1. Intermediate Accounting September 30th, 2010
Turn in Take-home Quiz (using Folders by last name)
General Course Questions:
(Syllabus, Student Enrollment & Wait List, Other)
Follow-up Chapter 3: The Accounting Information System
Introduce Chapter 1, IFRS & the Codification
Assignments for Tuesday, October 5th:
A. Readings: Chapter 2 and IFRS pp. 8-9
B. Codification CE2-1 thru CE2-3
C. Chapter 2: BE2-2 thru BE2-11, E2-3, E2-5
D. Discussion Questions Kapnick & Wyatt

2. Chapter 1 Learning Objectives
Understand the “Objectives of Financial Reporting” and how they effect an efficient use of scarce resources
Historical events substantiate the need for improving accounting standards
Who sets Accountings Standards and How are they developed?
A. SEC
B. AICPA
C. FASB and the Codification
D. IFRS
4. Challenges facing the Accounting Profession

3. Objectives of Financial Accounting
To provide information that is
Useful in investment and credit decisions
Useful in assessing cash flow prospects
About company resources, claims to those resources and changes in them
Financial Statement Elements
Assets
Liabilities
Stockholders’ Equity
Revenues
Expenses 3

4. 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, unions and governmental agencies.
Is accounting an art or a science?
Is there only one correct Net Income amount? 4

5. What level of sophistication is assumed of Financial Statement Users?
Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making investment, credit, and similar decisions rational. The information should be comprehensible to those who have a reasonable understanding of accounting concepts, financial statements, and business and economic activities and are expected to be willing to study and interpret the information with reasonable diligence.
(Statement of Financial Accounting Concepts #1)

6. Why Do we Need Rules to Play the Game of Business?
The Need for Accounting Rules:
Stockholders & Creditors have limited resources and need to make wise investment choices.
Establishing rules levels the playing field by requiring companies to report comparable information.
The SEC was established in 1932 to regulate reporting of Financial Information.
The SEC delegates most of its rule making authority to the private sector (AICPA, FASB, etc.) to establish the rules called Generally Accepted Accounting Principles (GAAP).
Stock market crash of 1929 led calls for government regulation of business, financial institutions and the stock market. SEC encouraged a private rule setting body by the accounting profession
CAP ( ) 51 Accounting Research Bulletins
APB ( ) 31 APB Opinions - Wheat Commission
FASB Statements of Fin. Accounting Standards, Interpretations, Technical Bulletins and Emerging Issues Task Force Stmts
SEC delegated their authority to the Acctg Profession
Sarbanes Oxley 2002 Public Company Accounting Oversight Board
AICPA Cm. Acctg. Procedure
AICPA Acctg. Principles Board
FASB
Sarbanes Oxley Act
Public Co. Oversight Board
Co. B
Co. A 6

7. Securities and Exchange Commission
Established by federal government
Accounting and reporting for public companies
Securities Act of 1933
Securities Act of 1934
Delisting and fines by SEC for violations
Encouraged private standard-setting body
SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority 7

8. American Institute of CPAs
National professional organization
Established the following:
Committee on Accounting Procedures
Accounting Principles Board
1939 to 1959
Issued 51 Accounting Research Bulletins (ARBs)
Problem-by-problem approach failed
1959 to 1973
Issued 31 Accounting Principle Board Opinions (APBOs)
Wheat Committee recommendations adopted in 1973 8

9. Financial Accounting Standards Board
Missions is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include:
Smaller Membership
Full-time, Remunerated Membership
Greater Autonomy
Increased Independence
Broader Representation 9

10. The SEC and the FASB establish GAAP in the United States

11. US Standard Setters 11

12. FASB Due Process for Standard Setting
Process operates in full view of the public, thus is open to political influences and can take considerable time.
FASB drafts and releases a discussion memorandums for identified accounting issues:
Describes the possible accounting treatments
Describes FASB’s preliminary views on the issue
Receives public feedback on the discussion memorandum
Prepares an exposure draft (proposed new accounting standard) after analyzing and evaluating feedback
Accepts public feedback on the exposure draft
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 12

13. Government (SEC, IRS, other agencies)
Standard Setting
Business Entities
User Groups that Influence Accounting Standards
CPAs and
Accounting Firms
Financial
Community
AICPA (AcSEC)
FASB
Preparers (e.g., FEI)
Academicians
Government (SEC, IRS, other agencies)
Investing Public
Industry
Associations
Accounting standards, interpretations, and bulletins 13

14. Types of Pronouncements
Issued by the FASB:
Standards, Interpretations, and Staff Positions.
Financial Accounting Concepts
Emerging Issues Task Force Statements 14

15. Supply and Demand of Financial Accounting Information
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 better financial reporting will result in more efficient functioning of our capital markets 15

16. Accounting and Capital Allocation
Review
An effective process of capital allocation is critical to a healthy economy, which
a. promotes productivity.
b. encourages innovation.
c. provides an efficient and liquid market for buying and selling securities.
d. All of the above. 16

17. Sarbanes-Oxley Act (SOX)
CEO and CFO certifications over F/S and internal controls
Prohibition on loans to executive officers and directors
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
Certain employment prohibitions
Created Public Company Accounting Oversight Board (PCAOB)
Creates auditing standards
Performs CPA firm inspections
Required consideration of Principles Based Accounting System!
Audit firms previously subjected onlyt to Peer review 17

18. Who’s Who in the Regulatory Zoo?
U.S.
AICPA
FASB “Codification”
SEC
The Sarbanes Oxley Act (SOX)
PCAOB
International (appx 100 countries)
IASB IFRS
IFRS for SMEs
Individual countries Jurisdictional IFRS
Codification eliminated need to determine which pronouncement was authoritative 18

19. SEC IFRS Roadmap
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
IFRS not as Robust as US GAAP
In-Consistencies under “Jurisdictional” IFRS
Private companies, Industry specific concerns (i.e., LIFO)
IFRS Enforcement
IFRS Principles-based model rejected by the SEC 19

20. International Standard Setters20

21. IASB Standard Setting
Potential agenda items discussed in meetings open to the public
Discussion papers and exposure drafts are published for public comment
The IASB solicits comments from various standard setting and regulatory bodies, as well as other users of financial statements 21

22. Accounting Profession
Challenges Facing the
Accounting Profession
Nonfinancial Measurements
Forward-looking Information
Soft Assets
Timeliness
An Expectations gap
The difference that 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 22

23. Trust 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 (Ethics, Character and Integrity) 23

24. Issues in Financial Reporting
Ethics in the Environment of Financial Accounting
In accounting, we frequently encounter ethical dilemmas.
GAAP does not always provide an answer
Doing the right thing is not always easy or obvious 24

25. AICPA Principles of Professional Conduct
Exercise sensitive professional and moral judgments in all activities
Accept the obligation to act in a way that will serve the public interest, honor the public trust and demonstrate commitment to professionalism
Perform all professional responsibilities with the highest sense of integrity to maintain and broaden public confidence.
Maintain objectivity, be free of conflicts of interest, be independent in fact and appearance.
Observe the profession’s technical and ethical standards, strive continually to improve confidence and quality of services and discharge professional responsibility to the best of one’s ability.
Observe the Principles of the Code of Professional Conduct, section 52-57, in determining the services provided to the public. 25

26. STANDARDS OF ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS (adapted from IMA)
1. COMPETENCE
Maintain professional competence.
Follow laws, regulations, and standards
Prepare complete and clear reports and recommendations after appropriate analysis.
2. CONFIDENTIALITY
Don't disclose confidential information.
Ensure that subordinates do not disclose confidential information.
Do not use confidential information for personal gain or advantage
See next slide for items 3 & 4 26

27. STANDARDS OF ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS (adapted from IMA) continued
3. INTEGRITY
Avoid actual or apparent conflicts of interest.
Refuse gifts, favors, or hospitality that might influence objectivity.
Refrain from subverting the organization's legitimate objectives.
Recognize and communicate personal limitations.
Communicate unfavorable as well as favorable information and opinions.
Refrain from actions that discredit the profession.
4. OBJECTIVITY
Communicate information fairly and objectively.
Fully disclose all information that could be expected to influence a user's understanding. 27

28. Resolving Ethical Dilemmas
Identify the Ethical Issues involved
Identify the Stakeholders involved (persons or organizations affected by the outcome of the dilemma)
Identify the alternative courses of action that can be taken
Decide on the best course of action consistent with the principles of honesty, integrity, and fairness and also consistent with any existing code of ethical conduct.. 28

29. Resolving Ethical Dilemmas
Follow the organization’s established policies for conflict resolution. If the ethical conflict is not resolved, consider the following course of action:
Discuss the problem with the immediate superior except whet it appears that the superior is involved, in which case the problems should be presented initially to the next higher managerial level. If satisfactory resolutions cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level.
If the immediate superior is the chief executive officer, or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with the superior’s knowledge, assuming the superior is not involved
Continued on next slide….. 29

30. Resolving Ethical Dilemmas, continued
Clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action.
If the ethical conflict still exists after exhausting all levels of internal review, the management accountant may have no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization.
Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate.
*Institute of Management Accountants, Formerly National Association of Accountants, Statements on Management Accounting: Objectives of Management Accounting. Statement No. 1B, New York, NY., June 17, 1982. . 30

31. Common Features of Criminal and Ethical Misconduct
Secret Problem
Opportunity
Rationalization

32. It should be modeled after the principles-based IFRS standards
What does the SEC Study conclude about the U.S. financial reporting system?
It is fundamentally sound, of the highest quality and needs no further improvement
It is fundamentally sound and generally of the highest quality but recent corporate accounting scandals are a call to action
It should be modeled after the principles-based IFRS standards
Page 1 paragraph 1 and page
Page 7 middle paragraph

33. IFRS standards are mainly rules-based
What does the SEC Study conclude about International Financial Reporting Standards (IFRS)?
IFRS standards are mainly rules-based
Most IFRS standards are overly general and should be characterized as principles only
Many of the IFRS standards are rules-based and others are overly general and could be fairly characterized as principles only
Page 7 middle paragraph

34. SEC Study on U.S. Adoption of a Principles Based Accounting System
Which does the study claim is better?
Financial reporting based on a Principles-only approach
Financial reporting based on objectives-oriented standards
Financial reporting based on a Rules-base approach
And why (what are the pros and cons of each)?
Page 5, “we believe financial reporting based on objectives-oriented standards strikes an optimal balance and should increase both comparability and transparency of information as compared to either a principles-only approach or a rules-based approach to standard setting.”
Principles only problems (expressed about principles-based but more applicable to principles ONLY):
High-level standard with little if any operational guidance (page 4 4th paragaph)
Insufficient guidance to make the standards reliably operational. (page 4 4th paragaph)
Requires the exercise of judgment without providing a sufficient structure to frame the judgment (page 4 paragraph 4)
Relies totally on management and auditor discretion in the application of principles resulting in loss of comparability
There would be greater difficulty in seeking remedies against “bad” actors either through enforcement or litigation
Regulatory agencies may not accept “good faith” judgments
Advantages of Principles based (objectives oriented) standards:
Focus is on the fulfilling the acctg objective of the standard which minimizes opportunities for financial engineering designed to evade the intene of the standard (page 3 #1)
Each standard is drafted in accordance with objectives set by an overarching coherent framework meant to unify the accounting system as a whole (page 3 #2)
Avoids exceptions, which by their vary nature are contrary to fulfilling a principled objective, create internal inconsistencies within the standard and inherently creaete a need for more detailed guidance (page 3 #3)
Avoids bright line tests which are often a product of exceptions. Slight shifts in the form or structure of a transaction can cause it to move across the threshold resultingin profoundly different acctg for transactions that are eocnomically similar (page 3 #4)
Provides structure and contain sufficiently detailed guidance thus lands solidly between the abstract principles only and the very specific rules only (page 3 #5)
Application for professional judgment is much narrower and provides a basis for more informative financial info.
Potential to improve actual comparability since they are more likely to reflect the underlying economic substance of transactions or events
Degrees of freedom to achieve “desired” accounting results is minimized- relative to either a rules based or principles-only approach.
Requires less professional judgement and may serve to better facilitate efforts to enforce compliance with the standards page 4
Better align the incentives of those who produce the financial info with the interest of investors which should result in more informative financial info page 7 1st paragraph
Cons of Rules based approach: Bottom of page 3
Contain numerous bright-line test, which can ultimately be misused by financial engineers as they comply with the letter but not the spirit
Contain numerous exceptions to the principles purportedly underlying the standards resulting in inconsistencies in acctg treatment of transactions and events with similar economic substance.
The need and demand for detailed implementation guidance creates complexity and uncertainty about the application of the standard
Rewards those who are willing to engineer their way around the intent of standards page 4 3rd paragraph
Act of compliance rather than an act of communication, leads to ever increasing complexity as financial engineering and implementation guidance vie to keep up with one another

35. Pros and Cons of Rules vs
Pros and Cons of Rules vs. Principle-base and Principles-only Accounting Standards
1. Rules Based: Pros: Cons: 2. Principle-based 3. Principles- only

36. Qualitative Characteristics
HOUSE OF GAAP
GAAP’s Objective is to provide Financial Information that is:
Useful in investment & credit decisions
Useful in assessing future cash flows
About the enterprise resources, claims to resources, and changes in them
Qualitative Characteristics
Relevance
Predictive or Feedback Value
Timeliness
Reliability
Comparability
Consistency
Elements
Assets
Liabilities
Stockholders’ Equity
Other Comprehensive Income
Revenues
Expenses
Assumptions
Economic Entity
Going Concern
Monetary Unit
Periodicity
Principles
Historical Cost
Revenue Recognition
Matching
Full Disclosure
Constraints
Cost/Benefit
Materiality
Industry Practice
Conservatism

37. Financial Reporting for Public Companies: The 10K
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). 37

38. Generally Accepted Accounting Principles (GAAP)
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 38