RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY FINANCIAL ACCOUNTING THEORY AND ANALYSIS: TEXT AND CASES 10TH EDITION RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY 4

THE DEVELOPMENT OF ACCOUNTING THEORY CHAPTER 1 THE DEVELOPMENT OF ACCOUNTING THEORY

Introduction What is theory? Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.” Normative theory Positive theory Why is the development of a general theory of accounting important? What is the relationship of accounting research to accounting theory? 5

THE EARLY HISTORY OF ACCOUNTING Zenon Papyri Renaissance Fra Luca Pacioli The evolution of joint ventures into ongoing businesses The impact of the industrial revolution and the progressive movement The concept of capital maintenance The accountant as a protector of business interests 6

ACCOUNTING IN THE UNITED STATES SINCE 1930 Meetings between NYSE and AIA AAA SEC Securities Act of 1933 Securities Exchange Act of 1934 Committee on Accounting Procedure Accounting Principles Board Financial Accounting Standards Board 7

THE ACCOUNTING PRINCIPLES BOARD Formation and structure Types of pronouncements APB Opinions Accounting for the investment tax credit (1961) APB Opinions 2 & 4 Rule 203 Criticism of the APB Independence of members Structure Response time 8

THE FINANCIAL ACCOUNTING STANDARDS BOARD The Wheat Committee The Trueblood Committee The FASB was established 9

Structure of the FASB Financial Accounting Foundation Board of Trustees Electors Appoint and fund Govern Appoint - - - - - - - | Appoint and fund Financial Accounting Standards Advisory Committee (approx. 20 members) Financial Accounting Standards Board (5 members) Task Forces of the Standards Board Appoint Admin. Staff Research Staff 10

FASB Sarbanes-Oxley Section 108 Mission Types of pronouncements Statements of Financial Accounting Concepts Statements of Financial Accounting Standards Interpretations Technical Bulletins 11

FASB Accounting Standards Codification July 1, 2009 Single source of GAAP Effective for interim & annual periods ending after September 15, 2009 12

FASB Accounting Standards Codification Goals: Simplicity Accurate representation of GAAP Up-to-date research Expectation Reduce research time Mitigate noncompliance risk Real-time updates Assist FASB 12

FASB Accounting Standards Codification July 1, 2009 No more SFAS Changes publicized through an ASU Summarize key provisions Detailed amendments to FASB Codification Explain basis for decision 12

FASB Emerging Issues Standards Overload Standard setting as a political process Economic Consequences 12

GAAP Evolution of phrase: Changed wording of auditor’s certificate brought about by meetings between NYSE and AIA The APB’s definition The Auditing Standards Executive Committee’s definition SAS 69: determining acceptance of a specific principle is difficult No single reference 13

SFAS No. 162 2008 Hierarchy of GAAP 13

GAAP Hierarchy LEVEL A: FASB Statements FASB Interpretations SEC Rules and Interpretive Releases Accounting Principles Board Opinions (unless amended) Account Research Bulletins (unless amended) LEVEL B: FASB Technical Bulletins AICPA Industry Audit Guides that have been reviewed by the FASB

GAAP Hierarchy LEVEL C: AcSEC Practice Bulletins that have been reviewed by the FASB Consensuses reached by the EITF LEVEL D: AICPA Accounting Interpretations (no longer issued) FASB Implementation Guides Other widely recognized or prevalent accounting practices

SFAS No. 168 2009 Codification Hierarchy Replaces 162 13

Rule 203 Ethics Must consider pronouncements as primary source of GAAP 13

THE ROLE OF ETHICS IN ACCOUNTING The public accountant as a watchdog 20

Accounting in Crisis – The Events of the Early 2000s Enron and the Accounting Scandals

Accounting in Crisis – The Events of the Early 2000s Two major changes in the accounting profession have taken place in the wake of the accounting scandals: Arthur Andersen formerly one the Big 5 audit firms has gone out of business Sarbanes-Oxley Act President Bush signed into law July 2002 imposes a number of corporate governance rules on publicly traded companies

International Accounting Standards The concept of harmonization The IASB The IASB’s objectives: To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements. 41 Statements of Accounting Standards and 10 Statements of Financial Reporting Standards to date No enforcement authority

Prepared by Kathryn Yarbrough, MBA End of Chapter 1 Prepared by Kathryn Yarbrough, MBA Copyright © 2011 John Wiley & Sons, Inc.  All rights reserved. Reproduction or translation of this work beyond that permitted 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.