Case 1-3 Politicalization of Accounting Standards Some accountants have said that politicalization in the development and acceptance of generally accepted accounting principles (i.e., standard setting) is taking place. Some use the term politicalization in a narrow sense to mean the influence by governmental agencies, particularly the SEC, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromising that takes place in bodies responsible for developing these principles because of the influence and pressure of interested groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, etc.). Required: A.) Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicalization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, APB, and FASB operated or operate. Cite specific developments that tend to support your answer. CAP. The Committee on Accounting Procedure, CAP, which was in existence from 1939 to 1959, was a natural outgrowth of AICPA committees which were in existence during the period 1933 to 1938. The committee was formed in direct response to the criticism received by the accounting profession during the financial crisis of 1929 and the years thereafter. The authorization to issue pronouncements on matters of accounting principles and procedures was based on the belief that the AICPA had the responsibility to establish practices that would become generally accepted by the profession and by corporate management. As a general rule, the CAP directed its attention, almost entirely, to resolving specific accounting problems and topics rather than to the development of generally accepted accounting principles. The committee voted on the acceptance of specific Accounting Research Bulletins published by the committee. A two-thirds majority was required to issue a particular research bulletin. The CAP did not have the authority to require acceptance of the issued bulletins by the general membership of the AICPA, but rather received its authority only upon general acceptance of the pronouncement by the members. That is, the bulletins set forth normative accounting procedures that "should be" followed by the accounting profession, but were not "required" to be followed. It was not until well after the demise of the CAP, in 1964, that the Council of the AICPA adopted recommendations that departures from effective CAP Bulletins should be disclosed in financial statements or in audit reports of members of the AICPA. The demise of the CAP could probably be traced to four distinct factors: (1) the narrow nature of the subjects covered by the bulletins issued by the CAP, (2) the lack of any theoretical groundwork in esta ...

1. Case 1-3 Politicalization of Accounting Standards
Some accountants have said that politicalization in the
development and
acceptance of generally accepted accounting principles (i.e.,
standard setting) is
taking place. Some use the term politicalization in a narrow
sense to mean the
influence by governmental agencies, particularly the SEC, on
the development of
generally accepted accounting principles. Others use it more
broadly to mean the
compromising that takes place in bodies responsible for
developing these principles
because of the influence and pressure of interested groups
(SEC, American
Accounting Association, businesses through their various
organizations, Institute
of Management Accountants, financial analysts, bankers,
lawyers, etc.).
Required:
A.) Do the reasons these groups were formed, their methods of
operation while in existence, and the reasons for the demise of
the first two indicate an increasing politicalization (as the term
is used in the broad sense) of accounting standard setting?
Explain your answer by indicating how the CAP, APB, and
FASB operated or operate. Cite specific developments that tend
to support your answer.
CAP. The Committee on Accounting Procedure, CAP, which
was in existence from 1939 to 1959, was a natural outgrowth of
AICPA committees which were in existence during the period
1933 to 1938. The committee was formed in direct response to
the criticism received by the accounting profession during the

2. financial crisis of 1929 and the years thereafter. The
authorization to issue pronouncements on matters of accounting
principles and procedures was based on the belief that the
AICPA had the responsibility to establish practices that would
become generally accepted by the profession and by corporate
management.
As a general rule, the CAP directed its attention, almost
entirely, to resolving specific accounting problems and topics
rather than to the development of generally accepted accounting
principles. The committee voted on the acceptance of specific
Accounting Research Bulletins published by the committee. A
two-thirds majority was required to issue a particular research
bulletin. The CAP did not have the authority to require
acceptance of the issued bulletins by the general membership of
the AICPA, but rather received its authority only upon general
acceptance of the pronouncement by the members. That is, the
bulletins set forth normative accounting procedures that "should
be" followed by the accounting profession, but were not
"required" to be followed.
It was not until well after the demise of the CAP, in 1964, that
the Council of the AICPA adopted recommendations that
departures from effective CAP Bulletins should be disclosed in
financial statements or in audit reports of members of the
AICPA. The demise of the CAP could probably be traced to four
distinct factors: (1) the narrow nature of the subjects covered by
the bulletins issued by the CAP, (2) the lack of any theoretical
groundwork in establishing the procedures presented in the
bulletins, (3) the lack of any real authority by the CAP in
prescribing adherence to the procedures described by the
bulletins, and (4) the lack of any formal representation on the
CAP of interest groups such as corporate managers,
governmental agencies, and security analysts.
APB. The objectives of the APB were formulated mainly to

3. correct the deficiencies of the CAP as described above. The
APB was thus charged with the responsibility of developing
written expression of generally accepted accounting principles
through consideration of the research done by other members of
the AICPA in preparing Accounting Research Studies. The
committee was in turn given substantial authoritative standing
in that all opinions of the APB were to constitute substantial
authoritative support for generally accepted accounting
principles. If an individual member of the AICPA decided that a
principle or procedure outside of the official pronouncements of
the APB had substantial authoritative support, the member had
to disclose the departure from the official APB opinion in the
financial statements of the firm in question.
The membership of the committee comprising the APB was also
extended to include representation from industry, government,
and academe. The opinions were also designed to include
minority dissents by members of the board. Exposure drafts of
the proposed opinions were readily distributed.
The demise of the APB occurred primarily because the purposes
for which it was created were not being accomplished. Broad
generally accepted accounting principles were not being
developed. The research studies supposedly being undertaken in
support of subsequent opinions to be expressed by the APB
were often ignored. The committee in essence became a simple
extension of the original CAP in that only very specific problem
areas were being addressed. Interest groups outside of the
accounting profession questioned the appropriateness and
desirability of having the AICPA directly responsible for the
establishment of GAAP. Politicization of the establishment of
GAAP had become a reality because of the far-reaching effects
involved in the questions being resolved.
FASB. The formal organization of the FASB represents an
attempt to vest the responsibility of establishing GAAP in an

4. organization representing the diverse interest groups affected by
the use of GAAP. The FASB is independent of the AICPA. It is
independent, in fact, of any private or governmental
organization. Individual CPAs, firms of CPAs, accounting
educators, and representatives of private industry will now have
an opportunity to make known their views to the FASB through
their membership on the Board. Independence is facilitated
through the funding of the organization and payment of the
members of the Board. Full-time members are paid by the
organization and the organization itself is funded solely through
contributions. Thus, no one interest group has a vested interest
in the FASB.
Conclusion. The evolution of the current FASB certainly does
represent "increasing politicization of accounti ng standards
setting." Many of the efforts extended by the AICPA can be
directly attributed to the desire to satisfy the interests of many
groups within our society. The FASB represents, perhaps, just
another step in this evolutionary process.
B.) What arguments can be raised to support the politicalization
of accounting standard setting?
all stakeholders who have fallen victim to corporate fraud
would be in support of policalitzation of accounting standard
setting
After the collapse of corporate giants who defrauded their
employees, lenders, the government and other stakeholders, the
SEC was forced to create greater restrictions and improved
policies, including the full disclosure principle, to protect
stakeholders.Fines, penalties, and even jail time were handed
down to the directors of many of these companies, for many
employees who lost their hard earned pensions, and investors
who lost their life savings
C.) What arguments can be raised against the politicalization of

5. accounting standard setting?(CMA adapted)
People who’ve always prepared their financial information
using fair judgment who are now forced to comply with a
lengthy list of regulatory rules and guidelines
many cannot afford to hire accounting professionals to ensure
they are in compliance with newly revised standards and
policies owing to financial hardships
Because of the illegal acts of businesses in the past, stricter
standard setting has burdened all publicly traded companies.
Case 1-6 Accounting in crisis
During the early 2000s, the role of accounting and the auditing
profession changed and several accounting scandals were
uncovered.
(a.) What conditions caused accounting and the audit profession
role to change during this time?
There were several conditions which lead to change the roles of
accounting & auditing professionals during this time. So let’s
know some major conditions which caused changes in the role
of accounting and auditing professionals;
1. Some major accounting scandals took place during this time
period like; Enron case, WorldCom and Tyco etc. Thus due to
these accounting scandals changes in the roles of accounting
and auditing professionals became necessary.
2. Due to major scandals, investors have lost their trust in the
market hence for making trust of the investors back into market
some changes became necessary.
3. Various stakeholders lost their trust in old accounting &
auditing process hence for making these accounting and
auditing work more reliable we need some solid changes in the
role of these professionals.
4. For making, accounting and auditing work more reliable &
independent these changes in the role took place.

6. (b.) What major changes occurred as a result of the accounting
scandals at that time?
Following major changes occurred as a result of the accounting
scandals at that time;
1. Use of information technology became a vital factor because
it assumed that more and more use of technology will bring fair
practices. So this change occurred as a result of accounting
scandals.
2. Various vital changes were made in accounting standards for
accounting recording and for auditing work as well.
3. Public accounting firms were prohibited to do more & more
advertising about their services & work.
4. Profit structure of the CPA firms also changed due to the
accounting scandals at that time.
5. Due to these accounting scandals, CPA firms started working
more efficiently & effectively so that overall costs of the
operations can be minimized and clients can be offered lower
prices for the services.
Case 2-2 The Theoretical Foundation of Accounting Principles
During the past several years, the FASB has attempted to
strengthen the theoretical foundation for the development of
accounting principles. Two of the most important results of this
attempt are the Conceptual Framework Project and the
Emerging Issues Task Force. During this same period, the FASB
has been criticized for imposing too many standards on the fi
nancial reporting process, the so-called standards overload
problem. Required:
a. Discuss the goals and objectives of
i. the Conceptual Framework Project
The Conceptual Framework Project seeks to revise the

7. Conceptual Framework, setting the standards for financial
reporting in the industry. The goals and objectives of the
project are to answer a series of questions that will have a
profound impact on financial reporting. These include the
clarification of the objective of financial reporting, and if
financial statements should be prepared from an entity or
proprietor perspective. It will detail what are the most important
characteristics of accounting information, as well as what is an
asset and a liability. The project will discuss whether or not all
assets or liabilities be recorded irrespective of the probability
that they may be realized or paid, and if matching principle is
dead. It also looks to answer if the revenue-recognition
principle will survive, or be replaced by the asset-liability view,
as well as if an asset should be measured at cost or fair value.
Lastly, the project hopes to clarify if "depreciation an outdated
concept tied to the matching principle, or is it a legitimate
valuation technique"
ii.The Emerging Issues Task Force
The Emerging Issues Task Force (EITF) was formed in 1984, as
a response to the FASB's task force recommendations regarding
the need for timely financial reporting guidance. As the FASB
states, in their Emerging Issues Task Force (n.d.) document, the
EITF's primary objective is to become aware of emerging
issues, in the industry, before they become widespread, and
before divergent practices regarding these issues become
entrenched.
b.Discuss the standards overload problem.
The standard overload problem (SOP) is a concern about having
too many accounting standards, such as the accounting
community including American Institute of Certified Public
Accountants (AICPA), Securities and Exchange Commission
(SEC), and the FASB.The SOP centers on small businesses that
have problems with the standards because of the lack of

8. resources that they can research and the implementation of the
ongoing pronouncements. There is no requirement for small
businesses to follow the requirements of Generally Accepting
AccountingPrinciples (GAAP) with the financial statements that
are needed. There are two concerns about the standard overload
problem that is that not all GAAP principles concern small
businesses when it comes to the financial statements.The second
is when the GAAP principles are relevant;they are frequently
interrupted with the cost benefits.
Case 2-5 Definition of Assets
your company owns a building that is fully paid for. Explain
how the building meets the definition of an asset under each of
the following scenarios.
a. your company is using the building as a plant that is
producing automobiles.
· The building is a resource that acts as a fixed asset. It
facilitates the production activities that help organization to
generate revenues and earn profit.
· A) If company is using the building as a plant that is
producing automobiles then plant is also a fixed asset. The
nature of fixed asset is of capital nature which means that will
give us the benefit for more then one year i.e. for long period.
b. your company is not using the building but plans to sell it.
Explain how the building meets the definition of an asset.
· At present, the building is an unused resource. The sale of the
building will generate cash that will be used to accelerate /
initiate production activities and the organization generates
revenue and earn profit.
· B) If company is not using the building but plans to sell it
then there is two cases i) in the first case if selling and
purchasing builiding is the business of the company then it is
not an asset. It will be considered as stock. ii) In the other case
if company bought the building for the purpose of investment

9. then it will be considered as fixed asset.
c. your company is not using the building but plans to remodel
it so that it can be used as a plant to produce automobiles.
· The building is unused today. But, it has value and it can be
used after remodeling as per the requirements. Then, a firm can
generate revenues and earn profit.
· C) If company is not using the building but plans to remodel it
so that is can be used as a plant to produce automobiles then it
will be considered as fixed asset and amount expensed on the
remodel of the building will also be added to the value of the
builiding. Building is giving us benefit for long term then it will
be considered as an asset.
Case 17-4 Preparation of Footnotes
You have completed your audit of Carter Corporation and its
consolidated subsidiaries for the year ended December 31, 2017,
and are satisfied with the results of your examination. You have
examined the financial statement of Cater for the past three
years. The corporation is now preparing its annual report to
shareholders. The report will include the consolidated financial
statements of Carter and its subsidiaries and your short-form
auditor’s report. During your audit, the following matters came
to your attention.
1. The Internal Revenue Service, which is examining the
corporation s 2017 federal income tax return, questions the
amount of a deduction claimed by the corporation s domestic
subsidiary for a loss sustained in 2017. The examination is still
in process, and any additional tax liability is indeterminable at
this time. The corporation s tax counsel believes that there will
be no substantial additional tax liability.

10. 2. A vice president who is also a stockholder resigned on
December 31, 2016, after an argument with the president. The
vice president is soliciting proxies from stockholders and
expects to obtain sufficient proxies to gain control of the board
of directors so that a new president will be appointed. The
president plans to have a footnote prepared that would include
information about the pending proxy fight, management s
accomplishments over the years, and an appeal by management
for the support of stockholders.
Required:
A. Prepare the footnotes, if any, that you would suggest for the
foregoing listed items.
B. State your reason for not making disclosure by footnote for
each of the listed items for which you did not prepare a
footnote.
Case 17-4 The Ethics of Accounting Choices
The Fillups Company has been in the business of exploring for
oil reserves. During 2017, $10 million was spent drilling wells
that were dry holes. Under U.S. GAAP, Fillups has the option of
accounting for these costs by the successful efforts method or
the full‐ cost method. Under successful efforts, the $10 million
would be expensed once it was determine d that the wells were
dry. Under full cost, the $10 million would be capitalized. It
would not be expensed until the oil from successful wells is
extracted and sold. Fillups decides to use the full‐ cost method
because of its positive effect on the bottom line.
Required:
a. What are the ethical considerations implied in the rationale

11. for Fillups s decision? Explain.
a. According to accounting ethics and code of conduct, The
expenses are capitalised by the Fill ups company which is
against accounting standards (US GAAP) as well as ethics
because the expenses are incurred on dry wells, not oil wells.
The capitalisation is relevant if drilling is done in oil wells, not
dry wells. For, Dry Wells, The successful effort method is the
appropriate one.
b. Do you believe that an accounting alternative should be
selected solely on the basis of financial statement effects?
Discuss.
B.Yes, the choice of the method has huge impact on financial
statements in the following manner. The capitalisation of
expenses will lead to:-
> Increase in the net income of the company ( Capitalising the
expenses and showing them over a period of time will lead to
income enhancement)
> Impact on the balance sheet: The expenses will be treated on
the asset side.
> Impact on retained earnings: In the long term, there will be
less retained earnings as well as shareholder equity.
> Impact on cash flows: Increase in cash flow from operating
activities and less from investment activities.
Case 1-3 Politicalization of Accounting Standards
Some accountants have said that politicalization in the
development and
acceptance of generally accepted accounting principles (i.e.,
standard setting) is
taking place. Some use the term politicalization in a narrow
sense to mean the
influence by governmental agencies, particularly the SEC, on
the development of
generally accepted accounting principles. Others use it more

12. broadly to mean the
compromising that takes place in bodies responsible for
developing these principles
because of the influence and pressure of interested groups
(SEC, American
Accounting Association, businesses through their various
organizations, Institute
of Management Accountants, financial analysts, bankers,
lawyers, etc.).
Required:
A.) Do the reasons these groups were formed, their methods of
operation while in existence, and the reasons for the demise of
the first two indicate an increasing politicalization (as the term
is used in the broad sense) of accounting standard setting?
Explain your answer by indicating how the CAP, APB, and
FASB operated or operate. Cite specific developments that tend
to support your answer.
B.) What arguments can be raised to support the politicalization
of accounting standard setting?
C.) What arguments can be raised against the politicalization of
accounting standard setting?(CMA adapted)
Case 1-6 Accounting in crisis
During the early 2000s, the role of accounting and the auditing
profession changed and several accounting scandals were
uncovered.
(a.) What conditions caused accounting and the audit profession

13. role to change during this time?
(b.) What major changes occurred as a result of the accounting
scandals at that time?
Case 2-2 The Theoretical Foundation of Accounting Principles
During the past several years, the FASB has attempted to
strengthen the theoretical foundation for the development of
accounting principles. Two of the most important results of this
attempt are the Conceptual Framework Project and the
Emerging Issues Task Force. During this same period, the FASB
has been criticized for imposing too many standards on the fi
nancial reporting process, the so-called standards overload
problem. Required:
a. Discuss the goals and objectives of
i. the Conceptual Framework Project
ii.The Emerging Issues Task Force
b.Discuss the standards overload problem.
Case 2-5 Definition of Assets
your company owns a building that is fully paid for. Explain
how the building meets the definition of an asset under each of
the following scenarios.
a. your company is using the building as a plant that is
producing automobiles.

14. b. your company is not using the building but plans to sell it.
Explain how the building meets the definition of an asset.
c. your company is not using the building but plans to remodel
it so that it can be used as a plant to produce automobiles.
Case 17-4 Preparation of Footnotes
You have completed your audit of Carter Corporation and its
consolidated subsidiaries for the year ended December 31, 2017,
and are satisfied with the results of your examination. You have
examined the financial statement of Cater for the past three
years. The corporation is now preparing its annual report to
shareholders. The report will include the consolidated financial
statements of Carter and its subsidiaries and your short-form
auditor’s report. During your audit, the following matters came
to your attention.
1. The Internal Revenue Service, which is examining the
corporation s 2017 federal income tax return, questions the
amount of a deduction claimed by the corporation s domesti c
subsidiary for a loss sustained in 2017. The examination is still
in process, and any additional tax liability is indeterminable at
this time. The corporation s tax counsel believes that there will
be no substantial additional tax liability.
2. A vice president who is also a stockholder resigned on
December 31, 2016, after an argument with the president. The

15. vice president is soliciting proxies from stockholders and
expects to obtain sufficient proxies to gain control of the board
of directors so that a new president will be appointed. The
president plans to have a footnote prepared that would include
information about the pending proxy fight, management s
accomplishments over the years, and an appeal by management
for the support of stockholders.
Required:
A. Prepare the footnotes, if any, that you would suggest for the
foregoing listed items.
B. State your reason for not making disclosure by footnote for
each of the listed items for which you did not prepare a
footnote.
Case 17-10 The Ethics of Accounting Choices
The Fillups Company has been in the business of exploring for
oil reserves. During 2017, $10 million was spent drilling wells
that were dry holes. Under U.S. GAAP, Fillups has the option of
accounting for these costs by the successful efforts method or
the full‐ cost method. Under successful efforts, the $10 million
would be expensed once it was determined that the wells were
dry. Under full cost, the $10 million would be capitalized. It
would not be expensed until the oil from successful wells is

16. extracted and sold. Fillups decides to use the full‐ cost method
because of its positive effect on the bottom line.
Required:
a. What are the ethical considerations implied in the rationale
for Fillups s decision? Explain.
b. Do you believe that an accounting alternative should be
selected solely on the basis of financial statement effects?
Discuss.