Intermediate

Financial Accounting I
Financial Accounting and
Accounting Standards
Environment and Theoretical Structure of Financial Accounting 2
Objectives of the Chapters
1. Understand the need to develop accounting
standards.
2. Study the development of accounting standards
from a historical perspective.
3. The GAA and the FAS! Accounting
Standards "odification.
#. Study the roles of the A$"A and the SE" in
developing GAA.
%. $ntroduce the accounting standard setting
process of the FAS!.
Environment and Theoretical Structure of Financial Accounting 3
Objectives of the Chapters (contd.)
&. Study the relationship 'et(een the
changes in the economic environment
and the development of accounting
standards.
). Understand the economic
conse*uence of accounting standards.
+. Understand the accounting standard
compliance system in the U.S. ,a
u'lic-rivate partnership.
Environment and Theoretical Structure of Financial Accounting #
Objectives of the Chapters (contd.)
/. 0iscuss financial reporting reform and
the Sar'anes and 12ley Act ,the u'lic
"ompany Accounting 3eform and $nvestor
rotection Act of 2442.
14. Study the need for international
accounting standards and the
convergence of the U.S. accounting
standards (ith the $nternational
Accounting Standards.
Environment and Theoretical Structure of Financial Accounting %
Financial Reporting: An Introduction
and Historical evelop!ent
1. 5hat is accounting6
2. 7o( do (e communicate financial information6

Tools8 Four financial statements.

3. 7o( do (e prepare financial statements6

$dentify9 measure and record 'usiness

transactions for 'usiness entities.

:ournal entries9 posting to ledger accounts9

(or; sheet ,including ad<ustments=.9 F-S9=
#. 5hy do (e need accounting standards6
"hat is Accounting #

An information system to account for all

business transactions and translate
these transactions into accounting
terms to 'e reported in financial
statements for interested users.
Environment and Theoretical Structure of Financial Accounting &
Environment and Theoretical Structure of Financial Accounting )
Accounting $tandards

Accounting methods (ith su'stantial

authoritative support to 'e used 'y
'usiness entities in preparing e2ternal
reports for users.
Environment and Theoretical Structure of Financial Accounting +
Issues Related to Accounting
$tandards
1. 5ho are the authorities to set these
standards ,Generally Accepted Accounting
rinciples9 GAA.6
2. 5hat are these standards6
5hat is FAS! "odification6
3. The roles of the A$"A and the SE" in
developing GAA.
#. The accounting standard setting process of
the FAS!.
Environment and Theoretical Structure of Financial Accounting /

1/3# "ongress
SE" 3egulation S>?
AS3 and F33
Staff Accounting !ulletins
1/3+ Accounting rofession
A$"A
1/3+>1/%/ "A === A3!s ,%1.
1/%/>1/)3 A! ===A! 1pinions ,31.
1/)3 FAS! ==. 1. Statement of Financial
Accounting Standards
2. $nterpretations
3. "oncepts of Financial
Accounting
#. Techni*ue !ulletins-Staff .
%. A'stracts issued 'y E$TF
Year Authority Official Release
/
Environment and Theoretical Structure of Financial Accounting 14
%ronounce!ents of the FA$&
1. Statement of Financial Accounting
Standards ,SFAS.
2. $nterpretations
3. A'stracts of E$TF ,Emerging $ssue Tas;
Force.
#. Techni*ue !ulletins-Staff ositions
%. Statements of Financial Accounting
"oncepts
Environment and Theoretical Structure of Financial Accounting 11
'AA%
('eneral Accepted Accounting %rinciples)

Accounting methods having

@su'stantial authoritative supportA and
used 'y 'usiness entities in preparing
financial statements.
Environment and Theoretical Structure of Financial Accounting 12
(.$. 'AA% (contd.)

$ncludes8
1. FAS! statements ,1/)3 > resent.
2. FAS! $nterpretations , 1/)3 > resent.
3. A! 1pinions ,1/%/ > 1/)3.
#. A! $nterpretations ,1/%/ > 1/)3.
%. "A9 A3!s ,1/3+ > 1/%/.
&. 1ther Authoritative ronouncements ,i.e.9
AS3 B F33 of the SE"9 Techni*ue
!ulletins-Staff ositions of FAS!9 and Staff
Acct. !ulletins of the SE"9 A'stracts of
E$TF9 S1 of the A$"A9 etc..
Environment and Theoretical Structure of Financial Accounting 13
FA$& Accounting $tandards
Codification (A$C) ($ource: $FA$ )*+)

Effective :uly 19 244/9 FAS! Accounting

Standards "odification 'ecame the
single source of authoritative9
nongovernmental US GAA.

The pronouncements of the SE" are

also sources of authoritative GAA for
SE" registrants.
Environment and Theoretical Structure of Financial Accounting 1#
FA$& Accounting $tandards
Codification (A$C) (Contd.)

All other non>grandfathered9 non>SE"

accounting literature NOT included in the
"odification (ill 'e non>authoritative.

The "odification does not change GAA

'ut only the (ay the existing accounting
standards are organiCed.
Environment and Theoretical Structure of Financial Accounting 1%
"hat Are Included in the FA$& Codification#
(Source: The FASB Accounting Standard Codification : Notice
to Constituents About the Codification)

The "odification includes8

FAS!8 Statements ,FAS.9 $nterpretations9

,F$D.Technical !ulletins ,FT!.9 Staff
ositions,FS. and Staff $mplementation
Guides ,EBA..

E$TF8 A'stracts and Topic 0

0erivative $mplementation Group $ssues

A! 1pinions

A3!
Environment and Theoretical Structure of Financial Accounting 1&
"hat Are Included in the FA$& Codification#
(Continued)

A$"A8 Statements of osition,S1.9

Audit and Accounting Guides ,accounting
content only. and ractice !ulletins ,!..

SE"8 3egulation S>?9 F339 AS39

$nterpretive 3eleases9 SE" Staff
Guidance in Staff Accounting
!ulletins,SA!.9 E$TF topic 0 and SE"
Staff 1'server comments.
Environment and Theoretical Structure of Financial Accounting 1)
"hat Are ,ot Included in the FA$&
Codification# (source: -he FA$& Codification
%roject b. /. Cathe.)

The follo(ings are e2cluded from the

"odification8
a.SE" content not specifically directed to
financial reporting ,i.e.9 F0BA guidance.
'.Governmental accounting standards and
auditing standards9 ta2 codes
c."oncepts Statements of FAS!
Environment and Theoretical Structure of Financial Accounting 1+
FA$& Codification: the Codification
Research $.ste! ($ource: $FA$ )*+)

Codification Research System CRS.. is

an online data'ase developed 'y the FAS!
to allo( users to access the "odification
,and therefore9 authoritative GAA. online.

"3S uses a numerical inde2 system in

(hich numerical num'ers are used to
correspond (ith topics9 su'topics9 sections
and paragraphs.
Environment and Theoretical Structure of Financial Accounting 1/
FA$& Codification: An 01a!ple
(see Illustration )23 on p)3)

E2ample ,source8 p1# of te2t'oo;.

Search GAA for the su'se*uent

measurement for loans and trade receiva'les
not held for sale ,"odification 314>14>3%>#).8

Topic8 AS" 314 ,3eceiva'le topic.

Su'topics8 AS" 314>14 ,for 1verall su'topic.

Sections8 AS" 314>14>3% ,to access the

Su'se*uent Feasurement Section.

aragraph8 AS" 314>14>3%>#) ,to assess the

Goans and Trade 3ece. Dot 7eld for Sale
ara..
FA$& Codification: An 01a!ple
Environment and Theoretical Structure of Financial Accounting 24
Environment and Theoretical Structure of Financial Accounting 21
-he Role of the AIC%A On $tandard
$etting

1/3/ > 1/%/ "A A3!s

1/%/ > 1/)3 A! 1pinions

1/)3 > resent 1. $ssue apers ,'y AcSE".

a
2. Statements of osition
3. ractice !ulletins
#. Auditing Standards ,'y the Auditing Standards
!oard.
,3eplaced 'y "A1! in 2442.
a. The Accounting Standards Executive Committee which was
established within the Accounting Standard Division of the AICPA.
Environment and Theoretical Structure of Financial Accounting 22
-he Accounting $tandard $etting %rocess
of the FA$& (A ue %rocess) (source: FA$&
45)) "ebsite(See Illustration 1-3 on 11)
1. The !oard identifies an accounting
issue 'ased on re*uests received
from various sources.
2. The "hairman decides (hether to add
a pro<ect to the technical agenda after
consulting (ith other mem'ers and
su'<ect to oversight 'y the
FoundationHs !oard of Trustees.
Environment and Theoretical Structure of Financial Accounting 23
-he Accounting $tandard $etting
%rocess of the FA$& (A ue %rocess)
3. The !oard deli'erates various issues
identified and analyCed by the staff at
one or more pu'lic meetings.
#. The !oard issues an E2posure 0raft
to see; input from interested parties.
,$n some case9 the !oard may issue a
0iscussion aper to o'tain comments
prior to issuing the E2posure 0raft..
Environment and Theoretical Structure of Financial Accounting 2#
-he Accounting $tandard $etting
%rocess of the FA$& (A ue %rocess)
%. The !oard holds a pu'lic roundta'le meeting
on the E2posure 0raft9 if necessary!
&. The staff analyCes comment letters9 pu'lic
roundta'le discussion9 and any other
information . The !oard redeli'erates the
"ro"osed "rovisions at one or more pu'lic
meetings.
).
Environment and Theoretical Structure of Financial Accounting 2%
-he Accounting $tandard $etting
%rocess of the FA$& (A ue %rocess)
). The !oard issues an Accounting
Standards Update to amend AS" 'y a
sim"le ma#ority vote ,i.e.9 four of the
seven 'oard mem'ers..

Dote8 effective 1-24119 FAS!

mem'ers e2panded from % to )..
Environment and Theoretical Structure of Financial Accounting 2&
-he Accounting $tandard $etting %rocess of the FASB
(A ue %rocess) (soruce: 6ieso7 et al. )8
th
edition7
illustration )29)
Environment and Theoretical Structure of Financial Accounting 2)
Other Issues Related to Accounting
$tandards
1. "hanges of the economic environment and
the development of accounting standards.
2. The economic conse*uence of accounting
standards.
3. The accounting standard setting and
enforcement systems in the U.S. and the
interrelationship of the Securities and
E2change "ommission ,SE". and the
Financial Accounting Standards !oard
,FAS!..
Environment and Theoretical Structure of Financial Accounting 2+
Changes of the 0cono!ic 0nviron!ent and
the evelop!ent of Accounting $tandards.
$xam"le%

SFAS Do. 13 ,Accounting for Geases.

SFAS Do. 33 and +/ ,Financial

3eporting and changing prices.

SFAS Do. %2 ,Foreign "urrency

Translation.

SFAS Do. 123 ,Accounting for Stoc;>

!ased "ompensation. and SFAS Do.
123 ,3.
Environment and Theoretical Structure of Financial Accounting 2/
0cono!ic Conse:uence of
Accounting $tandards
E2amples8

SFAS Do. 14& ,EmployersH accounting for

post>retirement 'enefits other than
pensions..

SFAS Do. 11% ,Accounting for certain

investments in de't and e*uity securities..

E$TF 2444>21 and ASU 244/>13 ,AS"

&4%>2%. on revenue recognition for
multiple>element arrangements.
Environment and Theoretical Structure of Financial Accounting 34
-he Accounting $tandard $etting
and 0nforce!ent $.ste!s

The interrelationship of the SE" and

the FAS!8
FAS!8 the rule ma;ing 'ody.
SE"8 the enforcing agency.
Environment and Theoretical Structure of Financial Accounting 31
-he Financial Reporting Refor! and the
$arbanes and O1le. Act

The collapse of Enron9 the dissolving of Arthur

Andersen and the accounting scandals of
some high>profile firms ,5orld"om9 ?ero29
Glo'al "rossing9 etc.. severely damaged pu'lic
confidence in the accounting profession and
the financial reporting.

At the demand of the pu'lic9 Sar'anes and

12ley Act (as passed to restore the pu'lic
confidence in the credi'ility of the financial
reports.
Environment and Theoretical Structure of Financial Accounting 32
-he Financial Reporting Refor! and the
$arbanes and O1le. Act (Cont.)

Iey rovisions of the Act including8

"reating u'lic "ompany Accounting 1versight

!oard to8 1. esta'lish the auditing standards9 2.
oversee the auditing professionHs auditing (or; to
protect the interest of the investors and the pu'lic.

$ncreasing "orporate E2ecutive Accounta'ility8 they

must personally certify 'oth the financial statements and
disclosures.

rohi'ition of Don>Audit Services ,i.e.9 'oo;;eeping9

internal audit9 appraisal9 and other consulting services.
Environment and Theoretical Structure of Financial Accounting 33
-he Financial Reporting Refor! and the
$arbanes and O1le. Act (Cont.)

3etention of (or; apers for % years.

Audit partnerHs 3otation.

"onflict of $nterest.

7iring of Auditor 'y the audit committee9

comprising mem'ers (ith financial e2pertise9
9 not the management.

Evaluation of $nternal "ontrol8 the management

needs to document and assess the effectiveness of internal
control. Auditors of the firm need to state81.(hether the
managementHs assessment is fair9 and 2.(hether the
internal control of the firm is effective.
Environment and Theoretical Structure of Financial Accounting 3#
-he ,eed for International Accounting
$tandards

"ompanies doing 'usiness in more

than one nation found that it is hard to
comply (ith more than one set of
accounting standards esta'lished 'y
authorities in different nations.

$n response to this pro'lem9

$nternational Accounting Standards
"ommittee ,$AS". (as founded in 1/)3
to develop a single set of glo'al
accounting standards.
Environment and Theoretical Structure of Financial Accounting 3%
-he Histor. of International Accounting
$tandard $etting (cont.)

#1 $nternational Accounting Standards

,$AS. (ere issued 'y $AS".

$AS" created $nternational Accounting

Standards !oard ,$AS!. in April9 2441
to 'e in charge of prescri'ing the
standards.

$AS! endorsed #1 $AS and named its

pronouncement as $nternational
Financial 3eporting Standards ,$F3S..
Environment and Theoretical Structure of Financial Accounting 3&
Convergence of the (.$. Accounting $tandards
and the International Accounting $tandards

To increase the international

compara'ility and the *uality of US
accounting standards9 the FAS! has
'een engaged in activities to increase
the convergence of the accounting
standards.

The FAS! is (or;ing closely (ith the

$AS! to(ard the convergence of
accounting standards.
Environment and Theoretical Structure of Financial Accounting 3)
Convergence of the (.$. Accounting $tandards
and the International Accounting $tandards

The goad of convergence is to develop

a single set of high>*uality international
standards to 'e used for domestic and
cross>'oard reporting.

!oth $AS! and FAS! ac;no(ledged

that convergence of $F3S and U.S.
GAA is a primary o'<ective of 'oth
!oards.
Environment and Theoretical Structure of Financial Accounting 3+
$hort2-er! International Convergence (source: FA$&
%roject (pdates and %rogress Report on IA$&2FA$&
Convergence "or; Issued on 8<44<45))))

To achieve this o'<ective and to

improve the financial reporting in the
US9 the FAS! started a short term
pro<ect9 conducted <ointly (ith the $AS!9
to eliminate narro( differences
'et(een US GAA and $F3S ,or $AS.
since 1cto'er9 2442.
Environment and Theoretical Structure of Financial Accounting 3/
$hort2-er! International Convergence
(contd.)

The follo&ing areas have been

addressed%

'! Share()ased *ayment ,SFAS Do.

123 ,3.8 Accounting for Stoc;>!ased
"ompensation. ,issued in 12-244#.
Su'stantially converging (ith $F3S
re*uirements.

3evision8 re*uired the option e2pense

to 'e recogniCed in the income
statement.
Environment and Theoretical Structure of Financial Accounting #4
$hort2-er! International Convergence
(contd.)

+! Inventory Costs ,SFAS Do. 1%18

$nventory "osts ,for idle capacity and
spoilage. 8 an amendment of A3! Do. #39
"hapter #. $ssued in 11-244#9 converging
(ith $F3S re*uirements.

3evision8 The amounts of costs ,$.e.9

idle facility e2pense9 freight9 handling
costs9 spoilage. are e2pensed.
Environment and Theoretical Structure of Financial Accounting #1
$hort2-er! International Convergence
(contd.)

,! Asset $xchanges ,SFAS Do. 1%38

E2changes of Donmonetary Assets9 issued in
0ecem'er 244#.8 an amendment of A!
1pinion Do. 2/. "onverging (ith $F3S
re*uirements.

"hanges8 eliminating some differences in

measurement 'et(een A! 2/ and that of
$AS 1& and $AS 3+ ,i.e.9 difference in the
treatment of nonmonetary e2change of
similar productive assets..
Environment and Theoretical Structure of Financial Accounting #2
$hort2-er! International Convergence
(contd.)

-! Accounting Changes ,SFAS Do. 1%#8

Accounting "hanges and Error "orrections9
issued in Fay 244%.8 a replacement of A!
Do. 24 and FAS! Do. 3. "onverging (ith the
$F3S re*uirmenets.

Eliminating the current period approach in

accounting for the voluntary accounting
changes.

3esult8 improve the compara'ility of

international financial reporting 'y eliminating
the differences 'et(een A! 24 and $AS +.
Environment and Theoretical Structure of Financial Accounting #3
$hort2-er! International Convergence
(contd.)

.! /iscontinued activities%

The $AS! issued $F3S % ,Don>current Assets

7eld for Sale and discontinued 1perations. in
244# (hich su'stantial convergence (ith US
GAA on this topic. 7o(ever9 the definitions
of discontinued 1perations 'et(een t(o
sets of standards remain divergent. !
Environment and Theoretical Structure of Financial Accounting ##
$hort2-er! International Convergence
(contd.)

0. Fair 1alue O"tion8 FAS! 1%/9 the fair value

option for financial assets and lia'ilities9 issued
in 244).

+. Research Costs% FAS 1#139 !usiness

"om'ination issued in 244+9 amending the
accounting for ac*uisition.

/. Don>"ontrolling $nterests 8 FAS 1&4 issued

in 244+.

14. :oint ventures8 $F3S 11 to 'e issued in

2411.
Environment and Theoretical Structure of Financial Accounting #%
$hort2-er! International Convergence
(contd.)

11. $ncome Ta28 3eassessed as a lo(er

priority pro<ect.

12. $nvestment roperties8 in process9 the

FAS! is developing proposals to align US
GAA (ith $F3Ss.

13. !usiness "om'inations8 ro<ect

completed and standard issued in 244+.

1#. "onsolidated Financial Statements8 in

process.
Environment and Theoretical Structure of Financial Accounting #&
$hort2-er! International Convergence
(contd.)

1%. Fair Jalue Feasurement8 ASU 2411>4#

issued in Fay9 2411 and $F3S 13 to 'e
issued in 2411.

1&. ost>Employment !enefits8 $F3S to 'e

issued to amend $AS 1/.

1)8 Financial Statement resentation>1ther

"omprehensive $ncome8 FAS! issued ASU
2411>4% in :une 2411. Amendments to
$F3Ss to 'e issued in 2411.
Environment and Theoretical Structure of Financial Accounting #)
$hort2-er! International Convergence
(contd.)

1thers in progress8

Accounting for 2eases ,E +-1)-24149

updated E issued on +-1+-2411 for re>
e2posure.

Revenue Recognition ,E 1-2#-2414 9

updated E issued on +-3-2411 for re>
e2posure.

For details9 go to8 (((.fas'.org!

Environment and Theoretical Structure of Financial Accounting #+
Current Co!pliances

Since there is no single set of high>*uality

accounting standards9 domestic ,U.S..
firms filing reports (ith the SE" must use
U.S. GAA.

Foreign issuers filing reports (ith the SE"

can use U.S. GAA9 the international
standards or the GAA of its home country.

$f foreign firms chose not to use U.S.

GAA9 they must file reports (ith
reconciliation to U.S. GAA.
A $ingle 'lobal Accounting =anguage
2 International financial reporting standards

$n Dovem'er 244+9 the Securities and

E2change "ommission ,SE". proposed
a roadmap for the US issuers to prepare
financial statements in accordance (ith
@$F3SA for the purposes of their filings
(ith the SE".

This roadmap9 if achieved9 could lead to

the re*uired use of $F3S 'y U.S.
issuers in 241% or 241&.
#/
A $ingle 'lobal Accounting =anguage
2 International financial reporting standards (Contd.)

$n Fe'ruary 24149 the SE" reaffirms its

commitment to one set of accounting
standard and continues to encourage the
convergence of standards 'et(een the US
GAA and $F3S.

1n 14-2/-24149 the SE" issued its first

rogress 3eport on its 3or4 *lan on the
possi'le move to(ard the adoption of the
$F3S for the US issuers.

The SE" (ill ma;e the decision of adopting

$F3S for US issuers in 2411.
%4
-he $0C>s Road!ap -o?ard 'lobal
Accounting $tandards
Environment and Theoretical Structure of Financial Accounting %1