The Environment of Financial Reporting C hapter 1 COPYRIGHT © 2010 South-Western/Cengage Learning Intermediate Accounting 11th edition Nikolai Bazley Jones An electronic presentation By Norman Sunderman and Kenneth Buchanan Angelo State University

2 1.Understand capital markets and decision making. 2.Know what is included in financial reporting. 3.Explain generally accepted accounting principles (GAAP) and the sources of GAAP. 4.Identify the types of pronouncements issued by the Financial Accounting Standards Board (FASB). 5.Understand how the FASB operates. Objectives

6.Describe the relationship between the Securities and Exchange Commission (SEC) and the FASB. 7.Use ethical models for decision making about ethical dilemmas. 8.Understand creative and critical thinking. 9.Describe the joint convergence project of the FASB and the IASB (Appendix). 10.Understand SEC reporting under U.S. GAAP and IFRS (Appendix). 3

4 More Accountants Needed New accounting rules pose challenges for financial accounting and projections point to increased hiring of accounting graduates.

5 Capital Markets Companies need large amounts of capital for operations

6 Stock Exchange Companies may obtain capital by issuing capital stock... Capital Markets

7 Bank Capital Markets …or by borrowing from lenders

8 Capital Markets

9 Accounting Information: Economic Activities and Decision Making

10 1.Buy. A potential investor decides to purchase a particular security on the basis of communicated accounting information. 2.Hold. An actual investor decides to retain a particular security on the basis of communicated accounting information. 3.Sell. An actual investor decides to dispose of a particular security on the basis of communicated accounting information. External and Internal Users

11 1.The balance sheet (or statement of financial position), which summarizes a company’s financial position at a given date. 2.The income statement, which summarizes the results of a company’s income-producing activities for a period of time. 3.The statement of cash flows, which summarizes a company’s cash inflows and outflows for a period of time. Companies present at least three major financial statements: Financial Reporting

12 A statement of changes in stockholders’ equity is also included by many companies. Financial Reporting

13 This statement summarizes the changes in each item of stockholders’ equity for a period. Financial Reporting

14 GAAP are the guidelines, procedures, and practices that a company is required to use in recording and reporting the accounting information in its audited financial statements. They are like laws and are the rules that must be followed in financial reporting. Generally Accepted Accounting Principles (GAAP)

15 FASB Accounting Standards Codification  The only source of authoritative U.S. GAAP (except for SEC rules and interpretative releases)  Electronic database that integrates and topically organizes U.S. GAAP  Changes the form not the substance of GAAP.

Key Elements of the Codification Area Topics Subtopics Sections Paragraphs

17 The Accounting Standards Codification should:  Reduce the amount of time and effort needed to solve an accounting research issue.  Improve the usability of the accounting literature, thereby reducing the chances of not complying with GAAP.  Provide real-time updates as new standards are issued. FASB Accounting Standards Codification

18 History of GAAP in the Private Sector

19 Structure of FASB

20 1.Statements of Financial Accounting Standards 2.Interpretations 3.Staff Positions 4.Technical Bulletins 5.Statements of Financial Accounting Concepts 6.Other Pronouncements Types of Pronouncements Previously Issued by the FASB These are now integrated into the FASB Accounting Standards Codification

21 IFRS and U.S. GAAP Many companies have become “globalized.” Currently, U.S. corporations are subject to the accounting standards established by the FASB, while foreign corporations are subject to international financial reporting standards (IFRS) established by the IASB or by accounting standards set by their national accounting standards board. These differences in accounting standards have led to differences among U.S. and foreign corporations’ financial statements. These differences, in turn, have made it difficult for investors and creditors to make valid comparisons across corporations and to make effective buy-sell-hold decisions in the U.S. and foreign capital markets.

22 IFRS and U.S. GAAP To resolve this issue, FASB and the IASB entered into an agreement to develop high-quality, compatible accounting standards that could be used for both “domestic” and “cross-border” financial reporting. To achieve this compatibility, the Boards agreed to work together to achieve “short-term” convergence on a number of individual differences between U.S. and international accounting standards.

23 C hapter 1 Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.