Characteristics of Financial

Accounting
• Accounting identifies, measures and
communicates financial information.
• This information is about economic
entities.
• Information is communicated to
interested parties such as investors,
creditors, managers, unions and
governmental agencies.

4
 Accounting and the Efficient
Use of Scarce Resources (1 of 2)

Financial Reporting aids users

in the allocation
of scarce resources.

5
 Accounting and the Efficient
Use of Scarce Resources (2 of 2)
Users
Financial Capital
(present and
Reporting Allocation
potential)

The financial Process of

Investors and
info. provided determining
creditors use
to help users how funds are
reports to make
with capital allocated among
capital
allocation competing
allocation decisions
decisions interests
6
 Objectives of Financial Reporting
by Business Enterprises
• The objectives are specified in Statement of
Financial Accounting Concepts No. 1. and are as
follows:
1) Information provided must be useful in
investment and credit decisions
2) Information must be useful in assessing cash
flow prospects
3) Information must be about enterprise resources,
claims to those resources and changes therein.

7
 Generally Accepted Accounting
Principles (GAAP)
• The profession has developed GAAP that
present fairly, clearly and completely the
financial operations of the enterprise.
• GAAP consist of authoritative
pronouncements issued by certain
accounting bodies.

8
 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(GAAP)

• - those principles that have "substantial

authoritative support" (meaning established
by an authoritative rule making body

9
HISTORY OF ACCOUNTING
STANDARDS SETTING

• PRIOR TO 1929 (STOCK MKT

CRASH)
• - No GAAP
• - No auditing requirement

10
 The Standard Setting Process:
Parties Involved
• Securities and Exchange • A federal agency with
Commission (SEC) oversight powers.
• American Institute of • The national professional
Certified Public organization of practicing
CPAs.
Accountants (AICPA)
• Private sector agency that
• Financial Accounting establishes and improves
Standards Board(FASB) reporting standards.

• Governmental Accounting • Regulates state and local

Standards Board governmental reporting
issues.
11
 The Financial Accounting Standards
Board (FASB)
• The FASB, the Financial Accounting Foundation
and the Advisory Councils make up the
standard setting structure.
• The FASB enjoys the following advantages
compared to its predecessor, the Accounting
Principles Board:
* smaller membership
* greater autonomy
* increased independence of members
* broader representation on the Board
* full time, paid members 12
 The Due Process (1 of 3)

• In establishing financial standards, the

FASB follows the due process.
• The due process gives time to interested
persons to make their views known to
the Board.

13
 The Due Process (2 of 3)

1 2 4
3
AGENDA Discussion Public
Memorandum Hearing

Topics for The FASB A public

standard issues hearing
setting are initial is
identified research and conducted
analysis
14
 The Due Process (3 of 3)
4 5
Exposure
Draft Final Standard

The FASB The FASB

issues evaluates
an exposure responses and
draft issues the
(tentative final
standard) standard
15
 Major Types of FASB
Pronouncements
1 Standards and Interpretations
:are modifications or extensions of standards
2 Financial Accounting Concepts
:are objectives and concepts used in the
development of standards
3 Technical Bulletins
:provide timely guidance on reporting issues
4 Emerging Issues Task Force Statements
: reach consensus on accounting for new and
unusual financial reporting practices
16
 Organizational Structure for
Setting Standards

Financial
Accounting
Foundation FASB
(FAF)

Financial
Accounting
Standards
Advisory
Council
17
 GAAP and Other Authoritative
Pronouncements
• GAAP consists of FASB Standards and
Interpretations, APB Opinions and AICPA
Accounting Research Bulletins.
• There are other documents that are
considered to provide authoritative support.
• See next slide for a hierarchy of these
pronouncements.

18
19
Impact of User Groups on Standard
Setting Procedures

20
Challenges Facing Financial Accounting
• Non financial measurements need to be
developed and reported.
• More information needs to be provided
regarding soft assets (intangibles)
• Forward-looking information, in addition to
historical information, must be provided.
• Statements may have to be prepared on a
real time basis (and not just periodically)

21
 The Expectations Gap

An expectations gap exists between the:

• public’s perception of the profession’s
accountability and
• profession’s perception of its
accountability to the public.

22
International Accounting Standards

• The International Accounting Standards

Committee (IASC) was formed in 1973 and
recently renamed International Accounting
Standards Board (IASB)
• The objective was to narrow divergence in
international financial reporting.
• There are many similarities between U.S.
and International accounting standards.
23
 COPYRIGHT
Copyright © 2003 John Wiley & Sons, Inc. All rights
reserved. Reproduction or translation of this work
beyond that named in Section 117 of the 1976 United
States Copyright Act without the express written
consent of the copyright owner is unlawful. Request
for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc.
The purchaser may make back-up copies for his/her
own use only and not for distribution or resale. The
Publisher assumes no responsibility for errors,
omissions, or damages, caused by the use of these
programs or from the use of the information
contained herein.

24