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Chapter 1

Overview
What do you think accounting is?
Is accounting an art or a science? Consider
Is there only one correct Net Income amount?

What are the accounting disciplines?


What is common between all accountings
disciplines?

Characteristics of Financial Accounting


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.
Users are assumed to have a reasonable understanding
of the business, and to use reasonable diligence

Objectives of Financial Accounting


To provide information that is
1) Useful in investment and credit decisions
2) Useful in assessing cash flow prospects
3) About company resources, claims to those
resources and changes in them

Supply and Demand of Financial


Accounting Information
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 accounting information
facilitates functioning capital markets

Financial Reporting for Public Companies:


The 10K
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 auditors opinion on whether the financial
statements and notes are fairly presented according to generally accepted
accounting principles (unqualified, qualified, adverse, or disclaimer).

Generally Accepted Accounting Principles


(GAAP)
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

Status of IFRS in US
In November 2008 the U.S. Securities and Exchange Commission issued a
proposed "roadmap" for a potential transition by U.S. issuers from U.S. GAAP to
International Financial Reporting Standards (IFRS.) Under the timeline
contemplated on this roadmap, the SEC would consider in 2011 whether to require
all public companies to adopt IFRS on a phased-in basis starting with large
accelerated filers for years ending on or after December 15, 2014; accelerated
filers for years ending on or after December 15, 2015; and non-accelerated filers
and smaller companies for years ending on or after December 15, 2016.
In June 2009, President Obama announced his administration's proposals to
reform the U.S. regulatory system, recommending that the FASB, the IASB and
the SEC make substantial progress toward a single set of high quality global
accounting standards by the end of 2009.
In February 2010, the SEC issued a statement reiterating its commitment to a
single set of high quality global standards and for the convergence of IFRS and
US GAAP. The SEC directed the staff to develop a work plan to facilitate the
SECs consideration in 2011 whether, and if so, how and when, to incorporate
IFRS into the financial reporting system for U.S. issuers.

SEC IFRS Roadmap


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


Consistency under principles based IFRS
Industry specific concerns (i.e., LIFO)
Private companies

Whos Who in the Regulatory Zoo?


U.S.

FASB
AICPA
Codification
SEC
The Sarbanes Oxley Act (SOX)
PCAOB

International (appx 100 countries)


IASB

IFRS
IFRS for SMEs
Individual countries
Jurisdictional IFRS

US Standard Setters
FAF
Finl Acctg Foundation
Oversees FASB, Appts
FASB & FASC members

FASB
Finl Acctg Stds Board
Establish & improve
accounting standards

FASAC
Finl Acctg Stds Advisory
Committee
Advises FASB on policy

SIC
EITF
Standing Interpretations
Emerging Issues Task Force
Committee
How to acct for new business
Specific application guidance
issues that arise

FASB Due Process


for Standard Setting
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 FASBs preliminary views on the issue

2.
3.
4.
5.

Receives public feedback on the discussion memorandum


Prepares an exposure draft (proposed new accounting
standard) after analyzing and evaluating feedback
Accepts public feedback on the exposure draft
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

Sarbanes-Oxley Act (SOX)


Created Public Company Accounting Oversight Board (PCAOB)
Creates auditing standards
Performs CPA firm inspections

CEO and CFO certifications over F/S and internal controls


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
Prohibition on loans to executive officers and directors
Certain employment prohibitions

Sarbanes-Oxley Act (SOX)


Created Public Company Accounting Oversight Board (PCAOB)
Creates auditing standards
Performs CPA firm inspections
Required consideration of Principles Based Accounting System!

CEO and CFO certifications over F/S and internal controls


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
Prohibition on loans to executive officers and directors
Certain employment prohibitions

International Standard Setters


IASCF
Intl Actg Stds Comm Fndn
Appts IASB members
& fundraises
IASB
Intl Acctg Stds Board
Issue IFRS, Exposure Drafts
& approve IFRIC interpretations

IFRIC
Intl Fin Reporting Interpretations
Committee
Develops interpretations of stds that
To be approved by IASB

SAC
Stds Advisory Committee
Consults w/ FASB

IASB Standard Setting


1.
2.
3.

Potential agenda items discussed in meetings open to the


public
Discussion papers and exposure drafts are published for
public comment
The IASB solicits comments from various standard
setting and regulatory bodies, as well as other users of
f/s

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?

The Expectations Gap


An expectations gap exists between what the
public thinks accountants and auditors should
do and what accountants and auditors think they
can do
Consider: what is earnings management? Is it
unethical?
Do accountants manage earnings by recording
accruals, adjustments, and depreciation?
Transparency