What is the purpose of information presented in notes to the financial statements?
To provide disclosure required by generally accepted accounting principles.
Essential characteristics of accounting are:
the identification, measurement, and communication of financial information about
economic entities to
interested parties. IMC
What determines whether a business thrives
efficient use of resources- resources are limited
An effective process of capital allocation is critical to a healthy economy, which
promotes productivity.
b. encourages innovation.
c. provides an efficient and liquid market for buying and selling securities.
Objectives of Financial Reporting
Provide financial information about the reporting entity that is useful to:
1 present and potential equity investors,
2 lenders, and
3 other creditors
in making decisions in their capacity as capital providers.
General-Purpose Financial Statements
Provide financial reporting information to a wide variety of users.
Provide the most useful information possible at the least cost.
Equity Investors and Creditors
Investors are the primary user group of financial statements, however may meet the needs of others.
Entity Perspective
Companies viewed as separate and distinct from their owners.
Decision-Usefulness
Investors are interested in assessing the company's
1. ability to generate net cash inflows and
2. management's ability to protect and enhance the capital providers' investments.
Parties Involved In Standard Setting
Three organizations:
1) Securities and Exchange Commission (SEC).
2) American Institute of Certified Public Accountants (AICPA).
3) Financial Accounting Standards Board (FASB).
Securities and Exchange Commission (SEC)
Established by federal government.
Accounting and reporting for public companies.
Encouraged private standard-setting body.
SEC requires public companies to adhere to GAAP.
SEC Oversight.
Enforcement Authority.
American Institute of CPAs (AICPA)
National professional organization
Established the following:
Committee on Accounting Procedures
1939 to 1959
Issued 51 Accounting Research Bulletins (ARBs)
Problem-by-problem approach failed
Accounting Principles Board
1959 to 1973
Issued 31 Accounting P
Financial Accounting Foundation
Financial Accounting Standards Board (FASB)
Financial Accounting Standards Advisory Council:
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
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.
The first step taken in the establishment of a typical FASB statement is
Topics are identified and placed on the board's agenda.
Types of Pronouncements from FASB
Accounting Standards Updates.
Financial Accounting Concepts.
Generally Accepted Accounting Principles
Principles that have substantial authoritative support.
Major sources of GAAP:
FASB Standards, Interpretations, and Staff Positions.
APB Opinions.
AICPA Accounting Research Bulletins.
Which of the following accounting pronouncements is the most authoritative?
c. AICPA Accounting Principles Board Opinion.
FASB Codification
Goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic.
Creates one level of GAAP, which is considered authoritative.
All other accounting literature is considered non-authoritative.
F
Expectation GAAP
What the public thinks accountants should do vs. what accountants think they can do.
Difficult to close in light of accounting scandals.
Sarbanes-Oxley Act (2002).
Public Company Accounting Oversight Board (PCAOB).
Issues in Financial Reporting
Financial Reporting Challenges
Non-financial measurements.
Forward-looking information.
Soft assets.
Timeliness
Understandability
Issues ContInternational 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.
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.
IFRS VS GAAP
IFRS tends to be simpler, more "principles based". GAAP is more detailed, "rules based"
1)The SEC allows foreign companies that trade shares in U.S. markets to file their IFRS financial statements without reconciliation to GAAP.
International Accounting Standards Board (IASB)
Issues International Financial Reporting Standards (IFRS).
Standards used on most foreign exchanges.
Standards used by foreign companies listing on U.S. securities exchanges.
IFRS used in over 115 countries.
IFRS stands for:
International Financial Reporting Standards.
International Organization of Securities Commissions (IOSCO)
Does not set accounting standards.
Dedicated to ensuring that global markets can operate in an efficient and effective basis.
The major key players on the international side are the:
IASB and IOSCO.
International Accounting Standards Board (IASB)
Composed of four organizations�
1) International Accounting Standards Committee Foundation (IASCF).
2) International Accounting Standards Board (IASB).
3) Standards Advisory Council.
4) International Financial Reporting Interpretations Committee (IFRIC).
IFRS Types of Pronouncements
International Financial Reporting Standards.
Framework For Financial Reporting.
International Financial Reporting Interpretations.
Hierarchy of IFRS
Companies first look to:
1) International Financial Reporting Standards;
2) International Accounting Standards; and
3) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretat
IFRS is comprised of:
International Financial Reporting Standards, International Accounting Standards, and international accounting interpretations.
International Accounting Convergence
The SEC appears committed to move to IFRS, assuming that certain conditions are met.
Any U.S. incorporation of IFRS in GAAP will occur over several years.
Which of the following statements is true? about IASB
A) The IASB has the same number of members as the FASB.
B) The IASB structure has both advisory and interpretation functions, but no trustees.
C) The IASB has been in existence longer than the FASB.
**D) The IASB structure is quite similar to the FASB's,