01Financial accounting and accounting standards

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Intermediate Financial Accounting I Financial Accounting and Accounting Standards Objectives of the Chapters Understand the need to develop accounting standards Study the development of accounting standards from a historical perspective The GAAP and the FASB Accounting Standards Codification Study the roles of the AICPA and the SEC in developing GAAP Introduce the accounting standard setting process of the FASB Environment and Theoretical Structure of Financial Accounting Objectives of the Chapters (contd.) Study the relationship between the changes in the economic environment and the development of accounting standards Understand the economic consequence of accounting standards Understand the accounting standard compliance system in the U.S (a Public/Private partnership) Environment and Theoretical Structure of Financial Accounting Objectives of the Chapters (contd.) Discuss financial reporting reform and the Sarbanes and Oxley Act (the Public Company Accounting Reform and Investor Protection Act of 2002) 10 Study the need for international accounting standards and the convergence of the U.S accounting standards with the International Accounting Standards Environment and Theoretical Structure of Financial Accounting Financial Reporting: An Introduction and Historical Development What is accounting? How we communicate financial information? Tools: Four financial statements How we prepare financial statements? Identify, measure and record business transactions for business entities Journal entries, posting to ledger accounts, work sheet (including adjustments…), F/S, … Why we need accounting standards? Environment and Theoretical Structure of Financial Accounting What is Accounting ? An information system to account for all business transactions and translate these transactions into accounting terms to be reported in financial statements for interested users Environment and Theoretical Structure of Financial Accounting Accounting Standards Accounting methods with substantial authoritative support to be used by business entities in preparing external reports for users Environment and Theoretical Structure of Financial Accounting Issues Related to Accounting Standards Who are the authorities to set these standards (Generally Accepted Accounting Principles, GAAP)? What are these standards? What is FASB Codification? The roles of the AICPA and the SEC in developing GAAP The accounting standard setting process of the FASB Environment and Theoretical Structure of Financial Accounting Year 1934 Authority Official Release Congress SEC Regulation S-X ASR and FRR Staff Accounting Bulletins 1938 Accounting Profession AICPA 1938-1959 CAP ……… ARBs (51) 1959-1973 APB ……… APB Opinions (31) 1973 FASB …… Statement of Financial Accounting Standards Interpretations Concepts of Financial Accounting Environment and Theoretical Structure of Financial Accounting Pronouncements of the FASB Statement of Financial Accounting Standards (SFAS) Interpretations Abstracts of EITF (Emerging Issue Task Force) Technique Bulletins/Staff Positions Statements of Financial Accounting Concepts Environment and Theoretical Structure of Financial Accounting 10 Convergence of the U.S Accounting Standards and the International Accounting Standards The goad of convergence is to develop a single set of high-quality international standards to be used for domestic and cross-board reporting Both IASB and FASB acknowledged that convergence of IFRS and U.S GAAP is a primary objective of both Boards Environment and Theoretical Structure of Financial Accounting 37 Short-Term International Convergence (source: FASB Project Updates and Progress Report on IASB-FASB Convergence Work Issued on 4/22/2011)) To achieve this objective and to improve the financial reporting in the US, the FASB started a short term project, conducted jointly with the IASB, to eliminate narrow differences between US GAAP and IFRS (or IAS) since October, 2002 Environment and Theoretical Structure of Financial Accounting 38 Short-Term International Convergence (contd.) The following areas have been addressed: Share-Based Payment (SFAS No 123 (R): Accounting for Stock-Based Compensation (issued in 12/2004) Substantially converging with IFRS requirements Revision: required the option expense to be recognized in the income statement Environment and Theoretical Structure of Financial Accounting 39 Short-Term International Convergence (contd.) Inventory Costs (SFAS No 151: Inventory Costs (for idle capacity and spoilage) : an amendment of ARB No 43, Chapter Issued in 11/2004, converging with IFRS requirements Revision: The amounts of costs (I.e., idle facility expense, freight, handling costs, spoilage) are expensed Environment and Theoretical Structure of Financial Accounting 40 Short-Term International Convergence (contd.) Asset Exchanges (SFAS No 153: Exchanges of Nonmonetary Assets, issued in December 2004): an amendment of APB Opinion No 29 Converging with IFRS requirements Changes: eliminating some differences in measurement between APB 29 and that of IAS 16 and IAS 38 (i.e., difference in the treatment of nonmonetary exchange of similar productive assets.) Environment and Theoretical Structure of Financial Accounting 41 Short-Term International Convergence (contd.) Accounting Changes (SFAS No 154: Accounting Changes and Error Corrections, issued in May 2005): a replacement of APB No 20 and FASB No Converging with the IFRS requirmenets Eliminating the current period approach in accounting for the voluntary accounting changes Result: improve the comparability of international financial reporting by eliminating the differences between APB 20 and IAS 8.Environment and Theoretical Structure of Financial Accounting 42 Short-Term International Convergence (contd.) Discontinued activities: The IASB issued IFRS (Non-current Assets Held for Sale and discontinued Operations) in 2004 which substantial convergence with US GAAP on this topic However, the definitions of discontinued Operations between two sets of standards remain divergent Environment and Theoretical Structure of Financial Accounting 43 Short-Term International Convergence (contd.) Fair Value Option: FASB 159, the fair value option for financial assets and liabilities, issued in 2007 Research Costs: FAS 141R, Business Combination issued in 2008, amending the accounting for acquisition Non-Controlling Interests : FAS 160 issued in 2008 10 Joint ventures: IFRS 11 to be issued Environment and Theoretical Structure of Financial Accounting 44 Short-Term International Convergence (contd.) 11 Income Tax: Reassessed as a lower priority project 12 Investment Properties: in process, the FASB is developing proposals to align US GAAP with IFRSs 13 Business Combinations: Project completed and standard issued in 2008 14 Consolidated Financial Statements: in process Environment and Theoretical Structure of Financial Accounting 45 Short-Term International Convergence (contd.) 15 Fair Value Measurement: ASU 201104 issued in May, 2011 and IFRS 13 to be issued in 2011 16 Post-Employment Benefits: IFRS to be issued to amend IAS 19 17: Financial Statement PresentationOther Comprehensive Income: FASB issued ASU 2011-05 in June 2011 Amendments to IFRSs to be issued in 2011 Environment and Theoretical Structure of Financial Accounting 46 Short-Term International Convergence (contd.) Others in progress: Accounting for Leases (EP 8/17/2010, updated EP issued on 8/18/2011 for reexposure) Revenue Recognition (EP 1/24/2010 , updated EP issued on 8/3/2011 for reexposure) For details, go to: www.fasb.org Environment and Theoretical Structure of Financial Accounting 47 Current Compliances Since there is no single set of high-quality accounting standards, domestic (U.S.) firms filing reports with the SEC must use U.S GAAP Foreign issuers filing reports with the SEC can use U.S GAAP, the international standards or the GAAP of its home country If foreign firms chose not to use U.S GAAP, they must file reports with reconciliation to U.S GAAP Environment and Theoretical Structure of Financial Accounting 48 A Single Global Accounting Language - International financial reporting standards  In November 2008, the Securities and Exchange Commission (SEC) proposed a roadmap for the US issuers to prepare financial statements in accordance with “IFRS” for the purposes of their filings with the SEC  This roadmap, if achieved, could lead to the required use of IFRS by U.S issuers in 2015 or 2016 49 A Single Global Accounting Language - International financial reporting standards (Contd.)  In February 2010, the SEC reaffirms its commitment to one set of accounting standard and continues to encourage the convergence of standards between the US GAAP and IFRS  On 10/29/2010, the SEC issued its first Progress Report on its Work Plan on the possible move toward the adoption of the IFRS for the US issuers  The SEC will make the decision of adopting IFRS for US issuers in 2011 50 The SEC’s Roadmap Toward Global Accounting Standards Environment and Theoretical Structure of Financial Accounting 51 [...]... Environment and Theoretical Structure of Financial Accounting 26 Other Issues Related to Accounting Standards 1 Changes of the economic environment and the development of accounting standards 2 The economic consequence of accounting standards 3 The accounting standard setting and enforcement systems in the U.S and the interrelationship of the Securities and Exchange Commission (SEC) and the Financial Accounting. .. in charge of prescribing the standards IASB endorsed 41 IAS and named its pronouncement as International Financial Reporting Standards (IFRS) Environment and Theoretical Structure of Financial Accounting 35 Convergence of the U.S Accounting Standards and the International Accounting Standards To increase the international comparability and the quality of US accounting standards, the FASB has been engaged... problem, International Accounting Standards Committee (IASC) was founded in 1973 to develop a single set of global accounting standards Environment and Theoretical Structure of Financial Accounting 34 The History of International Accounting Standard Setting (cont.) 41 International Accounting Standards (IAS) were issued by IASC IASC created International Accounting Standards Board (IASB) in April, 2001... Accounting Standards Board (FASB) Environment and Theoretical Structure of Financial Accounting 27 Changes of the Economic Environment and the Development of Accounting Standards Example: SFAS No 13 (Accounting for Leases) SFAS No 33 and 89 (Financial Reporting and changing prices) SFAS No 52 (Foreign Currency Translation) SFAS No 123 (Accounting for StockBased Compensation) and SFAS No 123 (R) Environment and. .. Financial Accounting 29 The Accounting Standard Setting and Enforcement Systems The interrelationship of the SEC and the FASB: FASB: the rule making body SEC: the enforcing agency Environment and Theoretical Structure of Financial Accounting 30 The Financial Reporting Reform and the Sarbanes and Oxley Act The collapse of Enron, the dissolving of Arthur Andersen and the accounting scandals of some high-profile... Environment and Theoretical Structure of Financial Accounting 13 FASB Accounting Standards Codification (ASC) (Contd.) All other non-grandfathered, non-SEC accounting literature NOT included in the Codification will be non-authoritative The Codification does not change GAAP but only the way the existing accounting standards are organized Environment and Theoretical Structure of Financial Accounting. .. Auditing Standards Board) (Replaced by PCAOB in 2002) a The Accounting Standards Executive Committee which was established within the Accounting Standard Division of the AICPA Environment and Theoretical Structure of Financial Accounting 21 The Accounting Standard Setting Process of the FASB (A Due Process) (source: FASB 2011 Website(See Illustration 1-3 on p11) 1 The Board identifies an accounting. .. Theoretical Structure of Financial Accounting 24 The Accounting Standard Setting Process of the FASB (A Due Process) 7 The Board issues an Accounting Standards Update to amend ASC by a simple majority vote (i.e., four of the seven board members) Note: effective 1/2011, FASB members expanded from 5 to 7) Environment and Theoretical Structure of Financial Accounting 25 The Accounting Standard Setting Process of... Financial Accounting 28 Economic Consequence of Accounting Standards Examples: SFAS No 106 (Employers’ accounting for post-retirement benefits other than pensions.) SFAS No 115 (Accounting for certain investments in debt and equity securities.) EITF 2000-21 and ASU 2009-13 (ASC 605-25) on revenue recognition for multiple-element arrangements Environment and Theoretical Structure of Financial Accounting. .. fair, and 2)whether the internal controlEnvironment of the and firm is effective Theoretical Structure of Financial Accounting 33 The Need for International Accounting Standards Companies doing business in more than one nation found that it is hard to comply with more than one set of accounting standards established by authorities in different nations In response to this problem, International Accounting
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