2. FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS
C H A P T E R 1
FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield

3. Learning Objectives
Identify the major financial statements and other means of financial reporting.
Explain how accounting assists in the efficient use of scarce resources.
Describe some of the challenges facing accounting.
List the objectives of financial reporting.
Explain the need for accounting standards.
Identify the major policy-setting bodies and their role in the standard-setting process.
Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP.
Describe the impact of user groups on the rule-making process.
Understand issues related to ethics and financial accounting.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Financial Accounting and Accounting Standards
Financial Statements and Financial Reporting
Parties Involved in Standard Setting
Generally Accepted Accounting Principles
Issues in Financial Reporting
Accounting and capital allocation
Challenges
Objectives
Need to develop standards
Securities and Exchange Commission
American Institute of CPAs
Financial Accounting Standards Board
Changing role of the AICPA
FASB Codification
Political environment
Expectations gap
International accounting standards
Ethics
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

5. Financial Statements and Financial Reporting
Essential characteristics of accounting are:
the identification, measurement, and communication of financial information about
economic entities to
interested parties.
LO 1 Identify the major financial statements and other means of financial reporting..

6. Financial Statements and Financial Reporting
Economic Entity
Financial Statements
Additional Information
Financial Information
Accounting?
Identifies
and
Measures
Communicates
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Owners’ or Stockholders’ Equity
Note Disclosures
President’s letter
Prospectuses,
SEC Reporting
News releases
Forecasts
Environmental Reports
Etc.
GAAP
Not GAAP
LO 1 Identify the major financial statements and other means of financial reporting..

7. Financial Statements and Financial Reporting
Review
What is the purpose of information presented in notes to the financial statements?
a. To provide disclosure required by generally accepted accounting principles.
b. To correct improper presentation in the financial statements.
c. To provide recognition of amounts not included in the totals of the financial statements.
d. To present management’s responses to auditor comments.
LO 1 Identify the major financial statements and other means of financial reporting..

8. Accounting and Capital Allocation
Resources are limited. Efficient use of resources often determines whether a business thrives.
Illustration Capital Allocation Process
Financial Reporting
Users
Capital Allocation
Information to help users with capital allocation decisions.
Investors, creditors, and other users
The process of determining how and at what cost money is allocated among competing interests.
LO 2 Explain how accounting assists in the efficient use of scare resources.

9. Accounting and Capital Allocation
Review
An effective process of capital allocation is critical to a healthy economy, which
a. promotes productivity.
b. encourages innovation.
c. provides an efficient and liquid market for buying and selling securities.
d. All of the above.
LO 2 Explain how accounting assists in the efficient use of scare resources.

10. Challenges Facing Financial Accounting
Nonfinancial Measurements
Forward-looking Information
Soft Assets
Timeliness
LO 3 Describe some of the challenges facing accounting.

11. Objectives of Financial Accounting
Financial reporting should provide information that:
(a) is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.
(b) helps present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts.
(c) clearly portrays the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources.
LO 4 List the objectives of financial reporting.

12. Objectives of Financial Accounting
Review
All of the following are objectives of financial reporting except to provide information
a. About enterprise resources, claims to those resources, and changes in them.
b. That is useful in investment and credit decisions.
c. About the management and major shareholders of an enterprise.
d. That is useful in assessing cash flow prospects.
LO 4 List the objectives of financial reporting.

13. Need to Develop Standards
Various users need financial information
Financial Statements
Balance Sheet
Income Statement
Statement of Stockholders’ Equity
Statement of Cash Flows
Note Disclosure
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
Generally Accepted Accounting Principles (GAAP)
LO 5 Explain the need for accounting standards.

14. Parties Involved in Standard Setting
Three organizations:
Securities and Exchange Commission (SEC)
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.

15. Securities and Exchange Commission
Established by federal government
Accounting and reporting for public companies
Securities Act of 1933
Securities Act of 1934
Encouraged private standard-setting body
SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.

16. American Institute of CPAs
National professional organization
Established the following:
Committee on Accounting Procedures
Accounting Principles Board
1939 to 1959
Issued 51 Accounting Research Bulletins (ARBs)
Problem-by-problem approach failed
1959 to 1973
Issued 31 Accounting Principle Board Opinions (APBOs)
Wheat Committee recommendations adopted in 1973
LO 6

17. Financial Accounting Standards Board
Wheat Committee’s recommendations resulted in the creation of a the Financial Accounting Standards Board in 1973.
Financial Accounting Foundation
Selects members of the FASB
Funds their activities
Exercises general oversight.
Financial Accounting Standards Board
Mission to establish and improve standards of financial accounting and reporting.
Financial Accounting Standards Advisory Council
Consult on major policy issues.
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.

18. Financial Accounting Standards Board
Missions is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include:
Smaller Membership
Full-time, Remunerated Membership
Greater Autonomy
Increased Independence
Broader Representation
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.

19. Financial Accounting Standards Board
Review
The first step taken in the establishment of a typical FASB statement is
a. The board conducts research and analysis and a discussion memorandum is issued.
b. A public hearing on the proposed standard is held.
c. The board evaluates the research and public response and issues an exposure draft.
d. Topics are identified and placed on the board’s agenda.
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.

20. Due Process FASB relies on two basic premises:
Responsive to entire economic community
Operate in full view of the public
Step 1 = Topic placed on agenda
Step 2 = Research conducted and Discussion Memorandum issued.
Step 3 = Public hearing
Step 4 = Board evaluates research, public response and issues Exposure Draft
Step 5 = Board evaluates responses and issues final Statement of Financial Accounting Standard
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.

21. Types of Pronouncements
Issued by the FASB:
Standards, Interpretations, and Staff Positions.
Financial Accounting Concepts
Emerging Issues Task Force Statements
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.

22. Types of Pronouncements
CA1-11 (Accounting Pronouncements) Standard setting bodies have issued a number of authoritative pronouncements. A list is provided on the left, below, with a description of these pronouncements on the right.
(d)
(f)
(c)
(e)
(a)
(b)
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.

23. Changing Role of AICPA
The AICPA established the Accounting Standards Executive Committee (AcSEC):
Audit and Accounting Guides
Statements of Position (SOP)
Practice Bulletins
AICPA and AcSEC no longer issues authoritative accounting guidance for public companies.
PCAOB oversees the development of auditing standards.
AICPA continues to develop and grade the CPA examination.
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.
LO 6

24. Generally Accepted Accounting Principles
Those principles that have substantial authoritative support.
Major sources of GAAP are:
FASB Standards, Interpretations, and Staff Positions
APB Opinions
AICPA Accounting Research Bulletins
LO 7 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP.

25. Generally Accepted Accounting Principles
Illustration GAAP Documents
LO 7 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP.

26. Generally Accepted Accounting Principles
Review
Which of the following accounting pronouncements is the most authoritative?
a. FASB Statement of Financial Accounting Concepts.
b. FASB Technical Bulletins.
c. AICPA Accounting Principles Board Opinion.
d. AICPA Statement of Position.
LO 7 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP.

27. Issues in Financial Reporting
Standard Setting in a Political Environment
Accounting standards are as much a product of political action as they are of careful logic or empirical findings.
LO 8 Describe the impact of user groups on the rule-making process.

28. Government (SEC, IRS, other agencies)
Standard Setting
Business Entities
Illustration User Groups that Influence Accounting Standards
CPAs and
Accounting Firms
Financial
Community
AICPA (AcSEC)
FASB
Preparers (e.g., FEI)
Academicians
Government (SEC, IRS, other agencies)
Investing Public
Industry
Associations
Accounting standards, interpretations, and bulletins
LO 8 Describe the impact of user groups on the rule-making process.

29. Issues in Financial Reporting
Review:
All those who serve on the FASB must be Certified Public Accountants.
False
Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.
LO 8 Describe the impact of user groups on the rule-making process.

30. Issues in Financial Reporting
Expectation Gap
What the public thinks accountants should do vs. what accountants think they can do.
Difficult to close
Sarbanes-Oxley Act (2002)
Public Company Accounting Oversight Board (PCAOB)
LO 8 Describe the impact of user groups on the rule-making process.

31. Issues in Financial Reporting
International Accounting Standards
Two sets of standards accepted for international use:
U.S. GAAP, issued by the FASB
International Financial Reporting Standards (IFRS), issued by the IASB
FASB and IASB recognize that global markets will best be served if only one set of GAAP is used.
LO 8 Describe the impact of user groups on the rule-making process.

32. Issues in Financial Reporting
CA1-9 (GAAP Terminology): With accounting and finance, it often helps to be fluent in abbreviations and acronyms.
Instructions:
Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term.
(a) AICPA (e) FAF (i) CPA
(b) CAP (f) FASAC (j) FASB
(c) ARB (g) SOP (k) SEC
(d) APB (h) GAAP (l) IASB
LO 9 Understand issues related to ethics and financial accounting.

33. Issues in Financial Reporting
Ethics in the Environment of Financial Accounting
In accounting, we frequently encounter ethical dilemmas.
GAAP does not always provide an answer
Doing the right thing is not always easy or obvious
LO 9 Understand issues related to ethics and financial accounting.

34. Diversity in Practice
iGAAP includes the standards, referred to as International Financial Reporting Standards (IFRS), developed by the IASB.
Differences between U.S. GAAP and iGAAP exist because of different user needs.
iGAAP tends to be simpler and less stringent than U.S. GAAP.
Regulators have recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile their accounting with U.S. GAAP.

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