accounting standards

1. Intermediate
Financial Accounting I
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 roles of the AICPA and the
SEC in developing GAAP.
5. Introduce the accounting standard
setting process of the FASB.
Environment and Theoretical Structure of Financial Accounting 2

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. (a
Public/Private partnership)
Environment and Theoretical Structure of Financial Accounting 3

4. Objectives of the Chapters (contd.)
9. Discuss financial reporting reform and
the Sarbanes and Oxley Act (the Public
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 4

5. Financial Reporting: An Introduction
and Historical Development
1. What is accounting?
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 5

6. What is Accounting ?
An information system to account for all
business transactions and translate
these transactions into accounting
terms to be reported in financial
statements for interested users.
Environment and Theoretical Structure of Financial Accounting 6

7. 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

8. Issues Related to Accounting
Standards
1. Who are the authorities to set these
standards (Generally Accepted
Accounting Principles, GAAP)?
2. What are these standards?
What is FASB Codification?
3. The roles 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

9. Year Authority Official Release
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. Abstracts issued by EITF
Environment and Theoretical Structure of Financial Accounting 9

10. Pronouncements of the FASB
1. Statement of Financial Accounting
Standards (SFAS)
2. Interpretations
3. Abstracts 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

11. 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

12. U.S. GAAP (contd.)
Includes:
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 of FASB, and Staff
Acct. Bulletins of the SEC, Abstracts of
EITF, SOP of the AICPA, etc.)
Environment and Theoretical Structure of Financial Accounting 12

13. 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.
Environment and Theoretical Structure of Financial Accounting 13

14. FASB Accounting Standards
Codification (ASC) (Contd.)
All other non-grandfathered, non-SEC
accounting literature NOT included in the
Codification will be non-authoritative.
The Codification does not change GAAP
but only the way the existing accounting
standards are organized.
Environment and Theoretical Structure of Financial Accounting 14

15. What Are Included in the FASB Codification?
(Source: The FASB Accounting Standard Codification : Notice
to Constituents About the Codification)
The Codification includes:
FASB: Statements (FAS), Interpretations,
(FIN)Technical Bulletins (FTB), Staff
Positions(FSP) and Staff Implementation
Guides (QA).
EITF: Abstracts and Topic D
Derivative Implementation Group Issues
APB Opinions
ARB
Environment and Theoretical Structure of Financial Accounting 15

16. What Are Included in the FASB Codification?
(Continued)
AICPA: Statements of Position(SOP),
Audit and Accounting Guides
(accounting content only) and Practice
Bulletins (PB).
SEC: Regulation S-X, FRR, ASR,
Interpretive Releases, SEC Staff
Guidance in Staff Accounting
Bulletins(SAB), EITF topic D and SEC
Staff Observer comments.
Environment and Theoretical Structure of Financial Accounting 16

17. What Are Not Included in the FASB
Codification? (source: The FASB Codification
Project by J. Cathey)
The followings are excluded from the
Codification:
a)SEC content not specifically directed to
financial reporting (i.e., MDA guidance)
b)Governmental accounting standards and
auditing standards, tax codes
c)Concepts Statements of FASB
Environment and Theoretical Structure of Financial Accounting 17

18. FASB Codification: the Codification
Research System (Source: SFAS 168)
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 18

19. FASB Codification: An Example
(see Illustration 1-5 on p15)
Example (source: p14 of textbook)
Search GAAP for the subsequent
measurement for loans and trade receivables
not held for sale (Codification 310-10-35-47):
Topic: ASC 310 (Receivable topic)
Subtopics: ASC 310-10 (for Overall subtopic)
Sections: ASC 310-10-35 (to access the
Subsequent Measurement Section)
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 19

20. FASB Codification: An Example
Environment and Theoretical Structure of Financial Accounting 20

21. 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)
(Replaced by PCAOB in 2002)
a. The Accounting Standards Executive Committee which was
established within the Accounting Standard Division of the
AICPA.
Environment and Theoretical Structure of Financial Accounting 21

22. The Accounting Standard Setting Process
of the FASB (A Due Process) (source:
FASB 2011 Website(See Illustration 1-3 on p11)
1. The Board identifies an accounting
issue based on requests received
from various sources.
2. The Chairman decides whether to add
a project to the technical agenda after
consulting with other members and
subject to oversight by the
Foundation’s Board of Trustees.
Environment and Theoretical Structure of Financial Accounting 22

23. The Accounting Standard Setting
Process of the FASB (A Due Process)
3. The Board deliberates various issues
identified and analyzed by the staff at
one or more public meetings.
4. The Board issues an Exposure Draft
to seek input from interested parties.
(In some case, the Board may issue a
Discussion Paper to obtain comments
prior to issuing the Exposure Draft.)
Environment and Theoretical Structure of Financial Accounting 23

24. The Accounting Standard Setting
Process of the FASB (A Due Process)
5. The Board holds a public roundtable
meeting on the Exposure Draft, if
necessary.
6. The staff analyzes comment letters,
public roundtable discussion, and any
other information . The Board
redeliberates the proposed
provisions at one or more public
meetings.
Environment and Theoretical Structure of Financial Accounting 24
7.

25. The Accounting Standard Setting
Process of the FASB (A Due Process)
7. The Board issues an Accounting
Standards Update to amend ASC by a
simple majority vote (i.e., four of the
seven board members).
Note: effective 1/2011, FASB
members expanded from 5 to 7).
Environment and Theoretical Structure of Financial Accounting 25

26. The Accounting Standard Setting Process of the FASB
(A Due Process) (soruce: Kieso, et al. 14th edition,
illustration 1-3)
Environment and Theoretical Structure of Financial Accounting 26

27. 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 setting and
enforcement systems 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 27

28. 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) and SFAS No.
123 (R)
Environment and Theoretical Structure of Financial Accounting 28

29. 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.)
EITF 2000-21 and ASU 2009-13 (ASC
605-25) on revenue recognition for
multiple-element arrangements.
Environment and Theoretical Structure of Financial Accounting 29

30. The Accounting Standard Setting
and Enforcement Systems
The interrelationship of the SEC and
the FASB:
FASB: the rule making body.
SEC: the enforcing agency.
Environment and Theoretical Structure of Financial Accounting 30

31. 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 31

32. The Financial Reporting Reform and the
Sarbanes and Oxley Act (Cont.)
Key Provisions of the Act including:
Creating Public Company Accounting
Oversight Board to: 1) establish the auditing
standards, 2) oversee the auditing
profession’s auditing work to protect the
interest of the investors and the public.
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 32

33. The Financial Reporting Reform and the
Sarbanes and Oxley Act (Cont.)
Retention of work Papers for 5 years.
Audit partner’s Rotation.
Conflict of Interest.
Hiring of Auditor by the audit committee,
comprising members with financial
expertise, , 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 33

34. The Need for International Accounting
Standards
Companies doing business in more
than one nation 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 founded in 1973
to develop a single set of global
accounting standards.
Environment and Theoretical Structure of Financial Accounting 34

35. The History of International Accounting
Standard Setting (cont.)
41 International Accounting Standards
(IAS) were 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 Standards (IFRS).
Environment and Theoretical Structure of Financial Accounting 35

36. 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.
Environment and Theoretical Structure of Financial Accounting 36

37. Convergence of the U.S. Accounting Standards
and the International Accounting Standards
The goad of convergence is to develop
a single set of high-quality international
standards to be used for domestic and
cross-board reporting.
Both IASB and FASB acknowledged
that convergence of IFRS and U.S.
GAAP is a primary objective of both
Boards.
Environment and Theoretical Structure of Financial Accounting 37

38. Short-Term International Convergence (source: FASB
Project Updates and Progress Report on IASB-FASB
Convergence Work Issued on 4/22/2011))
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)
since October, 2002.
Environment and Theoretical Structure of Financial Accounting 38

39. Short-Term International Convergence
(contd.)
The following areas have been
addressed:
1. Share-Based Payment (SFAS No.
123 (R): Accounting for Stock-Based
Compensation. (issued in 12/2004)
Substantially converging with IFRS
requirements.
Revision: required the option expense
to be recognized in the income
statement.
Environment and Theoretical Structure of Financial Accounting 39

40. 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 IFRS requirements.
Revision: The amounts of costs (I.e.,
idle facility expense, freight, handling
costs, spoilage) are expensed.
Environment and Theoretical Structure of Financial Accounting 40

41. 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 IFRS
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 41

42. 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 requirmenets.
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 42

43. Short-Term International Convergence
(contd.)
6. Discontinued activities:
The IASB issued IFRS 5 (Non-current Assets
Held for Sale and discontinued Operations) 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 43

44. Short-Term International Convergence
(contd.)
7. Fair Value Option: FASB 159, the fair
value option for financial assets and
liabilities, issued in 2007.
8. Research Costs: FAS 141R, Business
Combination issued in 2008, amending
the accounting for acquisition.
9. Non-Controlling Interests : FAS 160
issued in 2008.
10. Joint ventures: IFRS 11 to be issued
in 2011.
Environment and Theoretical Structure of Financial Accounting 44

45. Short-Term International Convergence
(contd.)
11. Income Tax: Reassessed as a lower
priority project.
12. Investment Properties: in process, the
FASB is developing proposals to align US
GAAP with IFRSs.
13. Business Combinations: Project
completed and standard issued in 2008.
14. Consolidated Financial Statements: in
process.
Environment and Theoretical Structure of Financial Accounting 45

46. Short-Term International Convergence
(contd.)
15. Fair Value Measurement: ASU 2011-
04 issued in May, 2011 and IFRS 13 to be
issued in 2011.
16. Post-Employment Benefits: IFRS to
be issued to amend IAS 19.
17: Financial Statement Presentation-
Other Comprehensive Income: FASB
issued ASU 2011-05 in June 2011.
Amendments to IFRSs to be issued in
2011.
Environment and Theoretical Structure of Financial Accounting 46

47. Short-Term International Convergence
(contd.)
Others in progress:
Accounting for Leases (EP 8/17/2010,
updated EP issued on 8/18/2011 for re-exposure)
Revenue Recognition (EP 1/24/2010 ,
updated EP issued on 8/3/2011 for re-exposure)
For details, go to: www.fasb.org.
Environment and Theoretical Structure of Financial Accounting 47

48. 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 48

49. A Single Global Accounting Language
- International financial reporting standards
 In November 2008, 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 2015 or 2016.
49

50. A Single Global Accounting Language
- International financial reporting standards (Contd.)
 In February 2010, the SEC reaffirms its
commitment to one set of accounting
standard and continues to encourage the
convergence of standards between the
US GAAP and IFRS.
 On 10/29/2010, the SEC issued its first
Progress Report on its Work Plan on the
possible move toward the adoption of the
IFRS for the US issuers.
 The SEC will make the decision of
adopting IFRS for US issuers in 2011. 50

51. The SEC’s Roadmap Toward Global
Accounting Standards
Environment and Theoretical Structure of Financial Accounting 51