 of 2)
FASB Codification
FASB has developed the Financial Accounting Standards
Board Codification Research System (CRS).
CRS is an online, real-time database that provides easy
access to the Codification.
The Codification and the related CRS provide a topically
organized structure, subdivided into topic, subtopics,
sections, and paragraphs, using a numerical index system.
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Generally Accepted Accounting
Principles (2 of 2)

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Learning Objective 4
Describe Major Challenges in the Financial
Reporting Environment

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Major Challenges in Financial Reporting
GAAP in a Political Environment
GAAP is as much a product of political action as it is of careful
logic or empirical findings.

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GAAP in a Political Environment

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Major Challenges in Financial Reporting
The Expectations Gap
What the public thinks accountants should do versus
what accountants think they can do.
• Difficult to close in light of accounting scandals
• Sarbanes-Oxley Act
• Public Company Accounting Oversight Board (PCAOB)

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Major Challenges in Financial Reporting
Financial Reporting Issues

• Nonfinancial measurements
• Forward-looking information
• Soft assets
• Timeliness
• Understandability

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 International Financial Reporting
Standards

• https://www.ifrs.org/
• IFRS Accounting Standards
• Integrated Reporting
• IFRS Sustainability Disclosure Standards
• Sustainability Accounting Standards Board

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Copyright
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