1. Turn in Take-home Quiz (using Folders by last name) 2. General Course Questions: (Syllabus, Student Enrollment & Wait List, Other) 2. Follow-up Chapter 3: The Accounting Information System 3. Introduce Chapter 1, IFRS & the Codification 4. Assignments for Tuesday, October 5th: A. Readings: Chapter 2 and IFRS pp. 8-9 B. Codification CE2-1 thru CE2-3 C. Chapter 2: BE2-2 thru BE2-11, E2-3, E2-5 D. Discussion Questions Kapnick & Wyatt Intermediate Accounting Intermediate Accounting September 30th, 2010 September 30th, 2010 1
Transcript
1. Turn in Take-home Quiz (using Folders by last name)
2. General Course Questions:
(Syllabus, Student Enrollment & Wait List, Other)
2. Follow-up Chapter 3: The Accounting Information System
To provide information that is1) Useful in investment and credit decisions2) Useful in assessing cash flow prospects3) About company resources, claims to
those resources and changes in themFinancial Statement Elements• Assets• Liabilities• Stockholders’ Equity• Revenues• Expenses
Objectives of Financial AccountingObjectives of Financial Accounting
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• Accounting identifies, measures and communicates financial information.
• This information is about economic entities.
• Information is communicated to interested parties such as investors, creditors, unions and governmental agencies.
Is accounting an art or a science? Is there only one correct Net Income
amount?
Characteristics of Financial AccountingCharacteristics of Financial Accounting
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What level of sophistication is assumed of What level of sophistication is assumed of Financial Statement Users?Financial Statement Users?
Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making investment, credit, and similar decisions rational. The information should be comprehensible to those who have a reasonable understanding of accounting concepts, financial statements, and business and economic activities and are expected to be willing to study and interpret the information with reasonable diligence.
(Statement of Financial Accounting Concepts #1)
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Why Do we Need Rules to Why Do we Need Rules to Play the Game of Business?Play the Game of Business?
The Need for Accounting Rules:• Stockholders & Creditors have limited resources and need to make wise investment choices.• Establishing rules levels the playing field by requiring companies to report comparable information.• The SEC was established in 1932 to regulate reporting of Financial Information.• The SEC delegates most of its rule making authority to the private sector (AICPA, FASB, etc.) to establish the rules called Generally Accepted Accounting Principles (GAAP).
Missions is to establish and improve standards of Missions is to establish and improve standards of financial accounting and reporting. Differences financial accounting and reporting. Differences between FASB and APB include:between FASB and APB include:
Process operates in full view of the public, thus is open to political influences and can take considerable time.
1. FASB drafts and releases a discussion memorandums for identified accounting issues:• Describes the possible accounting treatments• Describes FASB’s preliminary views on the issue
2. Receives public feedback on the discussion memorandum3. Prepares an exposure draft (proposed new accounting
standard) after analyzing and evaluating feedback4. Accepts public feedback on the exposure draft5. Decides whether to:
• Remove the exposure draft from further consideration• Revise and reissue the exposure draft• Vote upon the current version of the exposure draft
FASB Due Process FASB Due Process for Standard Settingfor Standard Setting
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FASBFASBFASBFASB Preparers (e.g., FEI)
Preparers (e.g., FEI)
Financial Community
Financial Community
Government (SEC, IRS, other
agencies)
Government (SEC, IRS, other
agencies)
Industry Associations
Industry Associations
Business EntitiesBusiness Entities
CPAs andAccounting Firms
CPAs andAccounting Firms
AICPA (AcSEC)AICPA (AcSEC)
AcademiciansAcademicians
Investing PublicInvesting Public
Accounting standards, Accounting standards, interpretations, and bulletinsinterpretations, and bulletins
Standard Standard SettingSetting
User Groups that Influence Accounting Standards
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Issued by the FASB:Issued by the FASB:
Types of PronouncementsTypes of Pronouncements
Standards, Interpretations, and Staff Positions.
Financial Accounting Concepts
Emerging Issues Task Force Statements
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• Demand: external parties demand financial accounting information to facilitate their resource allocation decisions
• Supply: Firms supply financial accounting info based on the expected economic consequences of doing so
• Ultimately better financial reporting will result in more efficient functioning of our capital markets
Supply and Demand of Financial Supply and Demand of Financial Accounting InformationAccounting Information
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An effective process of capital allocation is critical to a healthy economy, which
a.a. promotes productivity.promotes productivity.
b.b. encourages innovation.encourages innovation.
c.c. provides an efficient and liquid market for provides an efficient and liquid market for buying and selling securities.buying and selling securities.
d.d. All of the above.All of the above.
Accounting and Capital AllocationAccounting and Capital Allocation
ReviewReview
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Sarbanes-Oxley Act (SOX)Sarbanes-Oxley Act (SOX)
– CEO and CFO certifications over F/S and internal controls– Prohibition on loans to executive officers and directors– SOX Section 404 internal control audits– Audit committee members
• Independent• Financially literate• Must approve all services performed by audit firm• Responsible for retaining and terminating the auditor• Firm must disclose financial experts on the audit committee
– Certain non-audit services prohibited by audit firm– Audit partner rotation– Certain employment prohibitions– Created Public Company Accounting Oversight Board (PCAOB)
• Creates auditing standards• Performs CPA firm inspections• Required consideration of Principles Based Accounting System! 17
U.S. • AICPA• FASB “Codification”• SEC• The Sarbanes Oxley Act (SOX)• PCAOB
International (appx 100 countries)• IASB IFRS
IFRS for SMEs• Individual countries Jurisdictional IFRS
Who’s Who in the Regulatory Zoo?Who’s Who in the Regulatory Zoo?
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• Issued in 2008, SEC to decide by 2011 if mandatory adoption will begin in 2014
• Milestones– Improving accounting standards– Improving funding and structure of IASB– Facilitating XBRL under IFRS – Updating education & licensing of US Accountants
• Concerns raised– Cost of conversion, time to convert– IFRS not as Robust as US GAAP– In-Consistencies under “Jurisdictional” IFRS– Private companies, Industry specific concerns (i.e., LIFO)– IFRS Enforcement – IFRS Principles-based model rejected by the SEC
SEC IFRS Roadmap SEC IFRS Roadmap
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International Standard SettersInternational Standard Setters
1. Potential agenda items discussed in meetings open to the public
2. Discussion papers and exposure drafts are published for public comment
3. The IASB solicits comments from various standard setting and regulatory bodies, as well as other users of financial statements
IASB Standard SettingIASB Standard Setting
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Nonfinancial Measurements
Forward-looking Information
Soft Assets
Timeliness
An Expectations gap
Challenges Facing the Challenges Facing the Accounting ProfessionAccounting Profession
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Trust Trust
• Trust drives the accounting profession– SOX, PCAOB, and class action lawsuits are a
result of a breach of trust– From a broad perspective, we pay a heavy price
for low trust:• Waits at airports, audit fees
• Implications for personal conduct (Ethics, Character and Integrity)
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Issues in Financial ReportingIssues in Financial ReportingEthics in the Environment of Financial
Accounting
In accounting, we frequently encounter ethical dilemmas.
GAAP does not always provide an answer
Doing the right thing is not always easy or obvious
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AICPA Principles of Professional ConductAICPA Principles of Professional Conduct
1. Exercise sensitive professional and moral judgments in all activities
2. Accept the obligation to act in a way that will serve the public interest, honor the public trust and demonstrate commitment to professionalism
3. Perform all professional responsibilities with the highest sense of integrity to maintain and broaden public confidence.
4. Maintain objectivity, be free of conflicts of interest, be independent in fact and appearance.
5. Observe the profession’s technical and ethical standards, strive continually to improve confidence and quality of services and discharge professional responsibility to the best of one’s ability.
6. Observe the Principles of the Code of Professional Conduct, section 52-57, in determining the services provided to the public.
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STANDARDS OF ETHICAL CONDUCT FOR STANDARDS OF ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS (adapted from IMA)MANAGEMENT ACCOUNTANTS (adapted from IMA)
1. COMPETENCE1. COMPETENCE
•Maintain professional competence.Maintain professional competence.
•Follow laws, regulations, and standardsFollow laws, regulations, and standards
•Prepare complete and clear reports and recommendations Prepare complete and clear reports and recommendations after appropriate analysis.after appropriate analysis.
•Ensure that subordinates do not disclose confidential Ensure that subordinates do not disclose confidential information.information.
•Do not use confidential information for personal gain or Do not use confidential information for personal gain or advantageadvantage
See next slide for items 3 & 4See next slide for items 3 & 426
STANDARDS OF ETHICAL CONDUCT FOR STANDARDS OF ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS MANAGEMENT ACCOUNTANTS
(adapted from IMA) continued (adapted from IMA) continued3. INTEGRITY3. INTEGRITY
•Avoid actual or apparent conflicts of interest.Avoid actual or apparent conflicts of interest.
•Refuse gifts, favors, or hospitality that might influence Refuse gifts, favors, or hospitality that might influence objectivity.objectivity.
•Refrain from subverting the organization's legitimate Refrain from subverting the organization's legitimate objectives.objectives.
•Recognize and communicate personal limitations.Recognize and communicate personal limitations.
•Communicate unfavorable as well as favorable Communicate unfavorable as well as favorable information and opinions.information and opinions.
•Refrain from actions that discredit the profession.Refrain from actions that discredit the profession.
4. OBJECTIVITY4. OBJECTIVITY
•Communicate information fairly and objectively.Communicate information fairly and objectively.
•Fully disclose all information that could be expected to Fully disclose all information that could be expected to influence a user's undeinfluence a user's understanding.
1.1. Identify the Ethical Issues involvedIdentify the Ethical Issues involved
2.2. Identify the Stakeholders involved Identify the Stakeholders involved (persons or organizations affected by (persons or organizations affected by the outcome of the dilemma)the outcome of the dilemma)
3.3. Identify the alternative courses of Identify the alternative courses of action that can be takenaction that can be taken
4.4. Decide on the best course of action Decide on the best course of action consistent with the principles of consistent with the principles of honesty, integrity, and fairness and honesty, integrity, and fairness and also consistent with any existing code also consistent with any existing code of ethical conduct..of ethical conduct.. 28
Follow the organization’s established policies for conflict resolution. If the ethical conflict is not resolved, consider the following course of action:1.Discuss the problem with the immediate superior except whet it appears that the superior is involved, in which case the problems should be presented initially to the next higher managerial level. If satisfactory resolutions cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level.2.If the immediate superior is the chief executive officer, or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with the superior’s knowledge, assuming the superior is not involvedContinued on next slide…..
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Resolving Ethical Dilemmas, continuedResolving Ethical Dilemmas, continued
3.Clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action. 4.If the ethical conflict still exists after exhausting all levels of internal review, the management accountant may have no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization.5.Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate. *Institute of Management Accountants, Formerly National Association of Accountants, Statements on Management Accounting: Objectives of Management Accounting. Statement No. 1B, New York, NY., June 17, 1982.
1..
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Common Features of Criminal and Ethical
Misconduct• Secret Problem
• Opportunity
• Rationalization
What does the SEC Study conclude about the U.S. financial reporting
system?A. It is fundamentally sound, of the highest
quality and needs no further improvement
B. It is fundamentally sound and generally of the highest quality but recent corporate accounting scandals are a call to action
C. It should be modeled after the principles-based IFRS standards
What does the SEC Study conclude about International
Financial Reporting Standards (IFRS)?
A) IFRS standards are mainly rules-based
B) Most IFRS standards are overly general and should be characterized as principles only
C) Many of the IFRS standards are rules-based and others are overly general and could be fairly characterized as principles only
SEC Study on U.S. Adoption of a Principles Based Accounting
SystemWhich does the study claim is better?
A.Financial reporting based on a Principles-only approach
B.Financial reporting based on objectives-oriented standards
C.Financial reporting based on a Rules-base approach
And why (what are the pros and cons of each)?
Pros and Cons of Rules vs. Principle-base and Principles-only Accounting
Standards1. Rules Based:
Pros:
Cons:
2. Principle-based
Pros:
Cons:
3. Principles- only
Pros:
Cons:
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HOUSE OF GAAP GAAP’s Objective is to provide Financial Information that is:
1. Useful in investment & credit decisions2. Useful in assessing future cash flows3. About the enterprise resources, claims to resources, and
changes in them
Qualitative Characteristics
RelevancePredictive or Feedback Value
TimelinessReliability
ComparabilityConsistency
ElementsAssets
LiabilitiesStockholders’ Equity
Other Comprehensive IncomeRevenuesExpenses
AssumptionsEconomic EntityGoing ConcernMonetary Unit
Periodicity
PrinciplesHistorical Cost
Revenue RecognitionMatching
Full Disclosure
ConstraintsCost/BenefitMateriality
Industry PracticeConservatism
• Background – discussion of nature of business, markets, customers, and products/services.
• Management Discussion and Analysis (MD&A) – discussion of results of operations (including comparisons to prior years), liquidity, capital resources (including forward-looking information).
• Selected financial data – five or ten-year time series of selected financial and non-financial data (allows analysis of trends).
• Financial statements – comparative B/S (2 years), I/S (3 years), SCF (3 years), and SE (3 years).
• Notes and supplemental disclosures – explanations, elaborations, and supplements to information reported in the financial statements
• Auditor report – independent auditor’s opinion on whether the financial statements and notes are fairly presented according to generally accepted accounting principles (unqualified, qualified, adverse, or disclaimer).
Financial Reporting for Public Companies: Financial Reporting for Public Companies: The 10K The 10K
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• Why do we need accounting rules?
• Is GAAP rigid or flexible?
• Is there more than one type of GAAP?– U.S.– IFRS– Other
• Why do we care about “other GAAP”?– Comparability– Roadmap for adoption of IFRS
Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP)Principles (GAAP)
