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Financial Accounting and Accounting Standards

Financial Accounting and Accounting Standards

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Financial Accounting and Accounting Standards

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  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. Environment and Theoretical Structure of Financial Accounting

  3. 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. Environment and Theoretical Structure of Financial Accounting

  4. Objectives of the Chapters (contd.) 9. Discuss financial reporting reform and the Sarbanes and Oxley Act (thePublic 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. Environment and Theoretical Structure of Financial Accounting

  5. 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? Environment and Theoretical Structure of Financial Accounting

  6. Accounting Standards • Accounting methods with substantial authoritative support to be used by business entities in preparing external reports for users. Environment and Theoretical Structure of Financial Accounting

  7. 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. Environment and Theoretical Structure of Financial Accounting

  8. 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 byEITF YearAuthorityOfficial Release Environment and Theoretical Structure of Financial Accounting 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 Environment and Theoretical Structure of Financial Accounting

  10. GAAP (General Accepted Accounting Principles) • Accounting methods having “substantial authoritative support” and used by business entities in preparing financial statements. Environment and Theoretical Structure of Financial Accounting

  11. 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.) Environment and Theoretical Structure of Financial Accounting

  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. Environment and Theoretical Structure of Financial Accounting

  13. 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. • . Environment and Theoretical Structure of Financial Accounting

  14. 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.) Environment and Theoretical Structure of Financial Accounting

  15. 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. Environment and Theoretical Structure of Financial Accounting

  16. The Accounting Standard Setting Process of the FASB (A Due Process) • Identify a topic and place it on the Board’s 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 FASB’s technical staff in consulting with a group of knowledge people in accounting and business community. Environment and Theoretical Structure of Financial Accounting

  17. 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. Environment and Theoretical Structure of Financial Accounting

  18. 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). Environment and Theoretical Structure of Financial Accounting

  19. 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) Environment and Theoretical Structure of Financial Accounting

  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.) Environment and Theoretical Structure of Financial Accounting

  21. The Accounting Standard Compliance System • The interrelationship of the SEC and the FASB: FASB: the rule making body. SEC: the enforcing agency. Environment and Theoretical Structure of Financial Accounting

  22. 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. Environment and Theoretical Structure of Financial Accounting

  23. 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) Environment and Theoretical Structure of Financial Accounting

  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 state:1)whether the management’s assessment is fair, and 2)whether the internal control of the firm is effective. Environment and Theoretical Structure of Financial Accounting

  25. 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. Environment and Theoretical Structure of Financial Accounting

  26. 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). Environment and Theoretical Structure of Financial Accounting

  27. 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). Environment and Theoretical Structure of Financial Accounting

  28. 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. Environment and Theoretical Structure of Financial Accounting

  29. 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. Environment and Theoretical Structure of Financial Accounting

  30. 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. Environment and Theoretical Structure of Financial Accounting

  31. 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.) Environment and Theoretical Structure of Financial Accounting

  32. 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. Environment and Theoretical Structure of Financial Accounting

  33. 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. . Environment and Theoretical Structure of Financial Accounting

  34. 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_convergence.shtml Environment and Theoretical Structure of Financial Accounting

  35. 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?showPageContent=no&xml=16_13_67_23092003.htm Environment and Theoretical Structure of Financial Accounting

  36. 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. Environment and Theoretical Structure of Financial Accounting

  37. 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.