Chapter 1 Flashcards
What is the objective of financial reporting?
To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.
Who are the parties involved in standard-setting?
Securities and Exchange Commission (SEC)
American Institute of CPAs (AICPA)
Financial Accounting Standards Board (FASB)
Describe the Capital Allocation Process
Financial Reporting > Users (investors and creditors) > Capital Allocation
Reporting helps users make decisions on on to allocate their capital among competing interests.
What are the major challenges in Financial Reporting?
Political environment Expectation gap Financial reporting issues International accounting standards Ethics
What are the essential characteristics of Accounting?
1) the identification, measurement, and communication of financial information about 2) economic entities to 3) interested parties
What are the most frequently provided Financial Statements?
Balance Sheet Income Statement Statement of Cash Flows Statement of Owners' or Stockholders' Equity Note Disclosures
What is the purpose of information presented in notes to the financial statements?
To provide disclosure required by generally accepted accounting principles.
Describe Entity Perspective
Companies viewed as separate and distinct from their owners
Describe 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.
What is the purpose of the Financial Accounting Foundation?
To select members of the FASB and their Advisory Councils, fund their activities, and exercise general oversight.
What is the purpose of the FASB?
To establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial info.
What is the purpose of Staff and Task Forces in setting accounting standards?
To assist the FASB on reporting issues by performing research, analysis and writing functions.
What is the purpose of the Financial Accounting Standards Advisory Council (FASAC)?
To consult on major policy issues, technical issues, project priorities, and selection and organization of task forces.
Explain Due Process steps for FASB
1) Topics identified and placed on Board’s Agenda
2) Preliminary views - research and analysis conducted and preliminary views of pros and cons issues
3) Public hearing on proposed standard
4) Exposure draft - Board evaluates research and public response and issues exposure draft
5) Accounting standards update (GAAP) - Board evaluates responses and changes exposure draft, if necessary. Final standard issued.
Explain GAAP
Generally Accepted Accounting Principles
Principles that have substantial authoritative support.
Major sources of G A A P:
- F A S B Standards, Interpretations, and Staff Positions
- A P B Opinions
- A I C P A Accounting Research Bulletins
Explain 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
What is the FASB Codification Research System (CRS)?
CRS is an online, real-time database that provides easy access to the Codification.
The Codification and the related CRS provide a topically organized structure, subdivided into topic, subtopics, sections, and paragraphs, using a numerical index system.
Major Challenges in Financial Reporting- 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
- Public Company Accounting Oversight Board (PCAOB)
Major Challenges in Financial Reporting -International Accounting Standards
Two sets of standards accepted for international use:
- U.S. G A A P issued by the F A S B
- International Financial Reporting Standards (I F R S) issued by the International Accounting Standards Board (IASB)
Major Challenges in Financial Reporting- Ethics in the Environment of Financial Accounting
In accounting, we frequently encounter ethical dilemmas.
- G A A P does not always provide an answer
- Doing the right thing is not always easy or obvious
What are the International Standard-Setting organizations?
International Accounting Standards Board (IASB)
International Organization of Securities Commissions (IOSCO)
What is IFRS?
International Financial Reporting Standards
- Standards used on most foreign exchange.
- Standards used by foreign companies listing on U.S. securities exchanges
- IFRS used in over 120 countries
How are IFRS and GAAP similar?
- Both the IASB and the FASB have essentially the same governance structure, that is, a Foundation that provides oversight, a Board, an Advisory Council, and an Interpretations Committee.
- The FASB relies on the SEC for regulation and enforcement of its standards. The IASB relies primarily on IOSCO for regulation and enforcement of its standards.
- Both the I A S B and the F A S B are working together to find common grounds for convergence.
How are IFRS and GAAP different?
- G A A P is more detailed or rules-based. I F R S tends to simpler and more flexible in its accounting and disclosure requirements.
- Different user needs. In some countries, the primary users of financial statements are private investors. In others, the primary users are tax authorities or central government planners. In the United States, investors and creditors have driven accounting-standard formulation.
What is the 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 Interpretations Committee (SIC).
Describe International Accounting Convergence
Rather than adopting IFRS at a point in time, the endorsement approach specifies that the FASB and IASB continue to collaborate to align GAAP and IFRS. As a result, standards (which are also IFRS) could be incorporated into GAAP.
Parties Involved in Standard Setting
Securities and Exchange Commission (SEC)
- Established by federal government
- Securities Act of 1933 and 1934
- Accounting and reporting for public companies
- Encouraged private standard-setting body
- SEC requires public companies to adhere to GAAP
- SEC Oversight
- Enforcement Authority
Parties Involved in Standard Setting
American Institute of Certified Public Accountants (AICPA)
- National professional organization
- Established the following:
- Committee on Accounting Procedures
- 1939 to 1959
- Issued 51 Accounting Research Bulletins (ARB s)
- Problem-by-problem approach failed
- Accounting Principles Board
- 1959 to 1973
- Issued 31 Accounting Principle Board Opinions (APBOs)
- Wheat Committee recommendations adopted in 1973
Parties Involved in Standard Setting
Financial Accounting Standards Board (FASB)
Wheat Committee’s recommendations resulted in FASB.
-Differences between FASB and APB include:
-Smaller Membership
-Full-time, Remunerated Membership
-Greater Autonomy
-Increased Independence
Broader Representation
