Questions from Readings Flashcards
According to Adam Smith, what is the factor that contributes to economic growth?
According to Adam Smith, impersonal goods are the fact that contributes to economic growth (“guns and butter)
What is the FASB’s rationale for expensing stock options?
FASB’s rationale for expensing stock options is that ESOs are a form of deferred compensation. There is an economic benefit derived from ESOs.
What is the difference between principles-based and rules-based accounting standards? Provide 2 examples to illustrate the difference.
Rules-based: rigid, leaves no room for judgment or disagreement
Principles-based: requires the application of judgment and expertise by managers and auditors
Examples
1. Depreciation (Rules: must expense 10%/year; Principles: expense should reflect economic decline every year)
2. Capital leases (Rules: must meet 4 rules to be capital lease; Principles: must be indication of apparent change in ownership)
Based on a study, do CPAs and CFOs strongly prefer rules-based accounting standards over principles-based or vice versa?
While those conducting the study believed they would prefer rules-based, the study showed that there is no preference of one over the other. There is an even split between the two. There is strong support for both. And there are pros and cons to both depending on the scenario.
What challenges does FASB face with regard to identifying and measuring economic consequences?
The future is uncertain. It is impossible to determine all possible consequences. It is impossible to quantify all costs/benefits. Benefits are usually non-financial.
Why is restatement a topic of importance for investors, auditors, and regulators?
Restatement is a topic of importance due to the pending convergence of IFRS into the US. Restatements attributed to judgment are especially important since IFRS is principles-based and based more on judgment.
Relevance and faithful representations are the primary qualities of accounting information under the new conceptual framework. How does conservatism fit with these qualities?
Conservatism, which requires a high degree of verifiability to achieve, helps assure faithful representations of financial statements, which in turn assure financial statements are relevant.
How do firms repair their reputation after a serious financial restatement?
Firms repair their reputation by targeting capital providers as well as other stakeholders. Those that sell durable products take actions targeting customers, while those that have specialized workforces take actions targeting employees. There will only be apparent benefits if these actions take place after a serious restatement.
Why do reputational losses differ across types of misstatements?
Reputational losses differ across types of misstatements due to the costs they impose directly on parties with whom they do business (customers, investors, suppliers). Some misstatements end up being more costly than others.
Explain the relevance vs. reliability trade-off as it relates to fair value accounting.
With the use of fair value accounting, financial reporting becomes more and more relevant as it relates more to the current market. However, the increased use of fair value accounting may lead to more judgment and subjectivity, which in turn could make financial statements less reliable. (And vice versa)
Why is accounting for defined-benefit pension plans more complex than accounting for defined-contribution pension plans?
Defined benefit pension plans are more complex because they involve estimating the PBO and pension expense, which requires actuarial assumptions regarding many items (e.g., mortality rates and employee turnover). Meanwhile, defined contribution pension plan obligations and expenses are directly set in place by the company without any need for subjectivity or judgment.
What are the political ramifications of IFRS adoption in the US?
On the plus side, this would show that the US is willing to adapt with the rest of the world. However, the US will give up all power to set accounting standards to the IASB in London. In addition, with many interpretations of IFRS globally, US firms would have to monitor the actions of regulators and governing bodies all around the world.
What is the “condorsement” approach?
Under “condorsement,” US GAAP will continue to exist, and the IASB and FASB would continue their convergence projects. In addition, FASB would work toward convergence of existing US standards not included in the convergence project to IFRS. This assures approval of guidance from US firms.
