the environment of financial reporting

1.The Environment of Financial Reporting C hapter 1 Intermediate Accounting 11th edition NikolaiBazleyJones

2. More Accountants Needed New accounting rules pose challenges for financial accounting and projections point to increased hiring of accounting graduates. 3. Capital Markets Companies need large amounts of capital for operations 4. Stock Exchange Companies may obtain capital by issuing capital stock... Capital Markets 5. Capital Markets Bank or by borrowing from lenders 6. External and Internal Users

Buy. A potential investor decides to purchase a particular security on the basis of communicated accounting information.

Hold.An actual investor decides to retain a particular security on the basis of communicated accounting information.

Sell. An actual investor decides to dispose of a particular security on the basis of communicated accounting information.

7. Comparison of Financial and Managerial Accounting Sources of Authority Internal needs Managerial Accounting Financial Accounting GAAP 8. Time Frame of Reported Information Comparison of Financial and Managerial Accounting Present and future Managerial Accounting Primarily historical Financial Accounting 9. Scope Comparison of Financial and Managerial Accounting Total company Financial Accounting Individual departments, divisions, and total company Managerial Accounting 10. Type of Information Comparison of Financial and Managerial Accounting Primarily quantitative Sales $275,240 Cost 180,120 Gross mar. 95,120 Expenses 80,120 Net inc. $15,000 Financial Accounting Qualitative as well as quantitative Materials usage is unfavorable by $8,400. Managerial Accounting 11. Statement Format Comparison of Financial and Managerial Accounting Prescribed by GAAP; oriented toward investment and credit decisions Financial Accounting Determined by company; focused upon specific decisions being made Managerial Accounting 12. Decision Focus Comparison of Financial and Managerial Accounting External Financial Accounting Internal Managerial Accounting 13. The companys accountants prepare both the financial and the managerial accounting reports and the information comes from the same information system. Comparison of Financial and Managerial Accounting 14. Financial Reporting Financial reporting is the process of communicating financial accounting information about a company to external users. 15.

Thebalance sheet(or statement of financial position), which summarizes a companys financial position at a given date.

Theincome statement , which summarizes the results of a companys income-producing activities for a period of time.

Thestatement of cash flows , which summarizes a companys cash inflows and outflows for a period of time.

Financial Reporting Companies present at least three major financial statements: 16. Financial Reporting Astatement of changes in stockholders equityis also included by many companies. 17. Financial Reporting This statement summarizes the changes in each item of stockholders equity for a period. 18. Generally Accepted Accounting Principles (GAAP) 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. 19. FASB Accounting Standards Codification Currently, there is no single document that includes all the accounting standards.However, the FASB has released itsFASB Accounting Standards Codificationfor verification by its constituents. When finalized, this Codification will be electronic and will integrate and topically organize U.S. accounting standards. 20.

A FASBStatements of Financial Accounting Standards andInterpretations,FASBStatement 133 Implementation Issues,FASBStaff Positions,and APBOpinionsand CAP (AICPA)A ccountingR esearchB ulletinsnot superceded by actions of the FASB (as well as SEC releases such asRegulation S-X, Financial Reporting Releases,andS taffA ccountingB ulletinsfor companies that file with the SEC)

Hierarchy of Sources of GAAP Continued CategoriesAuthoritative Sources 21.

B FASBTechnical Bulletins,and, ifcleared by the FASB, AICPAIndustry Audit and AccountingGuides,and AICPAS tatementso fP osition

C FASBE mergingI ssuesT askF orceConsensus Positions , Topicsdiscussed in Appendix D ofEITFAbstracts,and, if cleared by theFASB, AICPAPractice Bulletins

Hierarchy of Sources of GAAP Continued Categories Authoritative Sources 22. Hierarchy of Sources of GAAP

D FASBQs and As(Implementation Guides), AICPA Accounting Interpretations,AICPAIndustry and Audit Guides , and AICPAStatements of Positionnot cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry (e.g., AICPAAccounting Trendsand Techniques )

Categories Authoritative Sources There are electronic databases such as the FASB Financial Accounting Research System (FARS) that include most accounting standards 23. FASB Accounting Standards Codification The Codification does not change GAAP. Instead, it reorganizes the many pronouncements on U.S. GAAP into about 90 accounting topics, organized in a consistent structure. 24. FASB Accounting Standards Codification

The FASB expects the Codification to:

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.

25. FASB Accounting Standards Codification The FASB expects to approve the Codification in 2009. At that time, the Codification will supercede all then-existing non-SEC standards. Once the Codification has been approved, the FASB will not issue separate new pronouncements. Instead, any new standards will be structured in a way to update the Codification. 26. Committee on Accounting Procedure (CAP)

In 1938, the AICPA formed the Committee on Accounting Procedure (CAP). This group issued pronouncements known as Accounting Research Bulletins (ARB), but the CAP did not have authority to enforce its pronouncements and application was optional. The CAP was criticized because its members were all CPAs and application was optional, so the AICPA formed the Accounting Principles Board (APB) in 1959 to replace the Committee on Accounting Procedure.

To alleviate criticism about the process of formulating accounting principles, which included wider representation.

To create a policy-making body whose rules would be binding on companies rather than optional.

Reasons for Forming the APB The APB was comprised 17 to 21 members, selected primarily from the accounting profession. 28.

Independence. The members of the APB were part-time volunteers whose major responsibilities were to the business, governmental, or academic organizations employing them.

Representation. The public accounting firms and the AICPA were too closely associated with the development of accounting standards.

Response time.Emerging problems were not solved quickly enough by the part-time members of the APB.

Criticisms of the APB 29.

Statements of Financial Accounting Standards

Interpretations

Staff Positions

Technical Bulletins

Statements of Financial AccountingConcepts

Other Pronouncements

Types of Pronouncements Issued by the FASB 30. Other Organizations Impacting GAAP

Securities and Exchange Commission (SEC) The SEC is a governmental agency that has the legal authority to prescribe accounting principles and reporting practices for all corporations issuing publicly traded securities.

American Institute of Certified Public Accountants (AICPA) The AICPA is the professional organization for all certified public accountants in the United States.To be a member of the AICPA, an individual must have passed the Uniform CPA Examination, hold a CPA certificate, agree to abide by its bylaws and Code of Professional Ethics, and have 150 hours of higher education.

Continued 31. Other Organizations Impacting GAAP

FASB Emerging Issues Task Force (EITF) The primary objectives of the EITF are (1) to identify significant emerging accounting issues (i.e., unique transactions and accounting problems) that it feels the FASB should address and (2) to developconsensus positionson the implementation issues involving the application of standards.

International Accounting Standards Board (IASB) The IASB issues International Financial Reporting Standards (IFRS) and includes 12 full-time members (and 2 part-time members) from various countries. To date, the IASB has issued 49 Standards.

Governmental Accounting Standards Board (GASB) The GASBs responsibility is to establish financial accounting standards for certain state and local governmental entities.

Public Company Accounting Oversight Board (PCAOB) The PCAOB is a non-profit corporation that was created by Congress in the Sarbanes-Oxley Act of 2002. Its purpose is to protect the interests of investors by overseeing auditors of public companies in the preparation of informative, accurate, and independent audit reports for companies that sell securities to the public.

Cost Accounting Standards Board (CASB) The CASB is responsible only for negotiated federal contracts and subcontracts exceeding $500,000.

Internal Revenue Service (IRS) The IRS administers the Internal Revenue Code enacted by Congress.

American Accounting Association (AAA) The AAA is an organization primarily of academics and practicing accountants.

Financial Executives International (FEI) The FEI consists primarily of high-level financial executives (such as financial vice-presidents, treasures, and controllers) of major corporations. The FEI publishes a monthly journal called theFinancial Executive .

Institute of Management Accountants (IMA) The primary focus of the IMA is on management accounting and financial accounting issues. The IMA publishes a monthly journal calledStrategic Finance .

CFA Institute (CFAI) Members of the CFAI are financial analysts who use accounting information in various investment management and security analysis decisions.

36. Principles of the AICPA Code of Professional Conduct Responsibilities In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. 37. Principles of the AICPA Code of Professional Conduct The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. 38. Principles of the AICPA Code of Professional Conduct Integrity To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. 39. Principles of the AICPA Code of Professional Conduct Objectivity and Independence A member should maintain objectivity and be free from conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance. 40. Principles of the AICPA Code of Professional Conduct Due Care A member should observe the professions technical and ethical standards, strive continually to improve competence and the quality of services, and discharge the professional responsibility to the best of the members ability. 41. Principles of the AICPA Code of Professional Conduct Scope and Nature of Service A member in public practice should observe the Principles of the CPC in determining the scope and nature of services to be provided. 42.

Theutilitarianmodel, which evaluates actions based on the greatest good for the greatest number.

Therights model, which embraces actions that protect individual moral rights.

Thejustice model, which emphasizes a fair distribution of benefits and burdens.

An Ethicists Basic Approaches to Moral Reasoning 43. 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. 44. IFRS and U.S. GAAP To resolve this issue, FASB and the IASB entered into an agreement (Norwalk) 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. 45. C hapter 1 The End

the environment of financial reporting

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