Agenda Monday 1/10 Announcements BAP meetings Wednesday in Jan SBA160 OSCPA Educational Foundation Scholarship PSU Bookstore Board of Directors Today Finish Chapters 1-2, IFRS, Wyatt, Kapnick Discuss project #1 Wed Quiz on Wed Ch 1-3 and articles discussed today Due: DQ for Kapnick, Wyatt DQ Ethics case due date moved to Wed. Jan 19th

What do you think accounting is? Is accounting an art or a science? Consider… Is there only one correct Net Income amount? What are the accounting disciplines? What is common between all accounting’s disciplines? Chapter 1 Overview

Accounting identifies, measures and communicates financial information. This information is about economic entities. Information is communicated to interested parties such as investors, creditors, unions and governmental agencies. –Users are assumed to have a reasonable understanding of the business, and to use reasonable diligence Characteristics of Financial Accounting

To provide information that is 1)Useful in investment and credit decisions 2)Useful in assessing cash flow prospects 3)About company resources, claims to those resources and changes in them Objectives of Financial Accounting

Demand: external parties demand financial accounting information to facilitate their resource allocation decisions Supply: Firms supply financial accounting info based on the expected economic consequences of doing so Ultimately accounting information facilitates functioning capital markets Supply and Demand of Financial Accounting Information

Background – discussion of nature of business, markets, customers, and products/services. Management Discussion and Analysis (MD&A) – discussion of results of operations (including comparisons to prior years), liquidity, capital resources (including forward-looking information). Selected financial data – five or ten-year time series of selected financial and non-financial data (allows analysis of trends). Financial statements – comparative B/S (2 years), I/S (3 years), SCF (3 years), and SE (3 years). Notes and supplemental disclosures – explanations, elaborations, and supplements to information reported in the financial statements Auditor report – independent auditor’s opinion on whether the financial statements and notes are fairly presented according to generally accepted accounting principles (unqualified, qualified, adverse, or disclaimer). Financial Reporting for Public Companies: The 10K

Why do we need accounting rules? Is GAAP rigid or flexible? Is there more than one type of GAAP? –U.S. –IFRS –Other Why do we care about “other GAAP”? –Comparability –Roadmap for adoption of IFRS Generally Accepted Accounting Principles (GAAP)

In November 2008 the U.S. Securities and Exchange Commission issued a proposed "roadmap" for a potential transition by U.S. issuers from U.S. GAAP to International Financial Reporting Standards (IFRS.) Under the timeline contemplated on this roadmap, the SEC would consider in 2011 whether to require all public companies to adopt IFRS on a phased-in basis starting with large accelerated filers for years ending on or after December 15, 2014; accelerated filers for years ending on or after December 15, 2015; and non-accelerated filers and smaller companies for years ending on or after December 15, In June 2009, President Obama announced his administration's proposals to reform the U.S. regulatory system, recommending that the FASB, the IASB and the SEC make substantial progress toward a single set of high quality global accounting standards by the end of In February 2010, the SEC issued a statement reiterating its commitment to a single set of high quality global standards and for the convergence of IFRS and US GAAP. The SEC directed the staff to develop a work plan to facilitate the SECs consideration in 2011 whether, and if so, how and when, to incorporate IFRS into the financial reporting system for U.S. issuers. Status of IFRS in US

Issued in 2008, SEC to decide by 2011 if mandatory adoption will begin in 2014 Milestones –Improving accounting standards –Improving funding and structure of IASB –Facilitating XBRL under IFRS –Updating education & licensing of US Accountants Concerns raised –Cost of conversion, time to convert –Consistency under principles based IFRS –Industry specific concerns (i.e., LIFO) –Private companies SEC IFRS Roadmap

U.S. FASB AICPA“Codification” SEC The Sarbanes Oxley Act (SOX) PCAOB International (appx 100 countries) IASB IFRS IFRS for SMEs Individual countries Jurisdictional IFRS Who’s Who in the Regulatory Zoo?

US Standard Setters FAF Fin’l Acctg Foundation Oversees FASB, Appts FASB & FASC members FASB Fin’l Acctg Stds Board Establish & improve accounting standards SIC Standing Interpretations Committee Specific application guidance EITF Emerging Issues Task Force How to acct for new business issues that arise FASAC Fin’l Acctg Stds Advisory Committee Advises FASB on policy

Process operates in full view of the public, thus is open to political influences and can take considerable time. 1.FASB drafts and releases a discussion memorandums for identified accounting issues: Describes the possible accounting treatments Describes FASB’s preliminary views on the issue 2.Receives public feedback on the discussion memorandum 3.Prepares an exposure draft (proposed new accounting standard) after analyzing and evaluating feedback 4.Accepts public feedback on the exposure draft 5.Decides whether to: Remove the exposure draft from further consideration Revise and reissue the exposure draft Vote upon the current version of the exposure draft FASB Due Process for Standard Setting

Sarbanes-Oxley Act (SOX) –Created Public Company Accounting Oversight Board (PCAOB) Creates auditing standards Performs CPA firm inspections –CEO and CFO certifications over F/S and internal controls –SOX Section 404 internal control audits –Audit committee members Independent Financially literate Must approve all services performed by audit firm Responsible for retaining and terminating the auditor Firm must disclose financial experts on the audit committee –Certain non-audit services prohibited by audit firm –Audit partner rotation –Prohibition on loans to executive officers and directors –Certain employment prohibitions

Sarbanes-Oxley Act (SOX) –Created Public Company Accounting Oversight Board (PCAOB) Creates auditing standards Performs CPA firm inspections Required consideration of Principles Based Accounting System! –CEO and CFO certifications over F/S and internal controls –SOX Section 404 internal control audits –Audit committee members Independent Financially literate Must approve all services performed by audit firm Responsible for retaining and terminating the auditor Firm must disclose financial experts on the audit committee –Certain non-audit services prohibited by audit firm –Audit partner rotation –Prohibition on loans to executive officers and directors –Certain employment prohibitions

International Standard Setters IASCF Intl Actg Stds Comm Fndn Appts IASB members & fundraises IASB Int’l Acctg Stds Board Issue IFRS, Exposure Drafts & approve IFRIC interpretations IFRIC Int’l Fin Reporting Interpretations Committee Develops interpretations of stds that To be approved by IASB SAC Stds Advisory Committee Consults w/ FASB

1.Potential agenda items discussed in meetings open to the public 2.Discussion papers and exposure drafts are published for public comment 3.The IASB solicits comments from various standard setting and regulatory bodies, as well as other users of f/s IASB Standard Setting

Trust drives the accounting profession –SOX, PCAOB, and class action lawsuits are a result of a breach of trust –From a broad perspective, we pay a heavy price for low trust: Waits at airports, audit fees Implications for personal conduct? Trust

An expectations gap exists between what the public thinks accountants and auditors should do and what accountants and auditors think they can do –Consider: what is earnings management? Is it unethical? –Do accountants “manage” earnings by recording accruals, adjustments, and depreciation? –Transparency The Expectations Gap