01Financial accounting and accounting standards

The GAAP and the FASB Accounting Standards Codification.. Who are the authorities to set these standards Generally Accepted Accounting Principles, GAAP?. GAAP General Accepted Account

Intermediate

Financial Accounting I

Financial Accounting and

Accounting Standards

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

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

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

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,

…

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

Accounting Standards

Accounting methods with substantial

authoritative support to be used by

business entities in preparing external

reports for users

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

ASR and FRR Staff Accounting Bulletins

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

GAAP

(General Accepted Accounting Principles)

Accounting methods having “substantial authoritative support” and used by

business entities in preparing financial

statements

U.S GAAP (contd.)

Includes:

1 FASB statements (1973 - Present)

2 FASB Interpretations ( 1973 - Present)

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

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

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 (Q&A).

EITF: Abstracts and Topic D

Derivative Implementation Group Issues

APB Opinions

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

What Are Not Included in the FASB

Codification? ( source: The FASB Codification

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.

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.)

FASB Codification: An Example

The Role of the AICPA On Standard Setting

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

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.)

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

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)

The Accounting Standard Setting Process of the FASB (A Due Process) (soruce: Kieso, et al 14 th edition,

illustration 1-3)

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

Changes of the Economic Environment and the Development of Accounting Standards.

SFAS No 123 (Accounting for Based Compensation) and SFAS No

SFAS No 115 (Accounting for certain investments in debt and equity

securities.) EITF 2000-21 and ASU 2009-13 (ASC

The Accounting Standard Setting

and Enforcement Systems

The interrelationship of the SEC and

the FASB:

FASB: the rule making body

SEC: the enforcing agency

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

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.,

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

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

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

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

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

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

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

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

Short-Term International Convergence

(contd.)

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

Short-Term International Convergence

(contd.)

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

Short-Term International Convergence

definitions of discontinued Operations

between two sets of standards remain

divergent

Short-Term International Convergence

(contd.)

value option for financial assets and

liabilities, issued in 2007.

Combination issued in 2008, amending

the accounting for acquisition.

issued in 2008.

10 Joint ventures: IFRS 11 to be issued

Short-Term International Convergence

completed and standard issued in 2008.

14 Consolidated Financial Statements: in

Short-Term International Convergence

(contd.)

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

issued ASU 2011-05 in June 2011

Amendments to IFRSs to be issued in

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.

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

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.

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

The SEC’s Roadmap Toward Global

Accounting Standards