Financial Accounting and Accounting Standards

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Financial Accounting and Accounting Standards


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Title: Financial Accounting and Accounting Standards

  • Financial Accounting and Accounting Standards

Objectives of the Chapters
  • 1. Understand the need to develop accounting
  • 2. Study the development of accounting standards
    from a historical perspective.
  • 3. The GAAP and the FASB Accounting Standards
  • 4. Study the role of the AICPA and the SEC in
    developing GAAP.
  • 5. Introduce the accounting standard setting

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.

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
  • 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 for?
  • 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?

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?
  • 3. The role of the AICPA and the SEC in
    developing GAAP.
  • 4. The accounting standard setting process of the

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. Statements
issued by EITF
Year Authority Official Release
Pronouncements of the FASB
  • 1. Statement of Financial Accounting Standards
  • 2. Interpretations
  • 3. Statements 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.

GAAP (contd.)
  • Including
  • 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, and Staff Acct. Bulletins of the SEC,
    Statements of EITF, etc.)

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.
  • All other non-grandfathered, non-SEC accounting
    literature NOT included in the Codification will
    be non-authoritative.

FASB Codification (Contd.)
  • The Codification does not change GAAP but only
    the way the existing accounting standards are
  • 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 (Contd.)
  • Example (source p14 of textbook)
  • Search GAAP for loans and trade receivables not
    held for sale subsequent to initial measurement
  • Topic FASB ASC 310 (Receivable topic)
  • Subtopics ASC 310-10 (for Overall subtopic of
    the Topic 310)
  • Sections ASC 310-10-35 (to access the Subsequent
    Measurement Section of the subtopic 310-10)
  • Paragraph ASC 310-10-35-47 (to assess the Loans
    and Trade Rece. Not Held for Sale Para.)

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)
  • a. The Accounting Standards Executive Committee
    which was established within the Accounting
    Standard Division of the AICPA.

The Accounting Standard Setting Process of the
FASB (A Due Process)
  • Identify a topic and place it on the Boards
  • Form a task force to define problems and issues
    related to the topic.
  • A discussion memorandum (DM, an impartial
    discussion of issues) is drafted by the FASBs
    technical staff in consulting with a group of
    knowledge people in accounting and business

The Accounting Standard Setting Process of the
FASB (contd.)
  • A public hearing held 60 days after the release
    of DM.
  • The Board evaluates the public response, prepares
    and releases an exposure draft (ED).
  • The ED is exposed to the public for at least 30
    days for public comments.
  • A committee studies the public commenst and
    revise the ED if necessary.
  • Voted by 5 members of the Board. The passage of
    a new FASB statement requires 3 votes.

Other Issues Related to Accounting Standards
  • 1. Changes of the economic environment and the
    development of accounting standards.
  • 2. The economic consequence of accounting
  • 3. The accounting standard compliance system in
    the U.S. and the interrelationship of the
    Securities and Exchange Commission (SEC) and the
    Financial Accounting Standards Board (FASB).

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

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.)

The Accounting Standard Compliance System
  • 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 reports.

The Financial Reporting Reform and the Sarbanes
and Oxley Act (Cont.)
  • Key Provisions of the Act including
  • Creating the Oversight board establish auditing
    standards(i.e., auditing,quality control, ethics,
    independence for the preparation of the audit
  • 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)

The Financial Reporting Reform and the Sarbanes
and Oxley Act (Cont.)
  • Retention of work Papers for 5 years.
  • Auditor Rotation.
  • Conflict of Interest.
  • Hiring of Auditor by the audit committee of the
    board of directors,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
    state1)whether the managements assessment is
    fair, and 2)whether the internal control of the
    firm is effective.

The Need for International Accounting Standards
  • Companies doing business in more than one nations
    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 formed
    in 1973 to develop a single set of global
    accounting standards.

The History of International Accounting Standard
Setting (cont.)
  • 41 International Accounting Standards (IAS) was
    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 Standard

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 (I.e. to
    develop a single set of standards).

Short-Term International Convergence (source
FASB Project Updates)
  • The IASB and the FASB acknowledged that
    convergence of IFRS and U.S. GAAP is a primary
    objective of both Boards.
  • 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) in October, 2002.

Short-Term International Convergence (contd.)
  • The following areas have been or will be
  • 1. Share-Based Payment (SFAS No. 123 (R)
    Accounting for Stock-Based Compensation. (issued
    in 12/2005) Substantially converging with IFRS
  • Revision required the option expense to be
    recognized in the income statement.

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 IFRB requirements.
  • Revision The amounts of costs (I.e., idle
    facility expense, freight, handling costs,
    spoilage) are expensed.

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
    IFRB 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

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 requiremenets.
  • 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.

Short-Term International Convergence (contd.)
  • 6. Discontinued activities
  • The IASB issued IFRS 5 (Non-current Assets Held
    for Sale and discountinued Operatins) in 2004
    which substantial convergence with US GAAP on
    this topic. However, the definitions of
    discontinued Operations between two sets of
    standards remain divergent. .

Short-Term International Convergence (contd.)
  • 7. Earnings Per Share
  • 8. Balance Sheet Classification
  • 9. Income Taxes
  • 10. Accounting for Leases (announced 7/18.06)
  • For details of the above areas of short-term
    convergence project, go to
  • http//

Short-Term International Convergence (contd.)
  • The IASB has also addressed several issues in the
    short-term convergence project and is working on
    a few topics. For further information, go to
  • http//

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.

A Single Global Accounting Language-
International financial reporting standards?
  • 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 2014.
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