Only in America … … can a pizza get to your house faster than an ambulance. … are there handicap parking places in front of a skating rink. … do drugstores make the sick walk all the way to the back of the store to get their prescriptions while healthy people can buy cigarettes at the front. … do people order double cheeseburgers, large fries and a Diet Coke. … do banks leave both doors open and then chain the pens to the counters. … do we leave cars worth thousands of dollars in the driveway and put our useless junk in the garage. … do we use answering machines to screen calls and then have call waiting so we won’t miss a call from someone we didn’t want to talk to in the first place. …do we buy hot dogs in packages of ten and buns in packages in eight. … do we use the word ‘politics’ to describe the process so well: ‘Poli’ in Latin meaning ‘many and ‘tics’ meaning ‘bloodsucking creatures’. … do they have drive-up ATM machines with Braille lettering.

Chapter 1 FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS Sommers – ACCT 3311 Chapter 1: Environment and Theoretical Structure of Financial Accounting.

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).

Financial Reporting Challenges Non-financial measurements Forward-looking information Soft assets Timeliness Understandability

Generally Accepted Accounting Principles 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. FASB has developed the Financial Accounting Standards Board Codification Research System (CRS). CRS is an online real-time database that provides easy access to the Codification.

Generally Accepted Accounting Principles Illustration 1-5 FASB Codification Framework

Issues in Financial Reporting GAAP in a Political Environment Illustration 1-6 User Groups that Influence the Formulation of Accounting Standards GAAP is as much a product of political action as they are of careful logic or empirical findings.

Issues in Financial Reporting International 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. FASB and IASB recognize that global markets will best be served if only one set of GAAP is used.

IFRS Insights – Relevant Facts International standards are referred to as International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB). Recent events in the global capital markets have underscored the importance of financial disclosure and transparency not only in the United States but in markets around the world. U.S standards, referred to as generally accepted accounting principles (GAAP), are developed by the Financial Accounting Standards Board (FASB). The fact that there are differences between what is in this textbook (which is based on U.S. standards) and IFRS should not be surprising because the FASB and IASB have responded to 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. It appears that the United States and the international standard-setting environment are primarily driven by meeting the needs of investors and creditors.

IFRS Insights – Relevant Facts The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges. There is a continuing debate as to whether non-U.S. companies should have to comply with this extra layer of regulation. Debate about international companies (non-U.S.) adopting SOX-type standards centers on whether the benefits exceed the costs. The concern is that the higher costs of SOX compliance are making the U.S. securities markets less competitive. The textbook mentions a number of ethics violations, such as WorldCom, AIG, and Lehman Brothers. These problems have also occurred internationally, for example, at Satyam Computer Services (India), Parmalat (Italy), and Royal Ahold (the Netherlands).

IFRS Insights – Relevant Facts IFRS tends to be simpler in its accounting and disclosure requirements; some people say more “principles-based.” GAAP is more detailed; some people say more “rules-based.” This difference in approach has resulted in a debate about the merits of “principles-based” versus “rules-based” standards. The SEC allows foreign companies that trade shares in U.S. markets to file their IFRS financial statements without reconciliation to GAAP.

A Move Away from Rules-Based Standards? Rules based accounting standards vs. objectives-oriented approach US GAAP → IFRS Objectives oriented (principles-based) approach stresses professional judgment

IFRS Insights ABOUT THE NUMBERS Illustration IFRS1-1 Global Companies

When Will US Move to IFRS? Accounting Today Article – “Accounting Convergence Unachievable”

Chapter 2 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING Sommers – ACCT 3311 Chapter 1: Environment and Theoretical Structure of Financial Accounting.

Discussion Question Q2-1 What is a conceptual framework? Why is a conceptual framework necessary in financial accounting? A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial account­ing and financial statements. A conceptual framework is necessary in financial accounting for the following reasons: (1) It will enable the FASB to issue more useful and consistent standards in the future. (2) New issues will be more quickly solvable by reference to an existing framework of basic theory. (3) It will increase financial statement users’ understanding of and confidence in financial reporting. (4) It will enhance comparability among companies’ financial statements.

The Conceptual Framework The Conceptual Framework has been described as a constitution, a coherent system of interrelated objectives and fundamental that lead to consistent accounting standards. Maintain consistency among standards. Resolve new accounting problems. Provide user benefits. The Financial Accounting Standards Board has issued seven Statements of Financial Accounting Concepts that form what we know as the conceptual framework of accounting. The conceptual framework does not prescribe generally accepted accounting principles, but it provides an underlying foundation for the development of accounting standards.. The primary purpose of the conceptual framework is a process leading to cohesive objectives and fundamental concepts on which financial accounting and reporting can be based.

Conceptual Framework Overview of the Conceptual Framework First Level = Basic Objectives Second Level = Qualitative Characteristics and Elements Third Level = Recognition, Measurement, and Disclosure Concepts.

Conceptual Framework

First Level: Basic Objectives Objective of general-purpose financial reporting is: 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.

Second Level: Fundamental Concepts Qualitative Characteristics “The FASB identified the Qualitative Characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.”

Second Level: Qualitative Characteristics Illustration 2-2 Hierarchy of Accounting Qualities

Discussion Question Q2-3 What is mean by the term “qualitative characteristics of accounting information”? “Qualitative characteristics of accounting information” are those characteristics which contribute to the quality or value of the information. The overriding qualitative characteristic of accounting information is usefulness for decision making.

Second Level: Qualitative Characteristics Fundamental Quality—Relevance To be relevant, accounting information must be capable of making a difference in a decision.

Discussion Question Q2-5 How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement? Information is material if it is deemed to have an effect on a decision made by a user. The threshold for materiality will depend principally on the relative dollar amount of the transaction being considered. One consequence of materiality is that GAAP need not be followed in measuring and reporting a transaction if that transaction is not material. The threshold for materiality has been left to subjective judgment.

Second Level: Qualitative Characteristics Fundamental Quality—Faithful Representation Faithful representation means that the numbers and descriptions match what really existed or happened.

Second Level: Qualitative Characteristics Enhancing Qualities