Chapter 1


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Intermediate Accounting I

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  • Part I.The framework for selecting accounting principles to be used in preparing financial statements in conformity with generally accepted accounting principles is shown on your screen. The FASB has categorized these various sources of accounting principles in descending order of authority.Part II.In October of 2007, the FASB announced its plan for the release of an Accounting Standards Codification that will integrate and topically organize all relevant account pronouncements issued by the various U.S. standard setters shown on your screen. After approval, expected in 2009, the Codification will become the only level of authoritative United States Generally Accepted Accounting Principles. All other literature will be nonauthoritative.
  • Chapter 1

    1. 1. 1-1
    2. 2. 1-2 C H A P T E R 1 FINANCIAL REPORTING AND ACCOUNTING STANDARDS Intermediate Accounting IFRS Edition Kieso, Weygandt, and Warfield
    3. 3. 1-3 1. Identify the major financial statements and other means of financial reporting. 2. Explain how accounting assists in the efficient use of scarce resources. 3. Explain the need for high-quality standards. 4. Identify the objective of financial reporting. 5. Identify the major policy-setting bodies and their role in the standard-setting process. 6. Explain the meaning of IFRS. 7. Describe the challenges facing financial reporting. Learning Objectives
    4. 4. 1-4 General-purpose financial statements Capital providers Entity perspective Decision- usefulness Global Markets Objective of Financial Reporting Standard-Setting Organizations Financial Reporting Challenges Financial statements and financial reporting Accounting and capital allocation High-quality standards IOSCO IASB Hierarchy of IFRS Political environment Expectations gap Significant financial reporting issues Ethics International convergence Financial Reporting and Accounting Standards
    5. 5. 1-5 What is accounting? Accounting: Broadly, is an information system that is meant to provide a fair and balanced reporting and measurement of financial performance for a given economic entity donated in monetary terms. Why do we need this information? … who uses this information? And what do they use it for? You have to keep this question in mind as you study to become a professional accountant
    6. 6. 1-6 Objective of Financial Accounting Objective: Provide financial information about the reporting entity that is useful to…  present and potential equity investors,  lenders, and  other creditors in making decisions in their capacity as capital providers.
    7. 7. 1-7 Capital Providers (Investors) Investors are the primary user group. 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. (costs vs. benefits)
    8. 8. 1-8 Decision-Usefulness Objective of Financial Accounting 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 (i.e. stewardship) Entity Perspective As we provide information about an entity, we have to view the entity (company) as a separate and distinct being from its owners.
    9. 9. 1-9 How Do We Prepare Accounting Information? Follow a set of standards we can all accept and agree on: 1. Can be local for a specific country. (U.S. GAAP, Saudi GAAP, Chinese GAAP) 2. Can be common for a group of countries (IFRS). We need to use a common method?... Otherwise! Question: do we really need international standards? Or, is having local accounting standards for your country enough?
    10. 10. 1-10 The Case for IFRS 1. World economies have become greatly intertwined in a globalized world economy. 2. Investors have become international in their investment strategies. 3. The rise of multinational corporations. 4. Companies list their shares in global exchange markets and seek to raise capital from different countries. 5. It is costly to have more than one set of standards. Why use IFRS instead of Custom Standards?
    11. 11. 1-11 Global Markets World markets are becoming increasingly intertwined. Top 20 Global Companies In Terms Of Sales
    12. 12. 1-12 Global Markets Significant number of foreign companies are found on national exchanges. By 2013, 213 of the largest 500 global companies in the world will be using IFRS.
    13. 13. 1-13 Characteristics of Accounting Information Financial Statements and Financial Reporting Characteristics of accounting are: (1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested parties.
    14. 14. 1-14 Financial Information Accounting? Identify and Measure and Communicate Statement of Financial Position Income Statement or Statement of Comprehensive Income Statement of Cash Flows Statement of Changes in Equity Note Disclosures President’s letter Prospectuses Reports filed with governmental agencies News releases Forecasts Environmental impact statements Etc. Financial Statements Additional InformationEconomic Entity Accounting Information Forms
    15. 15. 1-15 Resources are limited. Efficient use of resources often determines whether a business thrives. Accounting and Capital Allocation What is the role of accounting in society? Accountants must measure performance accurately and fairly, so that the right managers and companies are able to attract investment capital.
    16. 16. 1-16 High Quality Standards Elements of Global Accounting Standards Globalization demands a single set of high-quality international accounting standards. How?  Some elements needed for success: 1. Single set of high-quality accounting standards established by a single standard-setting body. 2. Consistency in application and interpretation. 3. Common disclosures. 4. Common high-quality auditing standards and practices. 5. Common approach to regulatory review and enforcement. 6. Education and training of market participants. (Continued)
    17. 17. 1-17 High Quality Standards Global Markets Globalization demands a single set of high-quality international accounting standards. Some elements: 7. Common delivery systems (e.g., eXtensible Business Reporting Language—XBRL). 8. Common approach to corporate governance and legal frameworks around the world.
    18. 18. 1-18
    19. 19. 1-19 The objective of financial reporting places the most emphasis on: a. reporting to capital providers. b. reporting on stewardship. c. providing specific guidance related to specific needs. d. providing information to individuals who are experts in the field. Review Question Objective of Financial Accounting
    20. 20. 1-20 General-purpose financial statements are prepared primarily for: a. internal users. b. external users. c. auditors. d. government regulators. Review Question Objective of Financial Accounting
    21. 21. 1-21 Two Major Organizations:  International Accounting Standards Board (IASB)  Issues International Financial Reporting Standards (IFRS).  Standards used on most foreign exchanges.  Standards used by foreign companies listing on U.S. securities exchanges.  IFRS used in over 115 countries.  To be implemented in Saudi Arabia in 2014! Standard-Setting Organizations
    22. 22. 1-22 Two Major Organizations: Financial Accounting Standards Board (FASB)  Issues Statements of Financial Accounting Standards (SFAS).  Required for all U.S.-based companies.  FASB standards are more detailed and outnumber current IASB standards. Standard-Setting Organizations
    23. 23. 1-23 Standard-Setting Organizations International Organization of Securities Commissions (IOSCO)  Does not set accounting standards.  Dedicated to ensuring that global markets can operate in an efficient and effective basis.  Is the equivalent of the SEC (securities and exchange commission) in the U.S. and CMA (Capital Markets Authority) in Saudi Arabia.
    24. 24. 1-24 Standard-Setting Organizations International Accounting Standards Board (IASB) Composed of four organizations—  International Accounting Standards Committee Foundation (IASCF)  International Accounting Standards Board (IASB)  Standards Advisory Council  International Financial Reporting Interpretations Committee (IFRIC)
    25. 25. 1-25 Standard-Setting Organizations
    26. 26. 1-26 The major key players on the international side (outside the United States) are the: a. IASB and FASB. b. SEC and FASB. c. IOSCO and the SEC. d. IASB and IOSCO. Review Question Standard-Setting Organizations
    27. 27. 1-27 Which body from the U.S. side is similar to the IASB? a. SEC. b. FASB. c. FASC. d. FAF. Review Question Standard-Setting Organizations
    28. 28. 1-28 Due Process The IASB due process has the following elements: 1. Independent standard-setting board; 2. Thorough and systematic process for developing standards; 3. Engagement with investors, regulators, business leaders, and the global accountancy profession at every stage of the process; and 4. Collaborative efforts with the worldwide standard- setting community.
    29. 29. 1-29 Due Process The IASB characteristics are as follows: • Membership: 14 members from different countries (2-part- time); • Autonomy: The IASB is NOT part of any other professional organization, only follows IASC. • Independence: Full-time IASB members must sever all ties to any past employer. • Voting: 9 out of 14 votes are required to approve a standard.
    30. 30. 1-30 Due Process
    31. 31. 1-31 Issued by the IASB: Types of Pronouncements International Financial Reporting Standards. Framework for financial reporting. International financial reporting interpretations.
    32. 32. 1-32 Types of Pronouncements Hierarchy of IFRS Companies first look to: 1. International Financial Reporting Standards (IFRS); 2. International Accounting Standards (IAS) (i.e. old standards); and 3. Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).
    33. 33. 1-33 Financial Reporting Challenges IFRS in a Political Environment
    34. 34. 1-34 Standard-Setting Organizations The independence of the IASB:  IASC is funded primarily by the private sector (including U.S. big accounting firms).  IASC has been seeking joint government funding to become more independent financially.  The SEC has still NOT issued guidelines for U.S. companies to use IFRS. Currently, foreign companies listed in the U.S. are allowed to use IFRS instead of U.S. GAAP.
    35. 35. 1-35 Accounting standard-setters use the following process in establishing international standards: a. Research, exposure draft, discussion paper, standard. b. Discussion paper, research, exposure draft, standard. c. Research, preliminary views, discussion paper, standard. d. Research, discussion paper, exposure draft, standard. Review Question Due Process
    36. 36. 1-36 What the public thinks accountants should do VS. what accountants think they can do. Financial Reporting Challenges The Expectations Gap Significant Financial Reporting Issues  Non-financial measurements  Forward-looking information  Soft assets  Timeliness
    37. 37. 1-37 Ethics in the Environment of Financial Accounting  Companies that concentrate on “maximizing the bottom line,” “facing the challenges of competition,” and “stressing short-term results” place accountants in an environment of conflict and pressure.  IFRS does not always provide an answer.  This is why your job is interesting!  Doing the right thing is not always easy or obvious. Financial Reporting Challenges
    38. 38. 1-38 International Convergence In 2002, the IASB and the FASB formalized their commitment to the convergence of U.S. GAAP and international standards. The two Boards agreed to: 1. Make their existing financial reporting standards fully converged as soon as practicable, and 2. Coordinate their future work programs to ensure that once achieved, convergence is maintained. Financial Reporting Challenges
    39. 39. 1-39  The fact that there are differences between IFRS and U.S. GAAP should not be surprising because standard-setters have developed standards in response to different user needs.  IFRS tends to be simpler and more flexible in its accounting and disclosure requirements.  The U.S. SEC recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile their accounting with U.S. GAAP.
    40. 40. 1-40 The expectations gap is: a. what financial information management provides and what users want. b. what the public thinks accountants should do and what accountants think they can do. c. what the governmental agencies want from standard- setting and what the standard-setters provide. d. what the users of financial statements want from the government and what is provided. Review Question Financial Reporting Challenges
    41. 41. 1-41 Appendix 1A THE U.S. STANDARD-SETTING ENVIRONMENT Organizations responsible for developing financial accounting standards (GAAP) in the United States: 1. Securities and Exchange Commission (SEC). 2. Financial Accounting Standards Board (FASB).
    42. 42. 1-42 Securities Act of 1933 Securities Act of 1934 Securities and Exchange Commission  Established by federal government  Accounting and reporting for public companies  Encouraged private standard-setting body  SEC requires public companies to adhere to GAAP  SEC provides oversight & enforcement authority.
    43. 43. 1-43 Financial Accounting Standards Board Wheat Committee’s recommendations resulted in the creation of a the Financial Accounting Standards Board (FASB) in 1973. Financial Accounting Foundation Selects members of the FASB Funds their activities Exercises general oversight. Financial Accounting Standards Board Financial Accounting Standards Advisory Council Mission to establish and improve standards of financial accounting and reporting. Consult on major policy issues.
    44. 44. 1-44 Mission is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include: Financial Accounting Standards Board Smaller Membership Full-time, Remunerated Membership Greater Autonomy Increased Independence Broader Representation
    45. 45. 1-45 FASB relies on two basic premises: (1) Responsive to entire economic community (2) Operate in full view of the public Financial Accounting Standards Board Step 1 = Topic placed on agenda Step 2 = Research conducted and Discussion Memorandum issued. Step 3 = Public hearing Step 4 = Board evaluates research, public response and issues Exposure Draft Step 5 = Board evaluates responses and issues final Statement of Financial Accounting Standard Due Process
    46. 46. 1-46 Financial Accounting Standards Board Standards, Interpretations, and Staff Positions. Financial Accounting Concepts Emerging Issues Task Force Statements Types of Pronouncements
    47. 47. 1-47 Hierarchy of U.S. GAAP FASB Statements of Financial Accounting Standards, FASB Interpretations, SEC rules and interpretive releases, AICPA Accounting Research Bulletins, Accounting Principles Board Opinions FASB Technical Bulletins, AICPA Industry Audit and Accounting Guides and Statements of Position AICPA Accounting Standards Executive Committee Practice Bulletins FASB Implementation Guides, AICPA Accounting Interpretations, and widely recognized general or industry practices. Most Authoritative Least Authoritative
    48. 48. 1-48 Establishment of Accounting Standards A Political Process GAAP Internal Revenue Service American Institute of CPAs Securities and Exchange Commission American Accounting Association Governmental Accounting Standards Board Financial Executives International
    49. 49. 1-49 Sarbanes-Oxley Act of 2002  Became law in 2002 after numerous accounting scandals.  Established the Public Company Accounting Oversight Board.  Implements stronger independence rules for auditors.  Requires CEOs and CFOs to personally certify that financial reports are complete and accurate.  Requires CEOs and CFOs to forfeit bonuses when there are accounting restatements.  Requires audit committee members to be independent have financial expertise.  Requires codes of ethics for senior financial officers.  Requires public companies to attest to the effectiveness of their internal controls.
    50. 50. 1-50 Principles that have substantial authoritative support. Major sources of GAAP: FASB Standards, Interpretations, and Staff Positions APB Opinions AICPA Accounting Research Bulletins U.S. Generally Accepted Accounting Principles Financial Accounting Standards Board When the Board approves a new standard, staff position, etc., the results are included in the Codification through an Accounting Standards Update.
    51. 51. 1-51 Financial Accounting Standards Board
    52. 52. 1-52 IASB and FASB have set up an extensive work plan to achieve one set of international standards. Improvements in Accounting Standards International Accounting Convergence Illustration 1A-3 IFRS Adoption Timeline
    53. 53. 1-53 SEC Work Plan International Accounting Convergence Sufficient development and application of IFRS. Independent standard-setting for the benefit of investors. Investor understanding and education. Regulatory environment. Impact on large and small financial statement preparers. Human capital readiness.
    54. 54. 1-54 End of Chapter 1